How has consumer behaviour changed and what does this mean for the credit market?

The insight your business needs to thrive in the changing economy

The last decade has seen a shift in consumer behaviours further compounded by the pandemic, resulting in a faster-changing credit landscape than ever seen before. We’ve been tracking the impact of Covid-19 on the UK economy, and the businesses and consumers that drive it.

Before the pandemic hit, household debt in the UK was the second-highest* among the G7 countries, and people were borrowing to facilitate their lifestyles with few households able to save.

At the time, we found that 40% of people** wouldn’t be able to pay their mortgage or rent if payments increased by more than £50 per month. There were increasing signs of stress across most demographics, with even the once-solid Bank of Mum and Dad seeing arrears rates rising.

Then the pandemic hit, with economic growth coming to a stop. In fact, the first 10 days of lockdown led to a bigger hit to output than the worse 90 days of the 2008 financial crisis. Away from GDP, 34% of the workforce was placed on furlough, and nearly 25%*** of businesses were forced to pause trading; it was truly unprecedented times.


Personal Finance

As Covid-19 swept the economy, it had a swift and severe impact, with 40% of people experiencing a pandemic-related income shock. The poorest households, typically working in low-skilled consumer-facing industries, were hit the hardest from a wage perspective but as some also received benefits, their overall incomes remained more stable. It was the middle-income band which was impacted the most.

Policymakers promoted the use of Emergency Payment Holidays (EPHs) across all credit products to help households. By the end of May, over 6% of consumers had requested payment holidays with 3.5 million borrowers requesting an EPH.

When some EPHs came to an end in November 2020, it brought with them an uptick in delinquencies. We estimate that consumers with an EPH enter the collections process at 3x-8x the normal delinquency rate. This is even more significant when compared to the wider trend of declining arrears and a reduction in the flow of new accounts into delinquency overall.

A further rise in delinquencies is expected in the future. Though new EPHs continue to be granted, the number of active accounts has dropped to 323,000, indicating a collection crisis on the horizon. This will require lenders to develop new tools and processes to tackle the crisis and more accurately understand their consumer base and its behaviour.


Spending and Borrowing

After a major decline during the first national lockdown, consumer credit applications and new lending have recovered well, with mortgage lending back up to pre-Covid levels.

The two key trends we have seen are the slow increase in extended loan terms and the continuation of lending into retirement being on the rise. The Bank of Mum and Dad has also reopened for business after restrictions seen in the early part of lockdown have been relaxed.

However, while the credit market is recovering, it is unlikely to get back to 2019 levels of lending until 2022. This means consumers will find credit less easy to access than before the pandemic.

Lenders are likely to tread carefully over the next couple of years as the true impact of the economic shock starts to play out in the market. Further, uncertainty around Brexit and climate change are likely to suppress lenders’ risk appetite. With various Government schemes in play, enhancements to traditional credit scores are needed to assess creditworthiness accurately.


Payments

Lockdown restrictions have correlated with a surge in alternative payment methods such as Buy-Now-Pay-Later (BNPL). BNPL is proving to be popular among Millennials and the Gen Z population. It has benefitted from the boom in online shopping as it fits perfectly with the monthly expenditure mind-set of consumers. The ability to spread the cost of a purchase using interest-free instalments means consumers have an easy and convenient way to pay without the commitments associated with credit cards. BNPL is the fastest growing online payment method in the UK, at double the growth rate of bank transfers and thrice that of digital wallets.


Digital Adoption

In the UK, around 75% of adults are now using online banking****, with mobile banking apps growing in popularity. Registrations among 70-year-olds were up three times compared to the same period in 2019 and the 40+ age group’s registrations also saw significant growth. While it’s true that many lenders have adapted to the new digital norm, true transformation still needs to take place for firms to cater to the needs of the changed consumer, and harness efficiencies in the way they operate.

 


Challenges for Lenders

Our research has found that lenders are finding it difficult to understand future risk using traditional credit metrics. The tools previously used to predict collections aren’t necessarily appropriate for today’s consumer. Government measures continue to mask and delay the real impact of the economic crisis. Lenders need to look to other data sources to try and differentiate with risks from opportunities. The answers are in the data; lenders just need to know how to use the data available to them.

To download the full research paper, visit our dedicated webpage for The New Consumer Credit Economy linked below.

Research contained within this blog, unless sourced otherwise, is an extraction from Experian research commissioned through 2020. This includes research with third-parties including Forrester Consulting, as well as consumer research conducted on Experian’s behalf through Consumer Intelligence, alongside independent market analysis conducted by Experian’s strategies and consultants. Additional data insights are derived from Experian data sources, and produced by our in-house economic team as part of their economic analysis. For a full list of resources download The New Consumer Credit Economy paper.

* Organisation for Economic Co-operation and Development

** Experian research

*** Office for National Statistics

**** The Lloyds Bank Consumer Digital Index 2020