18
BusinessDay www.businessday.co.za Thursday 22 February 2024
INSIGHTS
CREDIT MANAGEMENT
Powering opportunities to create a better tomorrow.
Sponsored content
Innovation required to get credit flowing
Many South •Africans remain
uninformed about their debtmanagement options, writes Pedro van Gaalen
S
A’s struggling economy needs consumer and business spending to boost consumption and investment to stimulate growth. However, the country finds itself in a credit quandary as lenders opt to limit exposure to higher-risk consumers in lower market segments, preferring to grant credit to lower-risk toptier segments. “However, these top-tier consumers have become overindebted in the highinterest rate environment,” says Jaco van Jaarsveldt, Head of Commercial Strategy and Innovation at Experian Africa. “This means lenders need to
Jaco van Jaarsveldt … solution. look elsewhere to drive credit growth and support economic activity.” A major hurdle is the loss of the retail credit market during the Covid-19 pandemic. After analysing 130-million retail credit accounts over five years, Experian determined four out of 10 consumers started their credit journey with a store card. “Of these four, 80% progressed to banking products, with 40% securing home loans after successfully building a credit record,” says Van Jaarsveldt.
However, when Covid shut stores, this credit line dried up, as did the credit rating data, and retail store credit accounts have only recovered to 30%-40% of pre-Covid levels. “This break in the credit life cycle now prevents many consumers from accessing banking products as banks can no longer select the best performing retail accounts from this large pool.” According to Van Jaarsveldt, the lending market and government must look at this challenge differently to find a solution. To support industry innovation, Experian leverages alternative data sources to build credit profiles on millions of thin-file and credit-invisible consumers — those with limited or no information on a traditional credit bureau. For example, Experian developed the Up app, which focuses on financial education and inclusion. The service targets the credit-excluded market and uses gamification to collect consumer-consented data based on user behaviours, such as budgeting, completing
financial education modules, checking their credit score or updating personal information. “Completing these processes improves creditworthiness because these behavioural attributes are good predictors of future payment behaviour,” explains Van Jaarsveldt. “Users also become more financially literate and, over time, build a credit score through alternative data that we can eventually present to banks, effectively replacing the lost retail channel.” Experian has also partnered with Chenosis to develop an API that provides access to consented data from MTN’s mobile customers to establish alternative risk metrics, such as airtime and data purchase patterns, which can help boost a consumer’s credit score or generate a new alternative credit score to broaden access to credit. From a government standpoint, Brett van Aswegen, CEO at Wonga Online, believes an overhaul of outdated pricing regulations will help unlock access to credit for a larger proportion of the population. “Since the pandemic, SA has
Alfred Ramosedi … partnership. experienced a surge in the demand for credit, paralleled by a significant increase in rejection rates. Yet, the average value of each credit product has increased,” he says. Van Aswegen explains that SA’s credit market, influenced by affordability regulations, will naturally exhibit a correlation between income and credit product value. “The paradox is that the increase in average credit product value is likely driven by a reduction in the number of
to take control of your financial health. Up your financial wellness with Experian’s web app, Up. Gain UNLIMITED and FREE access to your credit report & score, along with a budgeting tool and educational content all on your phone. Learn more today.
lower-value credit products, typically granted to lowerincome individuals.” Van Aswegen attributes this shift in risk appetite to the monthly fees that a credit provider may charge for opening and servicing a loan, which are regulated under the National Credit Act but have not been updated since 2015 to keep up with inflation. “The only way credit providers can manage the margin pressure is to reduce risk through the proportion of defaulting loans, which has the unintended consequence of disproportionately excluding middle to low-income consumers from the formal credit market,” he says. “As such, we desperately need to re-evaluate existing
pricing policies, which requires a collaborative effort from financial institutions, the National Credit Regulator and the department of trade, industry & competition.” Getting more credit-active consumers back into the market after defaulting is another area where innovative solutions can support credit growth. In this regard, Alfred Ramosedi, CEO at Bayport Financial Services, explains that many consumers are trapped in unnecessary debt-counselling processes that increase overindebtedness rather than extricate them from it. “Many South Africans remain uninformed about their debt-management options. For instance, in many cases debt
consolidation, combined with financial literacy education, is more beneficial than formal debt counselling.” Wherever possible, Bayport also refers consumers to a financial wellness partner that can help free them from unfair or illegitimate debt-counselling processes. “Furthermore, the agreements we have in place with employers allow us to assist customers in ways that are unavailable in an openmarket environment. We believe an employer-level partnership is essential to combating the prevalence and impact of overindebtedness in the workplace and keep these consumers out of reach of unscrupulous informal lenders and the payday debt spiral.”
Possible interest rate relief from mid-year Stubborn inflation from a mix of global and local factors has forced the South African Reserve Bank to relentlessly hike interest rates over the past three years, with the prime lending rate rising steadily from 7% in December 2020 to peak at 11.75% in mid-2023. “High interest rates are feeding into the cost of living crisis by increasing the cost of debt across the market,” says Alfred Ramosedi, CEO at Bayport Financial Services. “This severely impacts disposable income, which limits a consumer’s ability to access formal credit, encouraging them to turn to the informal sector seeking credit from unregulated providers.” While the broad consensus among economists suggests that the Bank’s monetary policy committee will keep rates steady at their 14-year highs, cuts are only likely later in 2024. This higher-for-longer interest rate environment will maintain the financial pressure on debt servicing costs among struggling consumers and businesses. “The longer high interest rates persist, the more difficult
the lender’s position becomes, with more cash channelled to servicing debt as opposed to funding growth or efficiency initiatives within businesses, or consumer spending on goods and services,” says Frank Blackmore, Lead Economist at KPMG South Africa. “If this continues for a long period, it can undermine resilience among businesses
HIGH INTEREST RATES ARE FEEDING INTO THE COST OF LIVING CRISIS BY INCREASING THE COST OF DEBT ACROSS THE MARKET and consumers who lack the capacity to absorb additional shocks, such as a drop in sales or an unexpected maintenance expense.” “In addition, the higher-forlonger interest rate environment means banks will face lower loan growth and sustained higher credit risk costs,” says Carmel Nel, Head of Multi Asset at Amplify fund
manager, Terebinth Capital. While the Bank’s hawkish tone amid global geopolitics and uncertainties around the local elections means we are unlikely to get any interest rate relief until mid-year, Nel believes moderating inflation should open the door for rate cuts. “Lending growth should improve as the probability of interest rate cuts increases as monetary policy easing would improve risk appetites among banks. On this front, we are already seeing signs that credit loss ratios are peaking, which should serve as a positive for credit provision to consumers. It is unlikely that credit lending standards will tighten further from here.” When the cycle eventually turns, Blackmore says the potential exists for multiple rate cuts throughout the remainder of the year. “However, unlike in countries such as the US, the Bank did not need to elevate interest rates far above longterm averages to become restrictive. As such, expect a much smaller proportional decrease of about 1.25 percentage points over 2024 and 2025,” he says.
Credit fraud on the rise
Experian South Africa (Pty) is a registered credit bureau with the National Credit Regulator in terms of the National Credit Act, registration number: NCRCB16.
With more consumers and businesses turning to credit to stay afloat in the turbulent economic environment, fraudsters look to exploit the situation. According to the Q4 2023 TransUnion Consumer Pulse Survey, digital fraud and personal data security are major concerns for consumers, as 61% of respondents were targeted by fraud schemes in the prior three months, with 10% falling victim. Based on survey insights, fraud schemes typically involve phishing, smishing (fraudulently soliciting information via SMS) and money/gift cards, highlighting the need for better data security measures and more secure digital environments. The business sector also experienced a spike in fraud, with quarterly Debtsource credit application data showing a sharp increase in fraudulent activity from Q2 to Q3 2023, coupled with a significant increase in the value of fraudulent applications. “Fraud is a pervasive business-to-business problem, with fraudsters employing various methods,” says Ann Buitendag, COO of Debtsource. While hacking and cybersecurity breaches dominate global risk trends,
Mark Wells … detection. Buitendag says customer fraud is a major concern in SA, ranking as the second most perpetrated fraud type. “This fraud encompasses various activities, such as false event details and credit application fraud. The accessibility and ease of perpetrating customer fraud in the digital age makes it an attractive option compared to traditional forms of robbery, leading to more data and credit application fraud cases.” In Experian’s latest fraud report, research conducted by Forrester Consulting reveals that the two biggest challenges limiting fraud prevention among businesses are an inability to align fraud prevention and
revenue growth strategies (59%) and the increased costs associated with using multiple types of fraud prevention software (59%). “As businesses expand their fraud prevention capabilities with multiple fraud services, connecting them via a single platform and API become crucial,” says Mark Wells, Chief Customer Officer at Experian Africa. The research findings affirm this need, with 65% of respondents stating that reducing the number of platforms across the business was their top fraud-related priority. In addition, 56% of local respondents believe that AI and machine learning (ML)powered solutions will drive the future of fraud prevention by helping to increase acceptance rates, reduce losses through greater fraud detection accuracy and decrease the volume of manual reviews and false positives. “Our survey results highlight how ML improves detection of both fraudsters and legitimate customers, enabling businesses to continuously and passively monitor customers without impacting the user experience, which is the key to balancing revenue growth with adequate fraud prevention,” says Wells.
19
BusinessDay www.businessday.co.za Thursday 22 February 2024
INSIGHTS: CREDIT MANAGEMENT
Report shows top-tier consumers taking strain
Household •finances among
these FAS groups are most sensitive to interest rate hikes
C
onsumers are using credit to navigate the cost of living crisis caused by stubborn inflation and interest rates that remain at a 14-year high. The TransUnion South Africa Industry Insights Report (IIR) for Q3 2023 showed originations saw the strongest year-on-year growth in personal loans (+7.5%) and clothing accounts (+11.2%). While new credit card originations declined (-6.3%) compared to the same quarter in 2022, as did retail revolving loans (-10.3%) and vehicle loans (-7.5%), Lee Naik, CEO of TransUnion Africa, says declines in some product originations are likely driven by caution among consumers in the current high interest rate environment. “However, the increase in originations among below prime consumers may indicate distressed borrowing to meet financial needs,” he says.
Lee Naik … caution. Moreover, TransUnion data shows that outstanding consumer credit balances grew 5.6% year on year, with all financial products contributing to the growth, except for bank and nonbank personal loans. The balance growth suggests consumers are increasingly leveraging credit to make everyday purchases. A more concerning picture emerges when reading below the top-line trends, as the credit active population in the greatest distress are the top-tier earners, who are struggling to service secured loans. “Of the R2.21-trillion in outstanding debt in SA, home loans and vehicle debt account for more than 80%, with R1.8trillion owed on home loans,” says Jaco van Jaarsveldt, Head of Commercial Strategy and Innovation at Experian Africa.
Unsurprisingly, Experian data shows that the highest-tier financial affluence segment (FAS) groups — the luxury living and aspirational achievers — are under the most financial distress. According to the most recent Experian Consumer Default Index (CDIx), these two groups experienced the largest year-on-year increases in composite CDI, increasing from 1.96 in September 2022 to 3.10 in September 2023 for the luxury living group and 3.83 to 5.70 for the aspirational achievers group. This represents a relative increase of 59% and 49%, respectively — the highest for any FAS group. “Effectively, 13% of the South African population holds 75% of total debt, and household finances among these FAS groups are most sensitive to interest rate hikes due to the quantum of debt they hold in interest rate-linked products.” Consequently, the Experian Q3 2023 CDIx saw a significant deterioration in first payment defaults on home loans over the period under review. Similar trends emerged in the TransUnion Q3 2023 IIR, where secured products saw increases in missed payments, potentially caused by higher interest rates and affordability challenges for homes and vehicles, indicating pockets of vulnerability.
According to the report, rate escalations between November 2022 and May 2023 exerted financial strain on consumers carrying certain debt products vulnerable to interest rate increases, pushing them toward delinquency. This is evidenced by a notable uptick in serious account-level and balance-level delinquencies (90 days past due) on home loans seen in the latest TransUnion IIR, which were up 150 and 200 basis points year on year, respectively, in Q3 2023. “The financial distress in the higher FAS groups is evident in the rise in demand for unsecured lending in these market segments, coupled with an uptick in requests for debt review services among the top two tiers, with the biggest growth witnessed in the luxury living category,” says Van Jaarsveldt. Despite the demand for unsecured lending, growth in credit card and personal loan origination trended downwards as traditional banks closed the taps on lending. The TransUnion Q3 2023 IIR shows the average value of new personal loans granted overall declined by 21.5% year on year, a trend attributable to the decreasing share of personal loans provided by traditional banking institutions. However, nonbank lenders were responsible for 80.4% of
new personal loans extended in Q3 2023 — a 2.8% increase from 2022’s corresponding quarter. This trend indicates greater demand among more affluent consumers with higher credit scores, who generally qualify for higher average opening loan amounts. The total number of active credit cards in the market also increased 1.3% year on year. However, origination levels in Q3 2023 were down compared to the same period last year. Van Jaarsveldt says available market data demonstrates the top end of the active credit population is overexposed to secured and unsecured loans. However, in the tough economic conditions, lenders remain hesitant to increase exposure to more vulnerable lower market segments.
Tech helps mitigate risks Amid high interest rates, credit providers need to manage risks while keeping lending accessible to support economic activity, with technology playing a critical role in facilitating this complex balancing act, even in a challenging economy. “Technology improves our ability to assess creditworthiness and affordability, which protects customers against overindebtedness and our business against bad debt,” says Alfred Ramosedi, CEO at Bayport Financial Services. “Digital technologies also reduce costs, which benefits our customers and enhances their experience through improved efficiencies and a comprehensive view of the customer across touchpoints.” Ayanda Ndimande, Head of Business Development at Sanlam Retail Credit, says: “Digital enablement via apps and the use of mobile devices improves convenience for consumers.” Digital-led innovation also helps broaden access to credit products by providing additional
sources of information. “With more data, creditors can understand their customers better and provide tailored solutions,” adds Ndimande. “Data also helps lenders develop new solutions, such as advice-led credit, which supports consumers who, under current circumstances, do not qualify for credit but, following proper advice, can qualify in future.” In this regard, the best outcome for credit markets is creating a free flow of information between the lender and borrower that informs creditworthiness, says Frank Blackmore, Lead Economist at KPMG South Africa. “However, lenders often encounter restrictions in the amount of data they can request from borrowers. Borrowers may also find themselves in positions where they don’t want to fully disclose their creditworthiness,” he says. “Consequentially, lenders need to use whatever information they have about the borrower and their behaviour to assess their risk as accurately
as possible and offer credit at a fair price, and are applying AI and ML to help reach these decisions.” These technologies also mitigate risk through better fraud detection, as AI and ML can analyse vast amounts of data, applying techniques such as pattern and anomaly detection to flag suspicious activity in real time. “AI is starting to play a significant role as a fraud detection tool in the trade credit sector,” says Frank Knight, CEO at Debtsource. “With one in every 300 credit applications processed by Debtsource including some element of fraud, we constantly refine our models to better detect low-, medium- and highrisk applications.” According to Knight, applying more efficient AI models to trade credit application vetting helped Debtsource clients avoid more than R400m in fraudulent transactions in 2023. This fraudulent activity typically includes commercial identity theft and scam businesses.
13%
of the South African population holds 75% of total debt
Debt burden weighs on businesses Subdued consumer spending, high interest rates, global macroeconomic headwinds and structural challenges that hold back domestic economic growth continue to negatively impact businesses, particularly in the small, medium and micro enterprises (SMME) sector, vital for job creation in SA. “We continue to see a significant deterioration in the Experian Business Debt Index (BDI), which fell from a betterthan-expected 0.445 in Q2 to 0.141 in Q3 2023,” says Jaco van Jaarsveldt, Head of Commercial Strategy and Innovation at Experian Africa. Experian data on outstanding debt also negatively impacted the BDI in the most recent report. While the number of outstanding debtors’ days on average decreased to 47.9 in Q2 from 49.9 in Q1, the specific ratios relating to outstanding debt, which are applied to measure debt stress, deteriorated slightly.
Frank Knight … longer supply chain delays in shipping, harbour and rail networks have placed added strain on company cash flows.
According to Van Jaarsveldt, subdued domestic demand, electricity supply issues and logistics constraints that impact stock levels are putting businesses under pressure. “To keep their businesses afloat, owners are drawing on personal funding lines as small business funding dries up amid high interest rates and risk-off sentiment from banks.” Frank Knight, CEO at Debtsource, says companies now rely more heavily on supplier credit facilities as their
13.4%
The total number of business liquidations decreased by this margin between October 2022 and 2023
prime form of business lending due to the decrease in available bank funding. “Longer supply chain delays in shipping, harbour and rail networks have placed added strain on company cash flows, forcing businesses to access second-tier financing options such as invoice discounting or supply chain finance,” he says. “However, these are typically at much higher rates than traditional bank funding, adding further pressure to profitability and cash flows.” The financial stress these factors place on businesses is evident in the rising rate of delinquencies, with Debtsource statistics showing a 33% increase since the start of the current interest rate hiking cycle. “There is a direct correlation between higher interest rates and increased delinquencies in trade credit because more companies go out of business when interest rates increase.” While the latest liquidation
data released by Statistics SA on November 27 2023 paints a different picture, with the total number of liquidations decreasing by 13.4% between October 2022 and 2023, Knight says these statistics overlook a crucial trend. “The conventional focus on liquidation statistics as a bellwether for the business sector’s overall health does not account for the fact that companies are increasingly opting for business rescue instead of succumbing to outright liquidation.” While providing a lifeline to struggling businesses, Knight says this shift in strategy conceals the gravity of the financial distress in the market, with Debtsource witnessing a 26% year-on-year increase in business rescues. “Our records indicate companies that go into business rescue remain there for longer, which simply means liquidation stats have a lag effect.”
Employees under financial stress = reduced productivity = more business stress! Partnering with Bayport’s financial wellness solutions enhances your employee value proposition Practical debt solutions Financial education Employees who are more engaged and productive
Call: 087 287 4006 to speak to a Bayport consultant Email: moneysolutions@bayport.co.za www.bayport.co.za
Borrow for the right reasons. Bayport Financial Services 2010 (Pty) Ltd is an authorised Financial Services Provider (FSP 42380) and a registered Credit Provider (NCRCP 4685). Terms and conditions apply.
Bayport Money Solutions© Bayport SA bayportza Bayport_SA