'New to credit' shouldn’t mean 'too risky for credit', with Charlie Wise
One morning, about five years into my time living in Hong Kong, I slipped my foot into a shoe only to bump into a frog that was sleeping inside it. Rough calculations say that, by that stage, I’d slipped a foot into a shoe 3,650 times in the city and thus the odds were greatly stacked in my favour, and yet, so great was my shock, and so increased was my awareness of what might slip under the door, that I checked every shoe every morning from there on out!
Lending is somewhat similar. The pain from the one loan you lose can overshadow the joy from the nine, or even ninety-nine, that pay you back. So you take precautions. You tip over the shoe. Or maybe you’re more scared of frogs than I am, and you poke a stick in there. But sometimes, those precautions become overkill. Maybe you’re that scared of frogs that you won’t settle for anything less than one of those bendy cameras surgeons use.
Unfortunately, you don’t have one of those bendy cameras surgeons use. And thus, actually-good would-be borrowers get turned away, not because they’re risky, but because we lack the data we want to be one hundred percent sure they’re safe.
The study we’re speaking about can be found here: https://content.transunion.com/v/english_report_empowering-credit-inclusion-a-deeper-perspective-on-new-to-credit-consumers
And as we mentioned, your local TransUnion homepage will also have links to the country-specific versions where those are available: the USA, Canada, South Africa, among others.
Charlie Wise can be found on LinkedIn at https://www.linkedin.com/in/charlie-wise-959570/
You can learn more about me on my LinkedIn page, my action-adventure novels are on Amazon, some versions even for free, and my work with ConfirmU and our gamified psychometric scores is at https://confirmu.com/ and on episode 24 of this very show https://www.howtolendmoneytostrangers.show/episodes/episode-24
Oh, and I'll announce it properly, but I'll be recording an episode of this show at Money2020 Europe in June so if you're going to be there, too, let's meet up. And if you're not, but you would still like to participate in the show, reach out to me at https://www.howtolendmoneytostrangers.show/contact-us
Regards,
Brendan
The full written transcript, with timestamps, is below:
Charlie Wise 0:00
The idea that all new credit consumers are high risk so let them prove themselves to somebody else before you take them on, that's really one of the things that we wanted to debunk as part of this study.
Brendan Le Grange 0:14
My very first job out of university was at a bank. In the weeks before I started, I visited my local branch and with only my offer letter in hand, signed up for an account, an overdraft, and my very first credit card. A few years later, when I was buying my first house, I got a pre-approved staff mortgage at the very best rates in the market. In other words, me, the guy who was so often designing the strategies that provided credit to the market, had no idea what it meant to be new to credit or credit invisible.
And I'm not unique, of course, it's a problem in almost every industry, that the more entrenched we become as insiders the less we remember about what it's like to be an outsider.
Welcome to How to Lend Money to Strangers with Brendan Le Grange, as I chat to Charlie Wies, a TransUnion institution, about his team's global study of new to credit customers.
Okay, well, Charlie Wise Senior Vice President of Research and Consulting at TransUnion, welcome to the show.
Charlie Wise 1:25
Thank you so much, great to be with you.
Brendan Le Grange 1:27
You were for a long time in the running to be TransUnion's most travelled employee, I think, every week or two somewhere else in the world. But you've settled down a little bit since then. That said, we're recording today in London, so you're not chained to your desk in Chicago by any means, so before we get into the new to credit study, and what that all means, maybe we can start by talking a bit about your role at TransUnion and what your team around the world is bringing to the market.
Charlie Wise 1:54
That sounds great. The role of Research and Consulting is to take this data that TransUnion has - in the US, the UK, Canada, Hong Kong, India, South Africa, and many of the major markets around the world, we sit on this consumer credit data - we have amazing insights into how consumers are acting, behaving performing on the credit they take on for everyday expenses for major purchases, etc, we have the ability to essentially look at the credit wallets of hundreds of millions of consumers around the world. And that's what my team really does is to dig into this data, to understand the major trends to be able to talk about how the consumer is contributing to the overall economic health of the different markets, and what lenders can better do to serve the needs of consumers going forward.
Brendan Le Grange 2:44
Yeah, and I think the term 'research' can get used in many ways, and we're talking here, in particular, about the new to credit study you've recently published - it's a study that's based on deep analysis of the actual bureau data that's been reported to you at TransUnion, as well as traditional survey based approaches, asking consumers what they think. So before we get into what that's showing us, could you describe this new to credit study, the scope of it?
Charlie Wise 3:11
The new credit study really stems from TransUnion's desire to help promote financial inclusion around the world.
Financial inclusion is at a major strategic priority of ours, to get more consumers access to the credit they need and deserve. Consumers that can access credit, have more ability to purchase homes, to get the vehicles and transportation they need to be able to get to work to start small businesses, etc. So promoting financial inclusion is very important to TransUnion.
And understanding new credit consumers is one of those foundational pieces: the consumers are coming into the credit market for the first time, who are they? what do they look like? how do they perform?
We set out to paint that picture, to essentially demystify this group that many lenders and governments and policymakers may not have the tools to understand themselves. We wanted to bring those insights to market and share that.
Brendan Le Grange 4:02
Yeah, it's an interesting space for a credit bureau because, I guess, over the last 40 or so years that there's been a credit bureau score in the market, it's grown so ubiquitous to us that there's a world for people that on the inside or people that have a credit bureau score, but a different world for people on the outside, with no credit bureau report, or no credit bureau score, and there's a big barrier to entry.
Charlie Wise 4:24
Typically, when we look at this, and we define new to credit consumers as those who are opening their first traditional credit product - we've got history and our credit bureau data that looks back many, many years and so we're able to see if this is a consumer that maybe had credit three four years ago, took a pause, and is back in, we're able to essentially push those aside and say no, we're really looking for people are opening their first traditional credit product for the first time. And by traditional credit product, I mean, credit cards, auto loans, mortgages, personal loans, student loans, the kinds of things that are reported to credit bureaus. Understanding that in many markets, there are informal lending arrangements that may not be reported to the bureau's. TransUnion has no visibility to that, so those are obviously not included in our study.
And this study period looks at those new to credit consumers for the first two years of their credit journey. And we basically want to understand after you open your first product, what do you then do? How do you then perform on your first product and your subsequent products?
Typically, in the markets that we look, at about two to 3% of the adult population is the amount of new credit consumers we're seeing come into the market each year.
And certainly the last couple of years had been quite interesting with the pandemic, disrupting a lot of economies, a lot of credit markets, but we are seeing about 2% to 3%, up to 4% (I think India is the leading market that we looked at about 4%).
How many are there: about 6 million consumers in the United States; in Canada, about a million consumers a year; in India, because India is a very large market, about 35 million consumers a year become new to credit. So there is globally 10s of millions of consumers that are collectively entering the credit market for the first time. So it's an important and sizable enough market, that it really matters.
Brendan Le Grange 6:14
Looking at the report across all the countries measured, which includes developed countries and developing countries, northern hemisphere and southern hemisphere, eastern and western - so a real global view. Yes, there are a lot of young people, obviously, but actually sort of 40% of people or so are not brand new graduates, brand new workers, there are many reasons people are new to credit.
Charlie Wise 6:34
Absolutely.
And particularly in developed markets (places like United States, UK, Canada|) the new adults, as Gen Z consumers who are 'adulting' for the first time tends to be the largest portion of new credit consumers, but not all of them.
As you noted, in many cases, what you're finding is consumers that maybe haven't had a need for credit before they reached their 30s. But for the first time, they say, you know, this world of paying cash, this world of using public transportation, maybe it's 'I have a new need', or maybe something has changed and now I need a loan.
We also certainly see in a lot of markets, that immigrants, new to country consumers, that may be older in many cases represent a significant portion of the new credit population. Canada is a perfect example of a market that has a large, ongoing influx of immigrants new to country, they need credit, they open it.
It's interesting to see though that India, the largest new credit market, in fact, you know, the largest population market that we're able to study, the largest population of new to credit consumers does not come from Gen Z, but actually the next older generation, the millennials, and our research found that that was largely due to the fact that India still is a very unpenetrated market, there's a lot of geographies, there's a lot of the population that just haven't yet had the opportunity to join the credit market. So there's a lot of called playing catch up in the Indian market, those older consumers that may not have either understood how to get credit, or because they live in rural areas, there was simply nowhere to get credit, are now getting it for the first time.
Brendan Le Grange 8:03
The interesting thing, and I think probably the main takeaway from the study, is that, actually, there isn't a huge amount of risk coming from these people in their first product.
So talk to me about how you looked at the risk of these incoming new to credit customers, and what it showed you about the inherent risk of first time borrowers.
Charlie Wise 8:21
There were two angles that we took: we took a quantitative... well, it was all very quantitative, but one looked at the measured reported credit data about these consumers. We're able to see the products they opened, when they opened them, how much they took out, and what was their subsequent repayment performance? Did they pay as agreed? Did they go into delinquency or charge off?
We coupled that with a market research study where we surveyed consumers that were identified as new to credit, because we want to kind of marry that what drove you to get credit? What was your experience? What's important to you?
What are we able to observe, as well as understand what's going on in the mind of the new credit consumer, because it really helps you understand how better to serve them.
So when we looked at the performance data of consumers when they opened their first product, what we found is that, surprisingly, that performance on both the first product they opened, as well as in subsequent products they opened over their first two year journey, when compared to existing credit consumers, those that had a more established track record of borrowing their repayment performance was (all else, you know, being equal) pretty comparable.
Which means that lenders are doing a good job of essentially making sure that those new credit consumers aren't getting in over their heads or not giving them credit cards with huge limits or large loans that they may struggle with. They're essentially helping them along that journey, giving them as much credit as they can manage, but then hopefully, they're able to quickly respond and say, okay, those the pay is agreed their first six payments for instance, on the credit card, they pay as agreed. Maybe I'll start metering out larger and larger limits because they proven themselves to be able to manage that
Brendan Le Grange 10:00
But it's interesting to see that you can measure that down to quite a fine detail. And obviously, that varies by client and country. And we'll talk at the end again about how people can contact you - but for any lender that's interested in maybe revisiting their new to credit score, they can look at the hard numbers, this is not something they need to take your word for, you can really track those performances that over two years, which I think is reassuring,
Charlie Wise 10:23
Exactly.
And one of the challenges is with lending to new credit consumers is that many of them because they don't have that credit history, there's very little data on which to assess them, at least from a traditional standpoint. So what we're seeing is in many markets, lenders are more and more looking for, and getting access to alternative data, things like rental payments, telco utility payments, other types of obligations that consumers have, where they're able to demonstrate that behaviour, the more they're able to access that the more confident they can be in extending that credit.
So that's a big development we've seen over the last 510 years that resurgence and certainly strong demand for what other data are available, if you don't have that traditional credit report,
Brendan Le Grange 11:09
What have you interpreted from the reasons that people are giving you to why they're taking that first product, and maybe how that varies with the the product needs and the product offerings across the world.
Charlie Wise 11:20
When we look at the first product opened by new to credit consumers, there's a pretty wide divergence by market. So in markets, like the developed markets, the US, Canada, UK, the most common first opened product for new credit consumers is a credit card. And a lot of these markets, credit card market is is very well developed. Credit card lenders have developed tools to bring consumers into the market that have no history, they can assign very small limits. In some cases, they can put in place secured cards that consumers need to put down a deposit against which to spend or borrow to manage that risk. There's ways to manage against that.
But these are highly developed credit card markets with a high degree of penetration of consumers that have that product. And so in those markets having a convenient means to spend is that is the primary reason given. And I think that has to do with the product itself. Because credit cards, yes are a source of borrowing. But they're also a means of conducting transactions, travel tickets, and reserving hotel rooms and things like that, that maybe consumers don't necessarily want to spend cash on, or that need to bridge short term, a large purchase and paid off over several months. So it is a tool of convenience as a credit tool of convenience that a lot of consumers, particularly those that are starting their first jobs that are adulting for the first time recognise that they need in those markets.
Let me contrast that, then, with the developing markets where credit cards are not nearly as mature a product, it's much less widely held in markets like India, Colombia, South Africa, a far smaller percentage of the credit active population have credit cards and credit card issuers in those markets are much less likely to have that be a product they want to put in front of somebody that doesn't have any credit history.
What you're tend to find is that, in those markets, the first product tends to be things that facilitate purchases. In South Africa, it's clothing accounts; in India, it's what's called consumer durable loans, essentially loans that are used to finance larger ticket items like household goods, appliances, etc; and in Colombia, the types of consumer spending finance loans a consumer needs to make a large purchase, they don't have the cash for the first time, they're recognising that I need to bridge that gap between what I have in my checking account today, and what I need to spend on, it's not necessarily that they're needing to take on debt because they can't make ends meet, they need to make a large purchase.
And the recognising the value of credit is it lets you bridge that gap between income and spending in a way that is responsible. And so that's where we see that big divergence in terms of the product and what they need. And when it can be asked consumers, it very much does dovetail they say I have a need to know to spend, I need to make a large ticket purchase that that really correlates with the product they choose to open.
Brendan Le Grange 14:04
As people get this first product, as they do get their first entry into the world of traditional credit, you surveyed them and asked them about the expectations of future demand - and we see that actually this point is the start of what they expect to be a relatively dense period of credit demand, that in the next year or so they expect to need to take out several other credit products.
If you're trying to sell products. There's not many times in someone's life, when they are out there looking for lots of products at once - and starting your first job or entering the market for the first place is one of those where you might want the credit card first, but then you might need a car loan, you may even want a mortgage or some other things to get that life on track.
So this is not something we're thinking about it in relationship terms and I'll give them a small limit credit card today. It's I'll give them a small credit card today but maybe I can also cross sell them a personal loan, maybe I can cross sell them an auto loan in a few months. Maybe in a year or two I can cross sell them a mortgage, these are consumers that anybody looking for growth should be interested in, in the relatively short term.
Charlie Wise 15:08
Lenders face that interesting dilemma of, they're always looking for growth. They're always looking for profitable new customers. But in many cases they're concerned about, I would say, diving in too deep with consumers that don't necessarily have that track record.
They want to wait until somebody has established their track record some place else, really proven themselves to be able to manage their debt, and then they want to jump on them and create a loyal relationship... well, that's a very expensive proposition, because it means you have to dislodge somebody from where they've been previously.
That's one of the things that we wanted to shine a light on is to understand, are these people really riskier? In other words, do you need to wait? Or do they reveal themselves pretty quickly.
And that's really what we found, is that based on the performance of consumers, when they open those subsequent products over the first two year journey, in many cases, they actually perform better controlling for credit score performed better than those that have established that track record.
And we think that's important, because if lenders are looking for profitable customers, they're looking for loyalty, they're looking for customers that are going to, all else being equal, take out additional product for the same lender and not shop around every time.
Well, we found through lots of our research, that being that first lender, or taking care of consumers early in that journey is an opportunity to create that loyalty, wow, bank XYZ really took care of me when nobody else would, now that my needs have expanded now that I need that auto loan now that I need, you know, a personal loan, I'm gonna go back to them. And that really is an opportunity for that long term profitable relationship as opposed to a one off transaction.
Brendan Le Grange 16:44
These consumers value transparency, they value understanding the credit product, and maybe that's something that's given by now pay later a leg up in the market. But more broadly, I think it maybe speaks to the need to, to educate the customer to have a transparent product that they can see. And perhaps even that journey that the consumer can see. Okay, this is I'm going to go from where I am today, to an auto loan and a mortgage in five years time,
Charlie Wise 17:09
There's been some positives, and there's been some negatives in terms of the credit awareness among younger consumers, particularly in developed markets, but I'd say in developing markets as well, that in some cases, debt is being portrayed as a four letter word.
In the United States, where I am, a lot of younger consumers do further education, they take out student debt. In some cases, there's a lot of burden when they get out of school, and they're conditioned to think of debt as a bad thing, something to be avoided. I've talked to younger people that have actually said, it's like, I'll never go into debt. I don't want to take on debt. To which my answer is so you have no interest in owning a home. Oh, yeah, I'm gonna buy a house someday, it's like you're going to pay cash. No, I'll take out a mortgage. But that's not debt. Yes, it very much is debt.
I think this this idea of thinking of debt as a credit card that you're overextended and you can't pay back or student loan, that you might not be able to see a light at the end of the tunnel, that there's a balance the debt can be, and in many cases, is a very useful tool for accomplishing what you want to do. If you need to save up the money to buy a home. You know, as well as I do that many markets, it's going to take you a lot of decades before you're ready to pay cash for for anything other than a than a studio apartment or a trailer in some places. If you want to own that home, in time that your small children can live there, you're going to have to build to borrow money.
And that means establishing a credit track record.
That means taking on debt responsibly, showing to lenders and others that you can manage that debt, building up your own skills around that because managing debt really is it's a muscle that needs to be developed and nurtured over time. And in a lot of cases, there's an opportunity and responsibility by lenders to educate consumers about both the positive need for and uses of debt to accomplish your life goals, but also what good debt management skills look like so that when consumers say things like, I don't want to take out more debt, because I don't want to become over indebted helping them understand, well, how much debt can you afford, based on your income level? What is the responsible level of debt? What kinds of things do you need to do to protect yourself from rising interest rate environments?
That is a very topical point of discussion right now. Or income security? Do you feel secure in your current job that you feel like you don't have to worry about that? Or are you a gig worker that might you have a much more fluctuating income? That's all part of credit education. I think lenders can help consumers, the more they know, the more that they can demystify this, the more the debt can be used as a tool and not as one of those unavoidable necessities.
Brendan Le Grange 19:45
I think it speaks to the need now to have a far more nuanced strategy for new to credit. They're not this homogenous high risk population that's just going to accept whatever is being offered to them.
It obviously varies by market. And I think for the most part, the best case is for somebody to come in and speak to their local representative to study their market in more detail. But, broadly speaking, looking at what you've seen in this report, what are some takeaways that lenders can maybe think about when they consider what the strategy is and should be for the new two credit customers in their market?
Charlie Wise 20:21
I think the more analytic approach that lenders can take, the more that they can make the kinds of decisions that's going to get the right credit at the right price into the hands of consumers that need it. So clearly, if you have a consumer, this demonstrated that they struggle with debt, they took out a first product and went bad on it's pretty quickly, maybe they just can't handle the debt based on their income. Maybe they're just not yet responsible borrowers because they don't understand what it entails to make timely monthly payments.
As a for instance, if you've proven yourself, it may be that lenders have no recourse but to kind of charge as much as lending laws will allow them to, to say, we have to protect ourselves against this risk. If you need credit, that's fine. But knowing that the vast majority of consumers new credit consumers that open new credit products, or even their first credit product, they're gonna pay as agreed, the more you understand who those consumers are, and not just paint a broad brush and say, now you're new to credit, or you've never had a product before you've just opened your first product, I'm going to charge you as much as as possible, because you must be riskier, and I need to protect myself against that.
Well, to be honest, for lenders, you're gonna get a lot of adverse selection, because the only people that are going to make cases take that very expensive debt, or the people that have no choice that absolutely need that credit. That's who you don't want. So I think that this study is a great start.
But it's not certainly the end game in terms of saying, so what would be the right pricing, what score cutoff would I use over there? Those are analytic studies that we do with individual lenders all the time to help them better understand that, but just demystifying the idea that all new to credit consumers are high risk, and let them prove themselves to somebody else before you take them on. That's really one of the things that we wanted to debunk as part of this study.
Brendan Le Grange 22:04
The next step, if somebody wants to, with more consideration, look at this wants to access the report and see the charts for themselves, or even if they want to speak to somebody who can walk them through it. And it's deeper meanings for their market. Where can somebody go to start that conversation?
Charlie Wise 22:22
Transunion.com for each country where we operate has versions of this report that you can find I don't have the URL around the top of my head, but certainly you'll be able to find that on the website. (edit: it is here: Empowering Credit Inclusion: A Deeper Perspective on New-to-Credit Consumers | TransUnion)
This was a recent study published in the US and Canada, we launched it at the end of January 2023. And other markets, we rolled it out. So looking on our website, you'll be able to find that, download the full reports, infographics, etc. And there's contact information for who to get in touch with TransUnion to follow up on next steps. And we've been talking to many major lenders in many markets about this report general, as well as what can we do to help lenders better understand this population?
Again, these studies are at a market level, each individual lender is going to have their own nuance on that depending on what products they specialise in, what segment of the market, they specialise in, what their own risk appetite looks like. That means that there as always, results will vary depending on where exactly you choose to play in that consumer lifecycle. If you really want to focus on new credit consumers, if you're looking for more mature consumers, high risk, low risk, etc. We help lenders all the time figure out how to use data and analytics to better target to get the right consumers in the door and find that profitable growth.
Brendan Le Grange 23:39
If you look at your research agenda for the next six months to or less talk about the rest of 2023. Are there any other big studies, or the big topics?
Charlie Wise 23:48
Some of the things that we're looking at right now have to do with the very timely topics of impact of inflation on consumer credit markets, how has inflation been impacting expected to continue to impact consumers and their capacity to manage their debt with inflation has been significant rise in interest rates in in many markets as well. And these things all impact consumer affordability. You know, when you have to pay more for everyday goods, you have to pay more for interest on your mortgage or credit cards. Sometimes that puts the squeeze on consumers, not everyone, but certainly a segment of the market.
So better understanding who who is more vulnerable versus who's more resilient in markets is really important and something that TransUnion has been spending a lot of time focused on. We're also recognising that many markets are continuing to to look at the R word, you know, potential for a recession, although it seems like a recession is just around the corner but has been for about six, six months so where that corner actually is we'll see.
Brendan Le Grange 24:48
I was feeling better last week, but now I'm feeling worse again, but yeah...
Charlie Wise 24:51
Exactly. There's there's good news, bad news, it seems like every day, but certainly understanding what that might mean and understand Seeing based on historical performance and historical views of consumer credit markets, in the US and elsewhere, what happened during the great financial crisis of 2008 2009? How did markets react? might we expect some similar things this time around? Or is this a fundamentally different circumstance that's likely going to affect consumers in a different way. That's another thing that we really want to understand.
We'd all love a crystal ball, but I think the more that we can use history as a guide to what might happen in the future, and what some scenarios might be, are things that we're really paying attention to, because we could ask for that by lenders all the time.
Brendan Le Grange 25:38
Great. Well, Charlie, the absolute pleasure to see you again, thank you so much for coming on the show. Great to be with you. All right. Thanks.
And thank you all for listening. Please do look for and follow the show on your favourite podcast platform and share the updates widely on LinkedIn where lending nerds are found in our largest concentration. Plus, send me a connection request while you're there.
This show is is written and recorded by myself Brendan le Grange in Brighton England and edited by Fina Charleson of FC Productions. Show music is by Iam_Wake, and you can find show notes and written transcripts at www.HowtoLendMoneytoStrangers.show
And I'll see you again next Thursday.