Consumers Shifted Credit Payment Behaviours in South Africa and Other Global Markets as a Result of COVID-19

TransUnion Global Payment Hierarchy Study observes consumer credit behaviour in five countries

In times of crisis, repayment prioritisation of credit products often provides a clearer view of how consumers are meeting the financial burdens they face. A new TransUnion (NYSE: TRU) Global Payment Hierarchy study found that the COVID-19 pandemic had a pronounced effect—in a short period of time—on how people paid their debts, particularly when faced with financial stress. In South Africa, the changes were prominent across multiple credit products. In general, the priority placed on paying credit cards increased during the pandemic and overtook that of personal loans – a trend not seen in other global markets studied.

“TransUnion has tracked payment hierarchy dynamics for a number of years in South Africa and has looked at how global and localised financial challenges have had an impact,” said Carmen Williams, director of research and consulting for TransUnion South Africa. “This study is unique in that it highlights how and why payment dynamics changed in South Africa and other countries as a result of the COVID-19 pandemic – a global crisis that has impacted consumers worldwide. These insights will better equip both financial institutions and consumers, fostering more trustworthy interactions between them as the world begins to normalise and recover from the pandemic.”

Credit Cards v. Personal Loans – What is the World Prioritising?

TransUnion analysed and compared trends for wallet profiles that are popular across the countries studied, including South Africa, Canada, Colombia, India, and the United States. The country-specific study observed consumers with one or more credit cards and at least one personal loan with no delinquencies reported at the time of selection into the study sample. To determine which credit product was prioritised over the other, TransUnion observed payment performance of those consumers 12 months later, measuring the rate at which these consumers were 30 or more days delinquent (one or more months in arrears) on their credit cards and personal loans. As a result, payment priority and the delinquency spread between the products in wallet was observed.

In most of the markets studied, there was a prioritisation of personal loans observed when consumers possessed multiple credit cards, though the gap between delinquency rates—indicating the degree of preference—narrowed during the pandemic. This trend was seen in Canada, India and the U.S., which suggests that credit cards gained importance during the pandemic and that consumers were more focused on keeping their cards in good standing by making timely payments. Colombian consumers showed no clear prioritisation of either product until March 2020, when more value was placed on personal loans.

In South Africa, there was actually a flip in priorities in 2020 during the pandemic as credit cards were prioritised over personal loans, reversing the pre-pandemic hierarchy in favour of personal loans. As the lockdown restrictions continued, consumers shifted to transacting more digitally – making credit cards a critical tender.

A deeper dive into the study found that younger generations have been most instrumental in this flip, with Millennials leading this shift well before the onset of the pandemic. The reversal in priority in favour of credit cards over personal loans first occurred in April 2019 for Millennials, and this priority became even more pronounced during the pandemic. This shift in payment priority is mostly driven by both the surge of online transactions, which generally require a credit card or similar means of virtual payment, as well as the digital savviness and receptiveness of younger consumer segments to transacting online.

Another interesting dynamic was observed in South Africa and other countries wherein the payment hierarchy was in favour of credit card payments both before and during the pandemic for those consumers possessing only one credit card and at least one personal loan. In South Africa, where the group holding just one credit card comprised approximately 68% of the overall study population, this group saw a widening of the delinquency spread in favour of credit cards during the pandemic compared to pre-pandemic levels. This prioritisation shows the importance of credit cards for consumers and the need to maintain access to this valuable source of credit and transaction currency.

South African Consumers Prioritise Credit Cards Over Personal Loans

*30 or more days delinquency rate (one or more months in arrears) at 12 months for consumers who possess at least one credit card and personal loan. A lower comparative delinquency rate indicates a higher prioritisation of the product in the payment hierarchy.

South African Consumers with One Credit Card Show a Similar Preference

**30 or more days delinquency rate (one or more months in arrears) at 12 months for consumers who possess one credit card and personal loan. In the case of South Africa, a widening of the delinquency rate spread between cards and loans indicates increased prioritisation of a card that was already the priority. The delinquency spread is defined as the difference in delinquency rates between two products and represents the relative preference for paying one product ahead of another.

“Cash was clearly not king during the early parts of the pandemic. Millions of people opted to use their credit cards to make digital transactions from the safety of their home for groceries, clothes or other everyday items,” said Williams. “If you only have one credit card and you were worried about visiting stores at the height of the pandemic, there’s a strong likelihood you will preserve that card to continue spending and making digital transactions. In South Africa especially, it is clear that the convenience offered by credit cards is a priority.”

These findings were further corroborated by a global behavioural survey of 2,667 consumers who possessed credit products in South Africa, Brazil, Canada, Colombia, Hong Kong, India, the United Kingdom and the United States.

When consumers across these regions were asked to share their likelihood to make a payment between primary card (defined as the card they use most), secondary card and personal loan payments, it was clear that secondary credit card is the first payment they are likely to miss. Only 26% of South African consumers are likely to prioritise the secondary card payment versus 37% who are likely to pay their primary card, while another 37% of them would pay personal loans first.

Consumers across the globe recognised that there will be consequences if they miss at least one payment of any of their credit products. For instance, more than half (53%) of global respondents with a credit card said they expected to receive a call from their lender if they missed one payment. The negative implication of a missed payment to a credit score was well understood by South African credit card and personal loan holders. In South Africa, approximately 74% of credit card holders and 74% of consumers with personal loans said a consequence of a missed payment would be a lower credit score.

South African Payment Hierarchy Dynamics Show Home Loans Took Top Priority During the Pandemic

In South Africa, TransUnion’s study also focused on four of the most popular credit products in the country – vehicle finance, credit cards, personal loans and home loans. South African consumers with these products in wallet currently follow a payment hierarchy of home loans first, then vehicle, personal loan next and card last. Prior to the pandemic, the top priority payment had been vehicle finance; this was flipped in favour of home loans at the onset of the pandemic. The delinquency spread—the difference between 30+ days past due rate at 12 months for vehicle finance versus home loans in wallet—widened to 1.9 percentage points in favour of home loans in Q3 2020 versus -0.2 percentage points in the Q3 2019 observation.

Home Loans become #1 Priority as the Pandemic Flared in South Africa

**30+ days past due rate (one month or more in arrears) at 12 months for those borrowers possessing all four credit products.

Another interesting factor observed in the study was the relative payment priority for those with greater equity in their homes. Consumers with higher equity (typically greater than or equal to 30% for the purpose of this study) prioritised home loan payments to a greater extent than those with less equity.

“The risk of losing one’s vehicle or home appears to be driving consumer payment choices,” explained Williams. “During the pandemic, government relief and deferral programs provided much-needed cash flow and loan flexibility to consumers. As the effects of the pandemic linger on, South African consumers are forced to stay home to stay safe, work-from-home to stay employed, and use their own vehicles to avoid public transportation. These dynamics are impacting consumer choices in favour of home and vehicle loan payments,” concluded Williams.

TransUnion’s ongoing research on payment hierarchy has three clear implications for lenders. First, lenders need to identify their own customers’ payment hierarchy to better manage consumer expectations and portfolio trends, leveraging this approach. Secondly, this study and past studies conducted across credit economies to decode loyalty have proven that consumers who are loyal to their lender tend to pay them first. Lenders can build loyalty amongst their existing customer base, by incorporating advanced off-us data and analytics into their ongoing account management strategies. Managing and defending loyalty is critical, especially amongst those who are top-of-wallet customers and those who carry only one credit card in wallet.

Lastly, as the study showed narrowing of spread between card and personal loans across most regions, and a flip in hierarchy in South Africa, it implies a need for acceleration of the digital ecosystem in the credit markets. Lenders can benefit from providing friction-right experiences to consumers while distinguishing between good consumers and fraudsters, and hence building consumer trust to conduct digital transactions in the era of the post-pandemic world.

For more information about TransUnion’s Global Payment Hierarchy Report, please visit our dedicated report website page.