Matt Komos and the state of the American consumer credit economy

Few of us will have experienced something as disruptive as COVID-19. The disease, and the lockdowns that followed it, shaped national economies and individual's lifestyle choices in markets around the world.

In today's episode, I catch up with Matt Komos - LinkedIn and find out how the American consumer credit industry has held up.

As TransUnion's VP for Research and Consulting, Matt is able to combine his apply his industry expertise to one of the richest consumer credit databases in the market, to give us a true bird's eye view of the situation as we begin discussions of a post-COVID recovery.

You can find ore of Matt's work at https://www.transunion.com/research

If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.

Regards,

Brendan

The full transcript with timestamps is below:

Matt Komos 0:00

I think the unprecedented level of government support and the way that lenders and consumers alike have been able to help keep the ship afloat, but would agree that it definitely could have been a lot worse than what we've seen up to date. But to your point, there are still plenty of consumers, hurting out there, and hopefully are getting that assistance as they need it.

Brendan Le Grange 0:43

Welcome back to How to lend Money to Strangers, the podcast about lending strategies across the credit lifecycle and around the world. And there isn't a bigger market in the world than the US. And there probably hasn't been a bigger time of chaos than right now. So in today's episode, I catch up with Matt Komos, and ask him about the state of the US consumer credit economy as we look towards a post COVID revival. Matt is the Vice President of Financial Services Research and Consulting for TransUnion in the US, so as well as more than 20 years of experience in consumer lending as an entrepreneur, a consultant, and an analyst, Matt has access to data that gives him a true bird's eye view of the market, making him an ideal candidate for the show. Join me in a second for our discussion.

Matt Komos 1:31

Brandon, What's up, dude?

Brendan Le Grange 1:32

Hey, Matt, how you doing?

Matt Komos 1:34

Life's been interesting. You know, it's been a weird year, of course.

Brendan Le Grange 1:39

But yeah, I mean, I guess that that's been a key topic of discussion now with the last year and a half, all COVID all the time in the credit markets, as well. And you've obviously - as you say, things are opening up now, there are obviously still far too many aftershocks to say COVID is behind us, but at least we're at transition stage - you've had a lot of data, both real data and survey data, to keep your eye on through the crisis. I think two key points that wpuld be nice to talk to and get your view of the American market with is (1) what is the status of the consumer credit economy, having been through what in some ways is the worst economic crisis in living memory? What did the market suffer? How've people gone through with accommodations? And how's that all looking? And then (2) I think maybe after that we can pick up on this versus the financial crisis, or the subprime financial crisis of 2007/ 2008.

Matt Komos 2:40

Sure, yeah. You know, so we've seen a lot of interesting dynamics in the consumer credit market. When COVID first started, you know, if you think about back to April, even at the end of March, April, May last year, there's a lot of uncertainty. And so what we saw was, generally, that, as consumers went into lockdown, their spending halted, people were not travelling, they weren't going out to eat. And so we saw actually, a lot of credit activity just fell off a cliff. And then you couple that with the fact that many lenders were pulling back as well, right, the typical economic shock type of reaction for the lending ecosystem is to pull back and limit the amount of access to credit. Now, what was interesting, over that same timeframe, we actually saw, well, auto loans, credit card, and personal loans, took a dive but mortgages stayed very strong. And a lot of that was because of the low interest rate environment and the strong health of home prices. And those have continued to go up. You know, even as we talk through this transition period, we've seen a tonne of refinance activity as well as new purchase activity. That growth has continued. Now we think that the mortgage side is probably going to cool off through the rest of this year, and it's going to kind of taper off. When we look at credit cards, auto lending, unsecured personal loans, those have started to rebound a bit. So they're not yet at pre COVID levels. But we did see through the first quarter the balances were starting to come back. We saw through the end of last year, originations were starting to come back, you know.

But even within those different industries, there's some interesting dynamics. In auto lending, for example, there's been a lot of supply chain issues - chip manufacturing, there's been a disruption there, which has created supply issues on the actual automobile side - and so that has driven prices up. So if I'm a consumer, and I decide well, with the low interest rates, I can now afford maybe a little bit more expensive car, it might not be available or I might have to turn to a used car. So it's been a very interesting dynamic in the auto space. And, you know, our auto leaders feel like this will probably work itself out in this the rest of this year, but again, it becomes that supply chain question.

Now, what we saw, you know, from a delinquency standpoint, and you referenced accommodations, that has really helped the US consumer, really across all major products, we've not seen delinquency spike, which again, is unusual when you know, we hit 14% unemployment from a peak standpoint (last year, it has been rebounding). Right, so employment has started coming back as the economy start reopening. But one of the challenges through all of last year was many different geographies within the US were kind of re-opening and then re-closing and re-opening. So it's kind of the stop and start thing that was going on. And the uncertainty about 'will I have a job?' or 'if I had my hours cut...'. We would have anticipated, typically, that delinquency would start going crazy. But that didn't happen. So lenders used accommodation programmes or payment deferral programmes to help stem that tide of delinquency; and really help the consumer bridge the gap between that unemployment and getting work again. What also helped was the massive amount of stimulus and government assistance that was provided to the US consumer. So the government stimulus being provided as well as unemployment benefits actually created, for some consumers, a higher income, and so they had much more cash flow. And what we saw happening was, you know, with the reduction in spending, many consumers were continuing to pay down their debt, which also helps push down delinquency. So it's been a flush of liquidity in the market, but then also these accommodation programmes. So, you know, many consumers, for example, they might not be paying their mortgage, so they're putting that money towards their credit card bills or their auto loan. And we think that's really what's helped keep delinquency at bay over this whole timeframe. Now, the current state of things, you know, many consumers are going to be coming off of their mortgage accommodations in the next couple of months. So we're keeping an eye on what happens when those consumers have to start making payments, not only on their mortgage, but then the rest of their bills, you know, we did a an analysis to kind of estimate, those consumers are going to basically experience a price shock of over 200%, in terms of their monthly obligations from where they're at today. So when that mortgage starts becoming due, that's what we're going to see how the consumer reacts.

And then the other question is, you know, for the other products, as they roll off of accommodation, what are some of the trends we're seeing. And interestingly, you know, the consumers who took advantage of those programmes early in the pandemic that have come out, they're actually performing pretty well. So you know, we haven't seen them go delinquent. And the trades that were on accommodation, or the other items in their wallet, consumers who are coming out more recently, who aren't able to maybe lean on some of that liquidity because the last round of stimulus went out a couple months ago. So there is a gap now, from an income standpoint, so it becomes a question of, will we see the employment rebound? Can consumers get back into the workforce to be able to start servicing their debt. So that's really what we're keeping an eye on over the coming months,

Brendan Le Grange 8:08

That puts into light, how much more complex the US market is. England, Scotland, and Wales had their own rules, but they were largely the same. The government support programme came in, it was a standard programme. And in terms of timing, we don't really have a big regional problem. So places like the financial centre in London might have hurt a little more as people left, (sure) to work from home, but everything opened and closed simultaneously. And largely, we had the same government programmes, which, again, unprecedented level of government funding, and unprecedented levels of people out of work, but at least it was a one level to watch. Whereas you've got 50 combinations (right) to try and keep an eye on. And I think what is interesting is... lock down came in, initially, and in the first month or two, it was never clear what sort of stimulus was going to come from any national government. And they all started coming up with plans encouraging payment holidays and such. You see, there's a combination, a lot of people said, I'm actually spending less. And if you hadn't lost your job, you're probably net benefiting because there's no temptation, there's no way to go out and spend, you could take payment holidays. So it is interesting to hear that, you know, that first batch caught up in their confusion, they actually now seem to be recovering, have got their minds around the new budgeting, perhaps, have adjusted by cutting back on spend, and are now doing quite well. Whereas others perhaps, maybe left it too late, maybe used up a lot of their savings, and now got hit in a worse position. Because when the crisis hit in the UK, it was one of the better times it could have, you know, the position of the market was actually pretty strong. We haven't had a lot of really strong economic growth, but it had been slow and steady. And since the last financial crisis had been recovering and in terms of risk, of the debt and amounts held by households, and things like the housing market were all pretty solid, we could absorb quite a lot, consumers were in a relatively stable position on average, and that there was now 18 months ago. And I guess what's worth keeping in mind is people that are hit now are being hit with perhaps not quite as strong a foundation, because they've got 18 months of trouble before them as well.

Matt Komos 10:24

Yeah, yeah. So first point, I would agree that the US, we were coming out of our longest expansion in history, you know, from an economic standpoint. So yeah, the country, the US consumer was actually in a, and we talked about this a lot, was in a good financial position, generally speaking, debt levels had kept growing, but income was keeping up relatively well with that. So kind of the debt to income picture was was pretty healthy. And the job market was great, you know, unemployment was down in the 3% range. We hadn't seen that in a long time. And, you know, I was recently reading a report, at least in the US, it was actually one of the shortest recessions that we've, technically speaking, that we've ever seen. But it's that that initial jump up to 14% unemployment and the recovery happened quickly, somewhat, but to your point, right, you have many consumers are forced to stay at home, you're not tempted to spend money. So you probably end up net benefit. And, and the accommodation programmes were made available to anyone. So what we have is a diverse set of consumers taking advantage of these programmes. And some of them probably didn't need it. But they took it as a precautionary measure and in the confusion, or just the uncertainty of those early days of like, not knowing what is this thing, and I can remember times where I was like, yeah, we'll be back to normal a couple months. And, you know, it didn't really pan out that way. And so I think lenders kind of made that conscientious decision that this has to be something that's going to be around until we're really in the clear. And and, you know, it's interesting, because, you know, we were talking a bit about the Delta variant that creates new uncertainty, right? I mean, there's, there's a sense in my mind that like, how much more might we have to go back to lockdown measures again, you know, and in the States there isn't a federally mandated thing, each state is kind of making up their own rules. And, and that happen, even with the government support, right, each state could decide to provide additional unemployment benefits or not. So it does make things a bit more complex. And in certain areas, there were certain areas within the US before this, that were already struggling economically. And so I think that really hit you know, hit hard.

And there's been this focus within the service industry, which is different than what we saw in the last recession, you know, we see a concentrated effect of this pandemic, whereas I think in the last recession, it was, it didn't really matter, necessarily what industry you worked in, you had, I think, a wider impact zone. If you work in technology, or the credit space, or you know, a lot of these types of jobs, we just shifted to working remote, but we didn't lose our jobs. So it's a bit different this time around.

Brendan Le Grange 13:11

Yeah, it's almost a new challenge, where suddenly the key risk is, well, what segment is somebody working in, right? That's typically not a measure available, even within banks. Government supports, well, September these programmes end, but a lot of the programmes worked on that idea. They thought, yeah, we'll do it for a few months, and then it'll be over. If this is the end of it, then it's probably fine. But as you said, we're not clear yet if this is the end of it. So it has been a weird impact on an industry and it's not something you can easily shift to because you can't move to a new state where you're at with demand, you can't go to a different type of restaurant, you can't work go from restaurants to hotels, and I think is a good reminder to lenders about the idea of affordability.

And also on long term relationships. So what I hope is, well, I hope we never have to do such wide scale accommodations, but what I hope is that the success of them - we saw them work in the UK, sounds like they're working in the US - might give lenders some hope in collections to help consumers that do fall into financial trouble in a normal economic cycle.

Matt Komos 14:27

Right. Yeah, exactly.

Brendan Le Grange 14:29

I guess one of the other key things and probably one that saved people the most is that, as you said, house prices have actually risen. The last crisis was a housing crisis. And your mortgage, if you have one, is your biggest single outlay in the month, but also your biggest potential wealth building tool. Yeah, So in the current crisis, people have one had the option to not pay the mortgage, and therefore save a huge portion of their monthly outgoings. So even if they took a payment holiday for one month or two months, that's a meaningful amount versus not paying an instalment loan. So having that a mortgage there has been really beneficial. And from lenders, the security has stayed there, you've had no problems of masses of consumers going underwater on their mortgages, which I think has been a great safety net for for all of us.

But you've looked at the payment hierarchy for consumers in this crisis. So as consumers are falling into financial trouble, most of us have a number of obligations, a credit card, or personal loan, auto loan and a mortgage, which of those we let default. So you've been able to see how that's changed in this crisis. And perhaps you can give a little bit of insight of how people have been thinking through their various debts now, and maybe contrast that to 2007/ 2008.

Matt Komos 15:55

Yeah, so we revised our payment hierarchy study, which is something we've been looking at since as early as 2007. And we looked at the what I would call the original construct, which is looking at mortgage + credit card + auto loans. What we used to think was consumers would rank order in terms of: they would pay their mortgage first, then their auto loan, then or credit card, and it kind of ranks in terms of what you would think from an asset perspective. Well, when we first did the payment hierachy, we actually found that auto loan is ranked first, then mortgage and then credit card.

Housing was at the crux of the last recession, and so what we had happen was home values collapsed. And so for many consumers, not only did they lose the equity they had built up in their home, but now that this asset that they believe, you know, was worth a certain value, all of a sudden went down to 50% of that value, or 60% of that value. And so many consumers in the last crisis actually walked from their homes, they just said, 'I'm not paying it'. And what we found was that mortgage actually fell behind credit card. So our new ranking became auto loans, credit cards, mortgages, and that was really surprising to us. But it made sense, because for many consumers, they had to use their credit card as a form of liquidity, right, that gave them access to buying groceries, if they were out of work, paying for whatever, and they might still need their car to get get to a job.

When we did this refresh, that new dynamic we saw back in the last recession actually reverted in 2014. So we actually as home prices started coming back up, we saw that consumer started reprioritizing their mortgage ahead of credit card. And what we saw, you know, actually starting back in like the first quarter of 2017, we first see that mortgage overtakes auto as the primary payment. So the phenomenon of mortgage becoming the highest ranked actually started well before this pandemic. And then what we saw in the pandemic, was the separation between auto and mortgage delinquency got even bigger. It's likely due to a number of factors, as we talked about the accommodations, for sure, you know, suppressing that delinquency, but also, you had so many people now working from home that they had to protect their home, they might be willing to maybe let one of their autos go, because they weren't going anywhere, you know, and people weren't taking road trips, and they weren't worried about their car, they had to make sure that they had a place to work that coupled with the home price index in the US. It's unbelievable the growth that we've seen. And that period in 2017, when we look at the rate of change in home price index, that's where we see a really big jump, and it's continued on. So it really ties very closely with what we would expect as those home prices go up, consumers prioritise their mortgage. Now, it's interesting, we in the past have always seen a pretty strong correlation in these kind of dynamics with unemployment as well. And it was tracking closely with unemployment to now with that spike in unemployment, we didn't see any shift. And we actually continued to see that, that greater push of, you know, mortgage separating from auto. So that was interesting to us just to see those dynamics at play. And again, very different than the last recession, where housing was kind of at the middle of the crisis, and was the, you know, a lot of the cause of the crisis. Whereas this time, housing was not really a factor is a totally different exaggerative factor at play here. In the home became so much more important

Brendan Le Grange 19:24

Here in the UK we're obviously... it's a country that's traditionally very reliant on public transport but because this was a health crisis, and people wanted to avoid being close to others, we saw a sudden demand increase for auto loan. So yeah, normally in a recession, people aren't going to think that I should go and buy a second car. But you mentioned earlier their supply chain issues, and also I think people were looking for a car to replace a bus trip to the office rather than a family car, so those combined meant that the auto loan industry data just showed it's, I think, it's six year old cars was where the big spike was and cars a year old or younger, so basically new cars, were down year over year, people couldn't get stock onto the floor but also most of the demand was for for older, cheaper cars. Which for lenders, also changes, because that's changes who you borrow from. So while the industry industry grew very well, and seemed to survive COVID without any of the trouble other products had, it wasn't every lender, which does, I think, serve as a good reminder of these sort of hierarchies. They're not fixed based on the pure merits of any one product. It does depend on the nature of the crisis.

One of the risks, I guess, that was mentioned, when I was working with it in the UK, but you've brought up here as well, people have been taking some payment holidays and... or payment freezes, some industries were easier to get those in than others. Or at least, it made more sense perhaps to get one for your mortgage than for an instalment loan that's only maybe $50 a month. Have you got any data, or just any chatter from the industry, that whether they think that's masking some delinquencies? Or do we feel like it's been going long enough now that we're actually pretty confident that, despite the fact there was a bit of a scramble for payment accommodations, the delinquency numbers themselves, are fairly reliable now/ that actually, most of that hiding of impact is washed through?

Matt Komos 21:27

Yeah, it's interesting, I think there's still a mixed bag in the US in terms of how lenders are thinking about it. We talked with a lot of our, you know, the lending community regularly. And some of them believe that we're kind of past the concern, and the wave, and the number of consumers that still having an accomodation are going to be coming off is reduced so much that they're not concerned about it, then we have a whole other area of the kind of credit ecosystem where the lenders are saying, you know, I still feel like there's hidden risk in the system and how do I have to think about that, you know?

And so, we've been trying to understand that for a while. We actually just released a study a couple of weeks ago looking at 'could we, if we look at the behaviour of the consumer within the first couple of months of them taking the accommodation, would that help us better differentiate risk in the long run?'. And we found, for example, if the consumer was opening new loans, or paying down their existing debt, or exiting their programme early making payments while they were in accommodation, and it's not surprising, right, these are all rational things that would make sense that these types of consumers are likely lower risk, but we have to prove it empirically. And if you have that concern, you might want to look at your portfolio to say, okay, can I better differentiate risk. But, you know, the message is understanding what happens with that consumer within the first couple months of them entering that programme can help uncover that underlying risk again, and then there's those other lenders that say, I'm not too worried about it, it's not a sizeable problem anymore. So it's definitely been a mix in the industry,

Brendan Le Grange 23:06

I guess it's that same problem of measuring at the portfolio versus individual level. So the UK market, I think, is in a similar position where, if you talk about it in industry, most of the payment freezes have been paid down there, most of them were paid down within six months at most, and the majority of people are back on normal payment programmes. But even if it's 1% of people are now six months, nine months, that they haven't paid the mortgage, that 1% of people who received it - if you haven't paid your mortgage for nine months, realistically, what is the route back? Get a job today, nine months worth of mortgage, even six months worth of mortgage payments, by this point? They might have every intention today, which is the silver lining, they are still working with you, they're communicating, but it is very much a collections problem now. And given that it's a mortgage, this is not a portfolio that has lots of room to absorb those that sorts of losses. So I think, are the numbers, those delinquency numbers at the industry reflective of true risk, probably pretty close, however, there'll probably be some consumers that are in dire straits.

As we came out of the last recession in the US equity in homes evaporated, the access to that sort of credit that homeowners used to have against their mortgage disappeared, so people started coming to look for traditional instalment loans. But a lot of instalment loan providers had either burned their fingers in the recession or just got weary, so they had stepped back and there was that demand-supply gap. And FinTech stepped into that gap. Oversimplification of the story, but basically, FinTech said we can make those loans and changed the industry and revived it. Now we've had another recession where lenders have been forced to reevaluate their models, borrowers potentially have rethought what is important and what's not important to them. Do you feel like this might also create any openings for new lending providers or any shifts in consumer patterns or, as things pick up, they'll pick up looking largely the same as before?

Matt Komos 25:15

Yeah, it's really good perspective because you know, typically, right, the economic disruption, it often leads to opportunity. I think what we've been seeing in the US, it's, it's a product space that I think is already very popular in the UK, the buy now pay later space, it existed in the US before the pandemic, but you know, you have the convergence of consumers being forced to move online to do shopping, you know, so even though they were locked down, I think many consumers were still buying home exercise equipment, or redoing their homes, whatever the case may be, and you have the buy now pay later space, you know, where it creates this convenient option, as you're going to check out to be able to pay in four, or no interest, you know, whatever, there's so many different options. Now, we've started to see that emerge in the US.

So it's something we're keeping an eye on and studying a bit to understand, is it really going to grow? Does it? Does it present a threat to the card market, the private label market? Is it augmenting the consumers purchasing behaviour? And then as we start to reopen, I think the question becomes will consumer you know, now that consumers have gotten used to that way of shopping? Or will that stick around or do consumers go back out and are spending at brick and mortar stores, they want to go back to a mall because they haven't been to one in 18 months, or whatever the case may be. But we're also seeing lenders and these buy now pay later, they're starting to potentially offer that point of sale experience at the brick and mortar. So, you know, that's where I think we starting to see that response. And it will really just depend on that consumer preference.

Brendan Le Grange 26:56

Yeah, as you say, it's the big story in the UK as well, I think we roughly got about a decade's worth of movement towards online spend in the first month of lockdown. So from about 20% of transactions being online to about 30%. Some of that was forced because you couldn't go to a pub or restaurant so those disappeared. So yeah, I don't think it's necessarily that big a move, but I think what it did successfully, was get a lot of people more familiar with the other types of online commerce. So everybody might have been shopping at Amazon, but the grocery stores, all those sort of more mundane things, we all knew you could go to a grocery store and order it, but I think it broke those barriers. And that's gonna have help. And all the fashion. So here buy now pay later is very big in the fashion market and all that, yeah, instead of walking around the store and looking at goods, it pushed people online. And I think it pushed a lot of retailers to improve the online experiences that they offered. Even before this hit, public data, if you look at the credit card balance growth in the UK, it's been about 2% year over year for the last couple of years, which is basically inflation. People have been getting rid of cash but credit card hasn't been picking up a lot. So they were really struggling to appeal widely to the market. And all of a sudden, you had these brands emerging that are doing nice and simple, interest free, two/ three months. Yeah. Not looking for anything complicated. I don't want 24 months to pay it down, give me just three months to split it. I mean, before the crisis hit our message to card operators was 'this is going to be about finding growth'. And then the message through the crisis was 'if balances dropped 10% overall, there'll be a lot of people looking for growth', right. And now 'you're looking for growth alongside these players who've had this perfect storm where they are emerging, they're the hot new thing, but also everybody has been forced online, and all the strongholds of credit cards, travel and entertainment to kind of shut'. That said, again, completely oversimplifying it, but it is something they can replicate pretty easily, not necessarily, from a business point of view, the economics are harder to get right than the experience, but to just compete by offering a two month, three month payment option is something that you'd think they could match quite easily. In fact, when I was in South Africa 20 years ago, all credit cards used to have 'straight' where you're paying it on the credit card as normal 'budget' where you'd say 'I want this individual transaction over three, six or 12 months'. They would charge you full interest rates, but it would be 3/ 6/ 12 months, so be interesting to see if something more akin to that arises where cards come in, and

Matt Komos 29:47

We're starting to see that a bit in the US. So there are some card issuers that are moving towards that model where, you know, you can split balances into an instalment payment, you know, over a shorter period. Consumers have voice that that's what they like. So I think that yeah, I think card issuers awakened to that fact and have started to respond. At the same time as we see opportunity for these new players in a market where digital, you know, first becomes kind of the mindset of the consumer. The reality is fraudsters are going to look to exploit that. And so I think that's where a lot of their concern is, is, you know, okay, if I don't traditionally create a digital experience, or, you know, an online type of engagement, because there's plenty of lenders in the US who don't have that totally figured out. Their biggest, you know, one of their biggest concerns or questions is, well, how do I prevent, you know, the fraud side of things, you know, and then you couple that with the growth and synthetic ID, so that has been a kind of a negative impact to the industry. Many of them are aware of it and they're making efforts to try to help work, that kind of activity.

Brendan Le Grange 30:57

Oh, well, thank you very much. I will catch you again soon. (Absolutely). And thank you for listening. After three country-centric shows, first with China, then Georgia and now the USA, next week, we're going to take a deeper dive into a core discipline of lending -collections. So please join me and Terry Franklin for that, next Thursday.

This has been How to Lend Money to Strangers, a podcasts about lending strategies around the world and across the credit lifecycle.

See, I forgot to push record on my my mix as I record on zoom and on and on the theme for this reason, I just looked here now on the Coronavirus, I see a big green flashing light