- What’s happening in the credit market?
- How well do you know your customers?
- Experian can help
We all know the headlines. Interest rates have increased, and further rises are likely. Inflation hit 9% in April and is probably already much higher. Huge increases in energy, fuel and food prices are unlikely to wane any time soon – particularly given the ongoing situation in Ukraine and another proposed energy-cap rise on the horizon. Overall, there’s an unnerving sense that the worst is yet to come.
If you look at the broader picture, GDP remains relatively strong, with the IMF predicting growth of 3.7% this year. Even if it falls to somewhere around 3%, that’s still positive. Similarly, the other key indicator of economic stress, the labour market, has recovered well from the pandemic, thanks in large part to government-protection schemes. Unemployment is now at a record low, below pre-COVID levels.
Of course, we’re fooling ourselves if we think everything’s rosy. We may not be in a full-on recession – yet – but for many consumers it’s certainly starting to feel like one. Real income levels will drop this year by the largest amount since records began in 1955, while the Consumer Confidence Index has taken a tumble, as people pledge to cut back on major purchases. Meanwhile, the ONS reports that four in 10 adults say it’s already very or somewhat difficult to afford their energy bills and a quarter say they can’t afford an unexpected but necessary cost of £850.
People are, unsurprisingly, spending less on non-essentials, such as eating out, and in the week to 21 April we saw a 9% drop in credit and debit card purchases. All of this is having a knock-on effect on businesses, with closures at their highest since 2017.
What’s happening in the credit market?
It’s too early to say what the full impact will be for the credit market, but the indicators are starting to give us some clues. Staying with businesses for a moment, we’ve seen a decline in new loans for SMEs (small to medium enterprises) and the number of SME accounts in collections is increasing, with particular pressure felt by those in the accommodation, food, transportation and construction sectors.
As for consumers, we’re yet to see incomes drop – and in fact the younger age groups have enjoyed a much larger wage increase over the past year than other segments; up around 13% for those under 24.
Unsurprisingly, it’s also the younger generations – in particular those under 30 – who are now starting to eat into their overdrafts. We’ve seen a 24% increase in overdraft balances in this age group compared to last year, which probably reflects the wider opening up of society post-lockdown.
Perhaps this is why we’ve also seen an increase in credit card and loan applications in the younger demographics, despite applications in general being down. We believe this is most likely because older customers have more savings to dip into.
Read our guide to find out how lenders can better support their customers through the cost of living crisis.Read now
We’re also seeing credit card spending rise – again mostly by the under 30s – outpacing repayments by around a third. However, this could increase even more as households use credit to help cover their monthly outgoings.
As things stand today, we’re not seeing this increase translate into a higher proportional rate of collections (although overall there are more collections due to the fact there’s a growth in lending). But this could easily change in the next few months as increased credit use, coupled with rising costs, leave many customers with nowhere to turn.
How well do you know your customers?
There’s little doubt that many UK consumers are going to find it incredibly difficult to balance their household budgets in the coming months, particularly with cuts to Universal Credit and another energy-price hike in the autumn.
It’s clear that traditional indicators of risk, such as employment levels and GDP, are no longer reliable predictors of stress. In today’s world, it’s about real income and the effect that the rising cost of living is having on people’s finances.
Customers will turn to credit, and that means more than ever, lenders will need to understand who is at risk and who isn’t. So, how exposed is your current portfolio? Can new customers afford to pay now and in the future when the economy predictably worsens? What do your customers need now to head off difficulties down the road?
Despite the risks, there are opportunities, particularly with younger customers. What’s interesting is that they may be relatively insulated from the cost-of-living crisis. Some 5.5 million under-30s have no mortgage debt and are still living at home. More than half of these (54%) have an excellent credit risk score and are active in the credit market. Are they the rich seam of quality customers you’re looking for?
Experian can help
In order to fully understand the levels of risk and opportunity in both new and existing customers, it’s vital that you have the right data, scorecards and models.
Understand portfolio risk at a customer level
At Experian, we can provide account-level reporting with simple red-amber-green indicators, so you can easily make decisions. Customers are stress tested against a range of factors, including cost of living, income shock, unemployment and job-sector risk, and even the effects of climate change.
Drive effective affordability strategies into the heart of your decisions
Both traditional and non-traditional data can provide a golden source of insight into a customer’s affordability too. Whether that be derived from bureau, income, payroll or Open Banking data sources for example. Enhanced models, such as affordability balance insights, offer further analysis into a customer’s current account balance. For example, how it is, or has been changing, for better or worse.
Understand exposure, and make informed customer acquisition strategies
In addition to data, new analytics can provide further clarity of risk and exposure, but also unearth valuable insight into new lending opportunities – whether that be new customers, or through new product or markets. We can provide access to Experian’s bureau data for you to perform your own analysis and experimentation.
Balance risk and reward, through improving your decision baseline
A key part of balancing risk, and opportunity is ensuring the decisions you make are made based on the most accurate view of your customers, and the economy. We can enable you with the environment to test the impact of changes to your policy or strategy rules – and subsequently change them, fast. Monitoring of your models is also where we are seeing instant value. Model monitoring helps ensure you are always making decisions based off the most predictive and performant base. You can be alerted if your models degrade or require attention – and harness Machine Learning as a catalyst for greater confidence.
Make customer-centric decisions, through personalised communications and treatments
There are many more areas where we can support. From driving personalised customer treatments, managing credit limits, to triggering communications that help your customers take early action. Our decisioning capabilities allow you to test and analyse different trends and scenarios before executing them with speed to support your customers – whatever risks they face, whatever opportunities they present. Based on whatever choices your business makes.
This may be the calm before the storm, but Experian is here to help you find a way through.
If you’d like to better understand how the cost of living affects your portfolio and how Experian can help, please contact your account manager, or fill in our contact form.
It is a tough situation for business and consumers right now:
- Inflation is at a near 40% high, 9% in April
- Fuel and food have seen significant price increases with a further energy price cap increase on the horizon
- Real income levels will drop this year by the largest amount since records began in 1955
- The Consumer Confidence Index has taken a tumble
- The ONS reports that four in 10 adults say it’s already very or somewhat difficult to afford their energy bills with a quarter saying they can’t afford an unexpected but necessary cost of £850
- Business closures are at their highest levels since 2017 and the number of SME accounts in collections is increasing
But it’s not all bad news:
- GDP remains relatively strong, with the IMF predicting growth of 3.7% this year
- Unemployment is now at a record low, below pre-COVID levels
- Younger age groups have enjoyed a much larger wage increase over the past year than other segments; up around 13% for those under 24
- Some 5.5 million under-30s have no mortgage debt and are still living at home, meaning they are potentially insulated from the major cost of living impacts
We are starting to see impacts on lending and credit behaviour:
- Consumers are spending less on non-essentials, such as eating out, and in the week to 21 April we saw a 9% drop in credit and debit card purchases
- We’ve seen a 24% increase in overdraft balances in the under 30 age group compared to last year
- We’ve also seen an increase in credit card and loan applications in the younger demographics, despite applications in general being down
- Credit card spending is on the rise – again mostly by the under 30s – outpacing repayments by around a third
- It’s clear that traditional indicators of risk, such as employment levels and GDP, are no longer reliable predictors of stress. In today’s world, it’s about real income and the effect that the rising cost of living is having on people’s finances
In these unprecedented times, Experian insight can help you minimise risk and identify opportunities:
- Improve your attraction and conversion through enhanced eligibility and prequalification strategies
- Understand what is affordable, and derive sophisticated analysis to determine future affordability
- Increase or decrease credit lines, control risk efficiently from poorly performing accounts and retain valuable customers.
- Identify stressed customers early to prevent them entering collections.
- Proactively manage customers in arrears, help them get back on track and reduce delinquencies.
- Enhance your scores and policy rules, as a virtuous cycle. Test, simulate, learn, build and monitor.
- Be more confident in your decisions and strategies through access to a range of services to offer bespoke portfolio and customer-level risk and opportunity assessment.