Gen Z Consumers Start to Shape South African Credit Market as They Become Increasingly Credit Active

• Almost 1.7 million Gen Z South African consumers are now credit active

• Clothing loans, personal loans (bank and non-bank) and credit cards are the most widely held products among credit active Gen Z consumers

• Although starting from a very low base, bank personal loans, home loans, retail revolving and vehicle loans are the fastest growing products among credit active Gen Z consumers

• Majority of credit active Gen Z consumers in subprime and near prime risk categories; however, nearly one third have prime and better risk scores 

Newly released research by TransUnion (NYSE: TRU) shows that South Africa’s Generation Z consumers—those born in or after 1995—are becoming increasingly credit active and are helping fuel the growth of the consumer credit market.

The TransUnion study explored credit activity of Generation Z consumers (also known as Gen Z) in emerging credit markets including South Africa, Colombia, and India, as well as established consumer credit markets including Canada, Hong Kong and the United States. The study explored the depersonalized credit data as of Q2 2019 of Gen Z consumers globally to understand their credit behaviors by country, specifically observing credit activity, originations, account preferences and balances.

The percentage of the South African population that was classed as Gen Z, between the ages of 0 to 24, was 46% as of Q2 2019, representing almost 27.5 million people. The percentage of the population that was Gen Z and over 18, and thus eligible to apply for credit, was 10%, almost 6 million people. The TransUnion study revealed that just over a quarter (28%) of this eligible group were credit active in Q2 2019, almost 1.7 million people.

According to the study, this youngest credit-active generation has a strong appetite for credit despite many of these consumers growing up in difficult economic conditions. In markets such as South Africa, Canada and the U.S., Gen Z saw their parents and other family members and friends suffer through recession, especially since 2008. In South Africa, although out of a technical recession as of Q3 2019, unemployment has remained high and economic growth volatile. Other factors such as technological advancements have also come into play in the way Gen Z manages its finances, with this generation having never known a time when mobile, online and app-based services were not available.

“Gen Z is the first generation of digital natives, and they have come to expect a seamless consumer experience across all walks of life – including how they access, use and manage credit. As young adults, they are perhaps more aware than previous generations at this age of the importance of building and maintaining healthy credit to help navigate the modern economy. As they come of age, they are starting to embrace credit opportunities to start building their financial resumes early,” said Carmen Williams, director of research and consulting for TransUnion South Africa. “Our belief is that the desire for credit among this generation is significant. In order to service this demand, it’s critical for lenders to have the ability to make more informed decisions on prospective customers and earn their trust as well as their business.”

Gen Z Consumer Credit Usage

The most commonly held products among credit active South African Gen Z consumers are clothing loans (66%). In fact, Gen Z are eight times more likely to have this product than non-bank personal loans, the next most popular consumer credit product (8% credit activity).

Most Popular Credit Products Among Gen Z Consumers

(Percentage of Credit-Active Consumers with Each Product Type)

For credit active consumers across South Africa as a whole (i.e. across all generations), bank personal loans are the most commonly held product (30%); by contrast, just 7% of credit active Gen Z consumers have bank personal loans. When looking at bank credit cards, 28% of credit active consumers in South Africa hold this product, but just 5% of credit active Gen Z consumers do. For those Gen Z consumers who hold a credit card, their limit utilisation is higher, at an average of 68%, compared to the entire credit active population, where it is 58%. This is likely due to Gen Z consumers being given lower limit amounts on credit cards. Card issuers typically assign lower limits to consumers with lower credit scores and limited borrowing history, and many Gen Z borrowers have such higher risk profiles.

Although clothing loans were the most widely held product among South African Gen Z consumers, the largest total overall balances were in the auto loans category. This is by virtue of the fact these are usually for a larger amount and longer term than personal loans and retail accounts, and relate to the purchase of a specific high value item (i.e. a car or van). In the consumption lending categories, total outstanding balances were greatest for personal loans, followed by clothing accounts and then credit cards, reflecting the combination of typical borrowing amounts and credit limits featured on these products as well as popularity.

The TransUnion study also revealed the fastest growing product categories among credit active South African Gen Z consumers. Although building from a low base, year-on-year originations growth (the rate at which new accounts are being opened) was highest for bank loans (209%), home loans (66%), retail revolving (61%), vehicle (52%), and credit cards (44%).

Risk Distribution

A common assumption is that all (or at least the vast majority) of Gen Z consumers are in the subprime credit tier because they don’t have long histories of positive credit repayment. The TransUnion study found that this was, in part, the case in South Africa, with the majority of credit active Gen Z consumers scored as either subprime or near prime.

Compared to the overall credit active population in South Africa, Gen Z consumers are more likely to be subprime (44%) or near prime (24%), although there is the same percentage of prime (15%) credit active consumers across both groups.

Risk Tiers: Gen Z vs. Total Credit Active Population

*TransUnion South Africa scorecard risk tiers: subprime 0–615; near prime 616–729; prime 730–821; prime plus 822–917; super prime 918–999.

“New to credit borrowers by definition have little or no credit history for lenders to use to assess their risk. We have seen that the use of expanded data sets and advanced analytic techniques can help lenders better understand the risk profiles of these younger borrowers and identify ways to engage them in a mutually profitable manner. Lenders that incorporate trended credit and alternative data can gain a better understanding of the specific risk profiles of Gen Z and as a result, are broadly able to provide more consumers with access to traditional credit products.” continued Williams. “Equally, as Gen Z consumers continue to build their credit history, it’s important for them to get into good habits. This will help them build a healthy financial foundation and continue to be able to access the opportunities they deserve.”

International Comparisons

According to the study, there is a relatively large divide in how Gen Z approaches credit in emerging versus established credit markets. While in most established markets more than half of Gen Z are already credit active, the percentages drop precipitously for emerging markets.

Percentage of Gen Z Population (over 18) that is Credit Active with Traditional Credit Products

**For this study, consumers are considered credit-active when they open a traditional lending product such as a credit card, auto loan, mortgage, personal loan, or student loan.

The emerging markets studied – South Africa, Colombia and India – have less established credit economies. In South Africa and India, because traditional credit card issuers tend to have more conservative underwriting practices that focus on low-risk borrowers with longer credit histories, credit card penetration is lower. As such, other products serve as the entry point to credit for Gen Z consumers. In South Africa, as previously stated, credit issued by retailers (a loan issued by clothing or apparel retailer) is the most widely held product at 66%, compared to just 5% for credit cards. In India, the most popular product for Gen Z consumers is a two-wheeler loan with 21% market penetration, while only 11% had a credit card.

Williams concluded: “The ability to ensure each consumer is reliably and safely represented in the marketplace will be critical for companies that want to continue to engage the increasingly important Gen Z market segment. By using advanced analytics and rich data sources, lenders can create a more informed picture of a consumer’s needs, behaviors and potential risks – those that embrace and leverage these insights will be the ones that succeed as Gen Z consumers continue to come of age and shape the consumer credit market for years to come.”