Case Study: TransUnion demonstrates the value of frequent data in the unsecured lending market
Financial services organisations, particularly those operating in the unsecured lending space such as furniture retailers, often target high-risk populations. This has the potential to deliver large rewards, but it can also result in significant levels of impairments. When the credit underwriter for one of the largest furniture retailers in South Africa, with nearly 1000 branches nationwide, was looking to cut costs, the first area they identified was the frequency of the data received from their credit bureau partner TransUnion.
However, by identifying and highlighting the dramatic losses the underwriter would suffer should this action be taken, TransUnion effectively demonstrated the enormous value of frequent, up-to-date data around credit and lending transactions. This resulted in the credit underwriter maintaining the monthly data received, ensuring responsible account management and maintaining optimal levels of risk within the portfolio.
At the end of the 2013-2014 financial year, the underwriter’s financial statements were under pressure and cost-saving initiatives were examined to ameliorate this performance. As part of an effort to cut costs, the financial service provider examined the possibility of reducing their monthly TransUnion account management data solution to a quarterly run, thereby saving around R3.2 million per annum.
However, the cost-reward matrix for such data is not as simple as reducing frequency to save money. After conducting a thorough impact analysis of the consequences of downgrading to quarterly batch data, TransUnion calculated that the underwriter, far from benefiting from reduced costs, would actually suffer a potential loss in revenue and increased impairments of R100 million per quarter, a total of R400 million annually.
According to Matthys Swanepoel, senior director of business development at TransUnion, credit data can be extremely beneficial to financial services companies.
“With high-risk consumers, there is enormous value to be derived from bureau and transactional data and the potential losses that the underwriter would suffer as a result far outweigh the immediate cost saving benefits,” said Swanepoel. “The credit bureau information provided by TransUnion is used by the financial services provider to determine what products to market to existing consumers, whether or not to extend further credit or decline credit and so on, based on reliable, up-to-date information on consumer credit health and recent payment behaviour. In today’s world this information changes so fast that using quarterly data is detrimental – the information is outdated, increasing risk and causing significant loss.”
During TransUnion’s impact analysis, it was identified that the financial services provider delivers R1.1 billion worth of new credit facilities per quarter. Without up-to-date credit bureau data, the company was at risk of declining applicants that could have proved to be profitable and of increasing bad debt as a result of approving applications that should have been declined. This would have resulted in the aforementioned loss in revenue and increased impairments of R100 million per quarter, close to 10% of new credit facilities, achieving exactly the opposite of the goal of cost saving.
“Ten years ago, best practice dictated that quarterly data runs were sufficient. However, during this time, impairments represented just 10-12% of personal and microloans. This figure today sits closer to 40%, meaning that almost half of all consumers granted credit will be unable to service their debt. People are overextended and with job losses, economic instability, increase in tax burden and other macro-environment trends, this is a highly volatile market,” Swanepoel explained.
“The underlying bureau data that drives our account management scores and strategies can change so dramatically even over a month that some of our clients are even beginning to request daily information. While the margins are good in the unsecured lending market, financial services providers need to be savvy about lending money. This in turn requires up-to-date, sound data on consumer credit behaviour,” he added.
When presented with the impact analysis, however, the executive team took an immediate decision to maintain monthly data runs.
“Having more frequent data available allows financial services providers to gain a holistic insight into specific consumers, including indicators that the consumer is distressed or likely to default on payments. Ensuring the most up-to-date view of consumers is essential for smart decision-making ability and in light of increasing regulation, is also important for compliance with changes in legislation such as the amendments to the National Credit Act (NCA),” Swanepoel concluded.