the dynamics of new-to-credit consumers - transunion
TRANSCRIPT
The Dynamics of
New-to-Credit Consumers
Priven Moodley
Senior Business Development Executive
TransUnion Africa
| 2© 2018 TransUnion LLC All Rights Reserved | 2
• The importance of new-to-credit consumers
• Hypotheses around new-to-credit consumers
• The typical first 12 months of a consumer’s credit journey
• Implications for lenders to consider around new-to-credit consumers
In this session, we’ll review:
New-to-credit (“NTC”) consumers are defined as those
who open their first trade.
First question:
Why should you care about NTC consumers?
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More than 1.9 million consumers opened their first trade
over the past four quarters—that’s a material market size
South Africa consumers opening their first trade
Source: TransUnion consumer credit database
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1
Nu
mb
er
of
co
nsu
mers
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NTC consumers offer potential for cross sell and building
loyalty. However, SA lenders have not fully captured this opportunity.
Cross-sell lift in consumers who open with first lender versus another lender
Source: TransUnion consumer credit database
0.9x 0.7x1.0x 0.4x
1.9x
1.3x
2.8x
1.4x
South Africa
United States
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R0
R500
R1,000
R1,500
R2,000
R2,500
R3,000
R3,500
2013 2018
Year
With rising acquisition costs, it’s becoming more
important to take advantage of this opportunity
Average cost to acquire a new bankcard customer
Source: TransUnion industry estimates based on data from
multiple South Africa card issuers
5-year CAGR = 5.4%
Ave
rag
e C
PA
(R
)
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• Hypothesis 1: NTC consumers are younger
• Hypothesis 2: A consumer’s first score is a subprime score
• Hypothesis 3: NTC consumers have volatile scores, so you can’t really trust the score they present
• Hypothesis 4: NTC consumers perform worse than credit-established consumers
• Hypothesis 5: NTC consumers have unique credit needs
Despite the opportunity, there are several perceived challenges
around NTC consumers that make lenders wary of this segment
Fact: There is not enough credit history available to make
traditional credit decisions for NTC consumers
To better understand NTC consumers and to validate or
disprove these hypotheses, we conducted a study
| 10© 2018 TransUnion LLC All Rights Reserved | 10
We studied NTC consumers in comparison to
credit-established consumers
Age
TransUnion Internal score
First credit product opened
Consumer opens first trade
Consumer has had a trade for at least 12 months
We began with 2,036,467 new-to-credit consumers and
21,402,059 credit-established consumers between Q1 2016 and Q1 2018
t:
Q2 Q3 Q4 Q1 Q2 Q3 Q1Q4Q1
2017 20182016
| 11© 2018 TransUnion LLC All Rights Reserved | 11
Hypothesis 1: New-to-credit consumers are younger
Age distribution of consumers
Source: TransUnion consumer credit database
True. However, many are older than you may expect
5%
28%
67%
36%31% 33%
18 to 24 25 to 34 35+
% c
on
su
mers
Age group
New-to-Credit
Established
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There are many ways a consumer can arrive at NTC status
• Young consumer
• Beginning of credit lifecycle
• Poor past performance
• Re-engaging with
credit after a hiatus
• Older consumer
• End of credit lifecycle
• Recent immigrant
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Hypothesis 2: A consumer’s first score is a subprime score
Source: TransUnion consumer credit database
% o
f co
nsu
mers
False. The majority of first scores are above subprime.
TransUnion Scorecard Risk Tiers:
Subprime 0-615; Near prime 616-729; Prime 730-821; Prime plus 822-917; Super prime 918–999
41%
11%0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
New to Credit Established
Super Prime
Prime Plus
Prime
Near Prime
Subprime
59%
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Typically, consumers start their credit journey by opening
a retail trade or a personal loan
Source: TransUnion consumer credit database
The industry of the first trade opened
42.1%
34.0%
8.6%
1.8% 0.9% 0.3%
12.3%
Personal Loan Clothing Retailinstalment &
revolving
Credit Card Mortgage Vehicle loan Other
% o
f co
nsu
mers
There is a clear distributional difference in both age and
risk between new-to-credit and established consumers.
Therefore, we need to control for these differences
in our further analysis.
| 16© 2018 TransUnion LLC All Rights Reserved | 16
We further studied the specific cohort of consumers who
became NTC in 2016 Q2 to understand their behaviors over time
Serious delinquency by product
v + 12 months
Q2 2017
v: consumer opens a
subsequent credit product
2016 Q2
Originations by product
TransUnion Internal score
Age
TransUnion Internal score TransUnion Internal score
Consumer opens first trade
Consumer has had a trade for at least 12 months
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We used simple random sampling to align the joint
risk and age distributions of our study segments
Example of sampling for 27-year-old consumers
• For each age and credit
tier, we sampled down so
the number of new-to-
credit consumers would
be roughly equal to the
established population
• After sampling, our study
contained about 450,000
consumers in each of the
two segments: ~900,000
consumers total -
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Subprime Near prime Prime Prime plus Super prime
Nu
mb
er
of
co
ns
um
ers
Established consumers New-to-credit consumers Established consumers, sampled
TransUnion Scorecard Risk Tiers:
Subprime 0-615; Near prime 616-729; Prime 730-821; Prime plus 822-917; Super prime 918–999
Source: TransUnion consumer credit database
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Hypothesis 3: New-to-credit consumers have volatile
scores, so you can’t really trust the score they present
Cumulative score migration (t to t+12)
% o
f co
ns
um
ers
Source: TransUnion consumer credit databaseAbsolute difference in credit score
True, new-to-credit consumers see more score migration
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
1 4 7
10
13
16
19
22
25
28
31
34
37
40
43
46
49
52
55
58
61
64
67
70
73
76
79
82
85
88
91
94
97
100
103
106
109
112
115
118
121
124
127
130
133
136
139
New to credit
Established
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That score migration is more likely to be negative than positive
for prime and better NTC. But the same is true for established.
Score migration* comparison, t to t+12
Source: TransUnion consumer credit database
* Score migration is considered the same or better if the score
dropped by no more than 10 points over the course of 24 months.
Segment Migration SubprimeNear
primePrime
Prime
plus
Super
prime
NTCSame or better 68% 51% 42% 30% 22%
Worse 32% 49% 58% 70% 78%
EstablishedSame or better 75% 56% 48% 45% 49%
Worse 25% 44% 52% 55% 51%
TransUnion Scorecard Risk Tiers:
Subprime 0-615; Near prime 616-729; Prime 730-821; Prime plus 822-917; Super prime 918–999
| 20© 2018 TransUnion LLC All Rights Reserved | 20
Hypothesis 4: NTC consumers perform worse than
credit-established consumers
Vintage delinquency of unsecured loans with a term 12 months and greater
3+
MIA
rate
Months on book Source: TransUnion consumer credit database
Does appear to be true
0%
5%
10%
15%
20%
25%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
New to credit
Established
| 21© 2018 TransUnion LLC All Rights Reserved | 21
NTC consumers perform worse in near prime and
better risk tiers, but better in subprime3+ MIA account-level on newly opened unsecured loans with term 12 months and greater
(measured at 12 MOB)
Source: TransUnion consumer credit database
0%
5%
10%
15%
20%
25%
30%
Subprime Near Prime Prime Prime Plus Super Prime
TransUnion Scorecard Risk Tiers:
Subprime 0-615; Near prime 616-729; Prime 730-821; Prime plus 822-917; Super prime 918–999
3+
MIA
rate
New to credit
Established
The score rank-orders delinquency–
lenders can price for this
| 22© 2018 TransUnion LLC All Rights Reserved | 22
Hypothesis 5: New-to-credit consumers have unique credit needs%
of
co
nsu
mers
wh
o
op
en
a n
ew
pro
du
ct
Consumers who opened a subsequent new product from t to t+12
Source: TransUnion consumer credit database
False. After controlling for
risk and age, NTC open roughly the
same mix of new products, with
clothing accounts the exception
92%
3% 3% 2%
84%
11%
3% 1%0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Personal Loan Clothing Retail (Instalment andrevolving)
CC
New to credit
Established
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• Consumers typically open their first credit product and receive their first credit score before the age of 25, although 33% of NTC consumers are above the age of 35
• The majority of NTC consumers are not subprime when they receive their first scores.26% are prime and above
• NTC consumers do experience higher score volatility than credit-established consumers, as such they require closer monitoring than established consumers
• NTC consumers do perform worse than established consumers
– BUT……scores clearly still do an effective job of rank-ordering risk for NTC consumers
• NTC consumers have generally similar credit needs to established consumers with similar age and risk profiles
To summarize our findings: market perceptions are
directionally true. However, really important nuances exist.
How might you identify opportunities in the
new-to-credit population?
| 25© 2018 TransUnion LLC All Rights Reserved | 25
Number of open trades = 1
and
Months since most recent trade opened < 12
Underwriting
CV Attributes to
identify NTC
consumers
Marketing
Use CV attributes in decisioning
process to identify applicants as
NTC consumers for pricing and
line management
Use CV attributes to develop
campaign targeting NTC
consumers with specific
offers and messaging
Portfolio
Management
Reward NTC consumers
when they graduate to
established status, and
thereby drive loyalty
Example:
CreditVision attributes can help lenders identify and set
strategies specific to NTC consumers
| 26© 2018 TransUnion LLC All Rights Reserved | 26
Percentage of consumers in TransUnion’s consumer credit
database who are unscorable using a traditional credit risk
scorecard
Percentage of these consumers who are scoreable using a
CreditVision score risk score
Relative GINI improvement on population using CreditVision
score over traditional credit risk scorecard 47.1
15.2%
48.1%
Want to go one step farther back? CreditVision Link can help
potentially millions of unscorable consumers gain access to credit
Source: TransUnion consumer credit database
| 28© 2018 TransUnion LLC All Rights Reserved | 28
• The new-to-credit segment remains a significant growth driver for consumer lending, with nearly 2 million consumers entering the credit market each year
• New-to-credit consumers do often follow the conventional wisdom, but there are important nuances that can make lending to this segment not only viable, but attractive
• New-to-credit consumers tend to have similar credit needs to established consumers with comparable age and risk characteristics
• Risk is indeed higher even when controlling for score—but it is consistently higher and can be accounted for in pricing
• There are alternative data tools available to help you refine your acquisition, risk and long-term engagement strategies in this segment
• TransUnion is always available to assist our lending partners in exploring this attractive growth avenue
Summary