MORE than 27 million South African consumers were considered to be either credit unserved or underserved at the end of March this year, according to the global information and insights company TransUnion’s study titled Empowering Credit Inclusion: A Deeper Perspective on Credit Underserved and Unserved Consumers.”
However, the study also found that about 16% of consumers who started as credit underserved were found to have migrated to becoming more credit active in a two-year window prior to the pandemic.
During the height of the pandemic, this percentage of consumers becoming more active decreased, to 13%, with those consumers skewing younger than the pre-pandemic sample.
In addition to South Africa, the TransUnion global study observed consumer credit behaviour in Canada, Colombia, Hong Kong, India, and the United States to get a better sense of the market size of these unserved and underserved consumer segments.
Lee Naik, CEO of TransUnion Africa, said that this study clearly points to hundreds of millions of consumers around the globe being credit unserved or underserved. “These credit disadvantaged consumers are often unable to access financial products and services because they have no or little credit history. This study served to better understand how many people are truly under or unserved from a credit perspective while also determining paths for them to gain more credit opportunities.”
The study explored the characteristics and behaviours of credit consumers and their overall sentiments towards credit, while offering key insights into the credit journeys of these consumers. Unserved consumers were defined as any person who has never had an open, traditional credit product (such as a credit card, personal loan or vehicle finance loan, etc) as reported on the TransUnion consumer credit database.
The underserved population have minimal credit participation, limited to a single type of credit product and no more than two open accounts of that type, and has been active in the credit market for at least two years.
This study specifically excluded new-to-credit consumers who have opened their first product within the past two years – from the underserved population, as many of those new-to-credit consumers become more fully credit active soon after opening their first product. The study sought to understand those consumers who remain unserved or underserved over a longer time period.
In the TransUnion global report, two cohorts of consumers were studied, each over a two-year time period –the first during the pre-pandemic period beginning March 2018 through March 2020, and the second beginning in June 2019 and studied through the pandemic time period of June last year, to determine if there were any pandemic-related shifts in consumer credit migration trends.
As at March this year, in South Africa, a greater percentage of women (53%) were credit active when compared to men (44%). From a credit underserved perspective, women represented a significant share of the underserved population at 62% (compared to 38% for men)– a great opportunity for lenders to tailor engagement activity accordingly.
TransUnion said while some unserved (also called credit inactive) consumers may have traditional credit scores when they opened their first credit product, many do not. The company said this lack of a credit score and any history of credit activity was certainly an impediment for these unserved consumers to get their first credit product, as many lenders are hesitant to extend credit to consumers without any credit history or score. For these traditionally unscorable consumers, they face a “chicken or egg” conundrum of how to get that first credit product when they lack a credit history.
Naik said this reality underscored the importance of incorporating alternative and trended data into the financial ecosystem, so that fewer consumers find themselves as credit invisible.
“Once these consumers can be evaluated by financial institutions, lenders can better determine where there might be new opportunities for growth and how they can expand credit inclusion,” Naik said.
Every year a portion of the underserved consumer population–those with minimal credit activity – becomes more fully credit active by opening additional credit products, while many remain in that underserved segment. To better understand how underserved consumers transitioned to becoming more fully credit active, the study looked at the number and type of credit products consumers had opened within the two-year period. For the purpose of the study, underserved consumers transitioned to served if they opened additional product types over the two-year study period – for example, when a previous credit card-only consumer also opened a vehicle finance loan.
Alternatively, they could become newly served if they opened additional products of the same type – for example, if they opened additional accounts of the same product type and reached three or more open accounts over the two-year study period.
The most common first credit products held by underserved consumers in South Africa were clothing accounts (59%), followed by personal loans (31%). TransUnion said this mirrored broader trends that TransUnion has observed in South Africa, where clothing accounts and personal loans were the most common first product for consumers entering the credit market.It said this varied country by country. However, as the study found that in other emerging markets like India and Colombia, the product type most commonly held by underserved consumers were agricultural loans and microcredit loans, respectively.
In Canada, Hong Kong and the United States, credit cards were the most commonly held product by underserved consumers. In South Africa, 78% of underserved consumers that migrated to credit served within the two-year period did so by opening a second product type. The most commonly opened second product types were personal loans, clothing accounts and retail revolving facilities.
When looking at the demographics of underserved and served consumer groups, the age distribution between the two was very similar, with just a slightly higher percentage of Millennials (born 1980-1994) as a proportion of underserved (46%) compared to served (42%), and slightly less Gen X (born 1965-1979) as a proportion of underserved (28%) compared to served (36%).
The demographic data reflected an opportunity for lenders to expand credit access for younger underserved consumers. The firm said increased access enabled economic advancement and upward mobility opportunities for these consumers who might be looking to buy their first vehicle or home or to fund higher education as a further means of advancement.
The report also observed that consumers who progressed to being served over the study period have very comparable, and sometimes better, performance on new accounts opened compared to consumers who were already served and more credit active at the time of origination. In the case of personal loan delinquencies in South Africa (as measured by 1+ months in arrears), newly served consumers were less delinquent (19.3%) when compared to credit-established consumers (21.8%) six-months post origination of a new personal loan.
Combined, TransUnion’s age and risk-specific insights clearly showed a wealth of untapped potential in the South Africa consumer credit market that could benefit both lenders and consumers alike.
“Consumers who migrated to being credit served are mostly young with comparable risk to already established consumers, who are no longer new to credit, but for whom graduating to being credit established or served has taken longer than for other consumers. These consumers appear to want more credit, but they are not necessarily able to access the credit they want, potentially due to their limited credit history. This highlights a missed opportunity for lenders who are seeking to grow and add new customers. Many of these underserved consumers would likely be well-performing and profitable borrowers, but because of their limited credit history, lenders are reluctant to extend them credit. Expanding the use of alternative and trended data on consumers into lending decisions could enable lenders to get a fuller picture of the financial capacity of underserved consumers and make credit available to more of them,” Naik said.