New TransUnion Study Finds New-to-Credit Consumers in South Africa Want More Education to Enable Greater Access to Credit
Greater investment in education can help reduce defaults and improve credit scores.
New-to-credit consumers – those early in their credit journeys – in South Africa and across the globe generally perform as well or better than borrowers with established credit and similar risk scores. This finding from a newly released TransUnion (NYSE: TRU) global study, “Empowering Credit Inclusion: A Deeper Perspective on New-to-Credit Consumers,” may give some assurance to lenders in both developed and developing credit markets that they can extend additional credit products to such consumers without incurring materially higher delinquencies.
The study included data and insights about millions of consumers in varied global markets, including South Africa, Brazil, Canada, Colombia, the Dominican Republic, Hong Kong, India, Philippines and the United States. TransUnion defined a new-to-credit consumer as one with no prior credit history on their credit bureau file who opened their first-ever, traditional credit product such as a vehicle finance loan, credit card or another product unique to individual regions. The study then examined the behaviors and performance of those new-to-credit consumers over the subsequent two years after opening their first credit product.
“A particular focus around the topic of financial inclusion is credit inclusion – the ability of consumers to access traditional lending products, such as credit cards, home loans and personal loans. These products serve as a means to financial mobility for consumers and can be a gateway to a better quality of life, enabling homeownership, business formation and wealth creation,” said Weihan Sun, Director, Financial Services Research and Consulting at TransUnion Africa.
“The more consumers who can participate in credit markets in a region, the greater the opportunities for broad economic inclusion. The data from our study demonstrate that new-to-credit consumers are often good risks who are hungry for credit and will show loyalty to those financial institutions that offer them their first credit accounts,” Sun added.
In South Africa, nearly 750,000 consumers opened their first credit product and became new-to-credit (NTC) during 2021. In 2022, the country surpassed that prior year number by the end of November and ended the year at over 810,000 NTC consumers, up 8.2% from prior year levels.
In 2021, Gen Z made up the largest part of this group, comprising 57% of the total, followed by Millennials (28%), Gen X (9%) and Baby Boomers (6%). One of the main takeaways from the study is that NTC consumers around the globe are generally good risks when compared to other established borrowers with similar credit risk profiles. Clothing accounts are generally the first credit product opened by most NTC borrowers in South Africa – 58% chose this product – while 13% chose to start their credit journey with a non-bank personal loan.
To better understand credit performance, the study looked at NTC consumers who opened credit cards as a subsequent product over their initial two-year journey and the delinquency performance after six months on those cards. It then compared their performance to the delinquency rate of credit-served consumers who also opened cards in the same time period. The study found in the near prime and prime score bands* — the score ranges where many NTC consumers fall early in their credit journeys — the delinquency rate for NTC consumers was comparable to, or even better than, that of more established credit-served consumers. This trend was seen in both pre-pandemic and pandemic periods.
In nearly every region, depending on risk tier or time period of origination, instances occurred in which NTC borrowers had lower delinquency rates on newly-opened credit cards than established borrowers. In South Africa, on subsequent credit card originations after opening their first account, NTC consumers had slightly lower delinquency rates than credit-served consumers in the same subprime and near prime score ranges.
Better understanding NTC borrower tendencies
TransUnion also undertook a survey-based market research study to understand the voice of NTC consumers, which included responses from 8,465 NTC consumers from a range of markets, including South Africa, Brazil, Canada, Colombia, Dominican Republic, India, Philippines, and the United States.
Interestingly, 40% of South Africans said that having more education on the availability and benefits of credit would make them more likely to expand their use of credit products.
“Lenders should invest in credit education to promote financial literacy for consumers, and equip them with the insights and knowledge on the products they are taking on to manage their credit exposure effectively,” Sun said. “Doing so may help prevent borrowers from defaulting, and will highlight the significant impact that defaulting behaviour has on an individual’s credit score.”
The survey found that new expenses were the primary driver for opening a first lending product in nearly all markets, excluding the United States and Canada, where having access to a convenient means of spending was the top motivator. This is supported by the choice of first product types, where in the United States and Canada the most common first product opened is a credit card.
Most South African consumers (45%) reported that they opened their first credit product because they had a new expense, followed closely by having started living on their own (40%). In South Africa, 58% of new-to-credit consumers chose a clothing account as their first credit product, followed by non-bank personal loans (13%), and retail instalment loans (10%), which aligns closely with their stated reasons for entering the credit market.
A majority of NTC consumers across all regions, with the exception of India, reported receiving a credit product at the first institution where they applied – without needing to go to multiple lenders. In South Africa, 61% of NTC borrowers reported receiving a credit product from the first institution where they applied.
The study also found that convenience is key for NTC borrowers and may portend more opportunities for lenders in the future. In selecting which institution to open their first product with, convenience was cited as the top criterion in all regions except for Brazil. In South Africa, 31% of consumers cited convenience as their top factor, with 22% choosing a lender where they already banked to open their first credit product. This suggests that there are opportunities for lenders to generate stronger loyalty among NTC consumers through more focused efforts on cross-selling relevant financial products and services.
Finally, the study found that on average, about six in ten NTC consumers said their need for credit will increase in the next three to five years, with the highest levels in developing markets (led by India at 79%). Approximately 60% of South African NTC consumers stated their need for credit will rise in this same timeframe.
“It’s clear that new-to-credit borrowers around the globe and in South Africa will play a large role in the growth of many lenders’ books of business,” said Sun. “Banks and other financial institutions who use alternative data to assess emerging consumers’ risk, while providing products, channels and a positive onboarding process, will likely be the ones who succeed in building loyalty with this important segment of the population.”
For detailed information about all global markets represented in the study, please click here.
* South African CreditVision™ Risk Score: subprime = 0-625, near prime = 626–655, prime = 656-695, prime plus = 696–720, super prime = 721–999.