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BusinessDay www.businessday.co.za Thursday 22 February 2024
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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
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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.