Innovation required to get credit flowing
• Many South Africans remain uninformed about their debtmanagement options, writes Pedro van Gaalen
SA’s struggling economy needs consumer and business spending to boost consumption and investment to stimulate growth.
However, the country finds itself in a credit quandary as lenders opt to limit exposure to higher-risk consumers in lower market segments, preferring to grant credit to lower-risk toptier segments.
“However, these top-tier consumers have become overindebted in the highinterest rate environment,” says Jaco van Jaarsveldt, Head of Commercial Strategy and Innovation at Experian Africa. “This means lenders need to look elsewhere to drive credit growth and support economic activity.”
A major hurdle is the loss of the retail credit market during the Covid-19 pandemic. After analysing 130-million retail credit accounts over five years, Experian determined four out of 10 consumers started their credit journey with a store card.
“Of these four, 80% progressed to banking products, with 40% securing home loans after successfully building a credit record,” says Van Jaarsveldt.
However, when Covid shut stores, this credit line dried up, as did the credit rating data, and retail store credit accounts have only recovered to 30%-40% of pre-Covid levels.
“This break in the credit life cycle now prevents many consumers from accessing banking products as banks can no longer select the best performing retail accounts from this large pool.”
According to Van Jaarsveldt, the lending market and government must look at this challenge differently to find a solution.
To support industry innovation, Experian leverages alternative data sources to build credit profiles on millions of thin-file and credit-invisible consumers — those with limited or no information on a traditional credit bureau.
For example, Experian developed the Up app, which focuses on financial education and inclusion. The service targets the credit-excluded market and uses gamification to collect consumer-consented data based on user behaviours, such as budgeting, completing financial education modules, checking their credit score or updating personal information.
“Completing these processes improves creditworthiness because these behavioural attributes are good predictors of future payment behaviour,” explains Van Jaarsveldt. “Users also become more financially literate and, over time, build a credit score through alternative data that we can eventually present to banks, effectively replacing the lost retail channel.”
Experian has also partnered with Chenosis to develop an API that provides access to consented data from MTN’s mobile customers to establish alternative risk metrics, such as airtime and data purchase patterns, which can help boost a consumer’s credit score or generate a new alternative credit score to broaden access to credit.
From a government standpoint, Brett van Aswegen, CEO at Wonga Online, believes an overhaul of outdated pricing regulations will help unlock access to credit for a larger proportion of the population.
“Since the pandemic, SA has experienced a surge in the demand for credit, paralleled by a significant increase in rejection rates. Yet, the average value of each credit product has increased,” he says.
Van Aswegen explains that SA’s credit market, influenced by affordability regulations, will naturally exhibit a correlation between income and credit product value.
“The paradox is that the increase in average credit product value is likely driven by a reduction in the number of lower-value credit products, typically granted to lowerincome individuals.”
Van Aswegen attributes this shift in risk appetite to the monthly fees that a credit provider may charge for opening and servicing a loan, which are regulated under the National Credit Act but have not been updated since 2015 to keep up with inflation.
“The only way credit providers can manage the margin pressure is to reduce risk through the proportion of defaulting loans, which has the unintended consequence of disproportionately excluding middle to low-income consumers from the formal credit market,” he says.
“As such, we desperately need to re-evaluate existing pricing policies, which requires a collaborative effort from financial institutions, the National Credit Regulator and the department of trade, industry & competition.”
Getting more credit-active consumers back into the market after defaulting is another area where innovative solutions can support credit growth.
In this regard, Alfred Ramosedi, CEO at Bayport Financial Services, explains that many consumers are trapped in unnecessary debt-counselling processes that increase overindebtedness rather than extricate them from it.
“Many South Africans remain uninformed about their debt-management options. For instance, in many cases debt consolidation, combined with financial literacy education, is more beneficial than formal debt counselling.”
Wherever possible, Bayport also refers consumers to a financial wellness partner that can help free them from unfair or illegitimate debt-counselling processes.
“Furthermore, the agreements we have in place with employers allow us to assist customers in ways that are unavailable in an openmarket environment. We believe an employer-level partnership is essential to combating the prevalence and impact of overindebtedness in the workplace and keep these consumers out of reach of unscrupulous informal lenders and the payday debt spiral.”