Latest / Market Pulse / Is This the Moment for Consumer-Permissioned Data?
Transcript
- Recorded 5/31/22 Katherine Doe (03:13): Welcome to episode 13 of our market pulse podcast from Equifax. We're two years beyond the start of the pandemic. And now we're seeing additional factors affecting consumers, including supply chain shortage impacts, rising inflation, global conflicts, and the end of various relief packages or the impending end of relief of those packages. So how will this impact consumer credit usage and access to credit? We'll dig in deeper to that today. I'm Katherine Doe. I'm a director of product marketing for our risk solutions here at Equifax, and I'm glad to be back as host. Joining me today are two experts, perfectly aligned for our topic. We're welcoming back David Fieldhouse, director of predictive analytics at Moody's Analytics. And we're glad to have for the first time to this series, Jeff Hollander credit practice manager at Envestnet Yodlee. And it's glad to have you both. I'm going to toss over to David first so we can try to get a bigger look at the bigger picture we're headed into the summer it's travel season. Katherine Doe (04:14): We're headed into summer and travel season with COVID largely out of the picture for most families. And I know everyone's eager to get back to normal and back to travel and their traditions. I know this doesn't necessarily coincide nicely with all of the impacts to consumer wallets as of late with gas prices inflation. So I'm curious, what are you and Moody's Analytics seeing in terms of economic trends and then maybe we can move after that, to the consumer credit trends that you're seeing as well. David Fieldhouse (05:03): Yeah. Well, in the data we have, we're definitely seeing consumers feeling the squeeze from inflation in, in the last year incomes really haven't kept up real after tax income is only grown in two months in, in the last year. So consumers are you know, feeling the squeeze from inflation. The impact is significant. The average household is going to pay about $317 to buy the same stuff this year as it would've bought last year. Right? So that that's a real impact from in inflation. The good news is that inflation is showing signs of peaking CPI increased in April but it was only 0.3% and that's higher than usual, but it's much better than it was in March and February in March, we saw 1.2% gain and in February is a 0.8% gain. David Fieldhouse (05:55): So things are moving in the right direction at when we look at some of the data points. The, the moderation is really coming from energy prices. So if, if you are booking some, some travel down the road, it you, you might benefit from that moderation. That's actually starting to show up in the data but be careful because other components like food and beverages are, are posting solid gains and that's helping prop up inflation. I think most importantly inflation expectations have fallen back in recent weeks and they're consistent with inflation soon receding. When we look at bond investors they price in inflation. We, we look at how they're viewing inflation and you know, they would've been working off the assumption of about a 3% increase in inflation one year out from the Russian invasion of Ukraine. David Fieldhouse (06:47): But that's started to fall back to 2.5%. So that's in the upper end of the Fed's target for CPI inflation. And then if, if we think take a step back to the, the economy overall and thinking about how that's impacting the economy well we can see that the fed is a bit behind on inflation. The labor market is extremely tight right now and that's going to make it very, very tricky to actually rein in inflation expectations. So we've already seen interest rates increase. We've yet to see the, the unemployment rate increase in response, which is a good sign, but tightening monetary policy detain inflation without causing increase in unemployment, the unemployment rate is really difficult. And so it's possible that the fed will push the economy into a mild recession. We're not, I want to be careful. David Fieldhouse (07:34): We're not predicting that a recession will happen but we'll put the odds at about one and three in the next year. So it it's, it's something that we're concerned about. And then on the bright side Catherine, you highlighted some of the you know, things moving in in the right direction, right? The pandemic continues to, to fade. And then we're also seeing the economic fallout from the Russian aggression is, is moving behind us. And then household balance sheets are in, in good shape. We estimate that household saved about 2.5 trillion in excess savings. And so that's the level of savings above the rate that they were making prior to the pandemic. So consumers have good balance sheets. You know, if we look at the credit data, we can see that delinquency rates remain low almost in all product categories, just, you know, a couple pockets where we're concerned about when we look at, you know, subprime auto, for instance, or some personal loans, we've seen some delinquency rates rise a bit quicker there, but almost every other product category has you know, very, very low delinquency rates, not record lows. David Fieldhouse (08:41): They have come up a bit since last year, but they're in really great shape. And so debt is very manageable. It was taken out at low interest rates and financial obligations are, you know, in a macro sense at near record low. So we feel very good about where the household balance sheets are. And, and we know that interest rates are increasing, but the good thing with debt in the United States is only about a fifth of the household debt interest payments will change if the market rates do so household balance sheets are, are really in great shape that even if there is some turmoil in the job market consumers have some wherewithal to, to withstand that and hopefully make their debt payments going forward. Katherine Doe (09:26): So thanks for that overview, David, that was really thorough. I did want to dig in a little bit further, you mentioned one or maybe many populations or score bands could be affected a little bit more than others in terms of rising delinquencies. So what can you tell us about those in particular? David Fieldhouse (10:56): Yeah. Well, we are seeing some of the impacts of inflation hitting different populations of the economy when we look at you know, and this is our, our big concern is that, you know, there, there are, you know, we see top line inflation numbers, but we have to remember that the basket of goods that different populations consume is different. And we know that certain segments of the consumer basket are, are seeing prices rise quite substantially, right? So we're, we're concerned about the uneven rise in inflation rates. We've looked at different CPI estimates for, for different groups. And, you know, we see that, you know, middle and lower income individuals typically have you spend more money on food and energy related products, and that causes their inflation rate to jump higher. There, there's also large jumps in the inflation rate for gen Z compared to other age groups. Gen Z typically spends a lot of their money on, on gasoline or, or, or more so than the average person would. David Fieldhouse: Among other racial groups, we can see that Hispanic and black households are really spending a lot more money on food and at home gasoline and utilities in, in, in comparison to Asian and white households, we're seeing Hispanic and black household inflation rates increase faster in recent months. So those are, are, are a couple of the populations that we are, we are worried about if you think about tying that to credit bans, where we can expect to see that typically lower bands will be have more, have lower incomes and, and we'd expect that to be associated with higher inflation rates. So that's definitely a concern. And then you know, we, if we look at the pop, the credit population, we look at mortgage holders versus non-mortgage holders, you know, or homeowners versus renters. We would expect to see that homeowners might be a little bit more insulated from the higher inflation. Whereas if you're a renter, right, you're going to be probably exposed to higher rents next year. So these are some of the segments. I think that we're, we're quite concerned about when we look at the credit trends. Katherine Doe (13:35): Hmm. Thank you. And, and looking maybe just a, a little bit further out into the data, how would we expect continuing student loan payments once all deferments are up, if that happens, say by September do you think these populations will be affected even further? Is that the assumption? David Fieldhouse (13:56): Yeah, I definitely think that we will play a role. I mean, at least with the student loan population they you know, they may have ha potentially have higher income levels and some of these other, the other populations. So, it's a little bit depends on, on who, who we're talking about, but if the student you know, if, if somebody who took out debt, student loan debt a couple years ago has been able to raise their income and benefit from really a tight labor market, they might be able to, to make those payments and, and, and it'd be quite manageable. But inevitably there's going to be, some people have to start making payments again and you would expect to see that they might not be prepared for. Right. And so you could probably see some, some higher delinquency rates. It's definitely helping the other lenders out there, you know, the non-student lenders, the auto lenders, the mortgage lenders, right. Because they don't have to compete for, for those repayment dollars, if you will. So, so we'll see, I think the delinquency rates will definitely rise when student loan payments re resume. I think that's inevitable. Katherine Doe (15:01): Hmm. Agreed. And so, I thinking bigger picture here I think this is a good segue to you, Jeff in, in thinking about Envestnet Yodlee and what do we do next? What, what do we do about being able to open opportunities for credit access? And if we are in a position where these score bands and consumers are, are needing access to credit, how can we help them? And so first I think maybe we just start off, I would love to get an introduction to you, Jeff, and, and maybe your elevator pitch for Envestnet Yodlee. Jeff Hollander (15:36): Okay. Sure. Thank you. So Envestnet Yodlee is the oldest and biggest data aggregator of bank data credit card data, basically consumer data which is consumer permission. The consumer says, we're opting into this. You can use my data for certain functions, whether it be personal financial management, whether it be facilitating payment to payment functionality or credit decisioning we will take that raw transaction data and categorize it and do, you know, amazing things with it. And now the space is ripe for using the bank data in the credit underserved market. And it's a very large underserved market. Approximately 125 million people are underserved. That's, you'll hear different numbers, but that's the one I'm going with of which 50, some million are what they call unscorable. They can't get a traditional credit bureau risk score, either the thin file or no file at the credit bureau. Jeff Hollander (16:34): That doesn't mean they're not using financial planning. They're not taking care of their finances, but how do you take that into account? The other 70 some million, our subprime near prime, that David was talking about? Every risk score band has good people in it, good credit risks in it, right? There's it's never all or nothing. So how do you find them on top of traditional credit data? And that's where the aggregated bank data can, can fill in the void and make the subprime near prime applicant give them a second chance to get approved for the loan get approved for a credit card and the thin file, no file, give them credit for how they're handling their finances outside of a traditional credit report. So, the data aggregation process is opening up to an approximately 125 million potential people and all lenders today want to approve more loans, but they have to do it intelligently. They have to deal with compliance. They have to do model risk. They have to do regulators. You have to be smart about it. And using this data customer permission data, I think is the best way to go right now. Katherine Doe (17:37): It's interesting. And I, do you feel like the path of the pandemic has increased the, the number of consumers that are interested in participating in this and, and banks looking for it have you seen growth in that area? Jeff Hollander (17:54): Yeah. And it's, it's really part of it is regulatory driven. Cause I think it was December of 2019, the five main regulators, the, the fed, the OCC, the D I C the N C a CFPB put out a memo saying, look at bank data, use this in helping to underwrite loans and cards for people who are normally ignored. Then you had project reach, come out an OCC driven initiative that wants people to start looking at cash flows out of bank data to help approve more loans. So you have the whole regulatory environment, you do have the pressure to grow, you know, internally. But how do you, how do you safely do it again? You have to be safe about it. So between the regulatory push the desire to grow in an empirical fashion, you can look at how they're handling their finances. Jeff Hollander (18:49): And if you think about it, you know, the traditional credit bureaus are great showing intent to pay, but aggregated data, how you handle your finances and, and your bank account show your ability to pay what's your monthly cash flow. How much do you have left over every month? How are you handling all those different types of bills? Do you have more than one source of income? And particularly COVID a lot of people are doing the gig economies. It's waking back up again. They might have three jobs, you can capture all that from a bank account aggregation process. So I think that is what's really driving. It's both regulatory and the desire to grow, but do it intelligently. Katherine Doe (19:28): Hmm. And it feels like now is a natural time to start thinking about that. And you know, I'm putting you on the spot here a little bit, but if, if I think most of our listeners are probably more on the financial service provider side, but just to give the full scope and picture of how consumers participate in this how, how can we get more people to raise their hand and say, they want to, to opt in, how can we get more consumers to open up that data to be considered for increases. Jeff Hollander (20:02): Sure. Approvals part, part of it is the financial service provider has to have a good strategy around deploying these solutions to the consumer. Who's applying, you have to do it at the right time in the process. You have to actually wordsmith it properly to get them excited about putting in their banking credentials. The one carried on the end of the stick is if you say, you know, you can still get this loan. If you do this, that gives them financial incentive to do it, but you're never going to get a hundred percent to say yes, but you can get a very high success rate now. Because they want that auto loan, they want that credit card, they want that product. So I think that helps. But a lot of it is a financial service provider has to think through the entire user experience to get them to click and say, yes. So it, it is, you know, just like any digital thing you have on your phone or whatever you're doing, it's thought through it's, it's, you know, test and control and what's the best way to present it. And what's the, what's going to get you the most success rate. So it is, it's a lot of user experience testing. Katherine Doe (21:09): And I know we have made some huge strides in, in terms of digitization after COVID and everyone being home and, and it, it was almost a necessity. It was a necessity for yes, for so many, so many providers. So, looking ahead a little bit let's say a year or two do you anticipate, or does Envestnet | Yodlee, where you think it will be in terms of this consumer permission data? Will it be factored into most, every decision? What what's the future look like Jeff Hollander (21:47): In a year? Probably not in every decision. But I will say the growth of using this alternative type of data and credit decisioning is very, a very steep curve right now. I think it will eventually become industry practice. You know that everyone's going to do this. It's going to be part of the underwriting process, because if you think about the common sense of it, if someone comes to you and says, I want this loan, I want this car, I want this credit card. And you say no, but you did have an opportunity to say yes, if you added this one layer onto the decisioning process, why wouldn't you, I mean, that someone wants your product. Someone wants to give, you know, take and pay you interest mm-hmm . So why wouldn't you take that one step more? So I think that's slowly coming about, but it's new. And being an old risk manager myself, it takes a while to get everyone nodding their heads and saying, okay, this is safe. We can do this. Because their other regulators are going to walk in the front door and make sure you're doing it right. So, it's going to take time. Anytime you're introducing analytics into a bank or financial service, it takes time. So the year isn't the right answer, but two to three years I think. Katherine Doe (22:54): Okay, that's great insight. And I kind of want to turn back over to you David, and, and what the Moody's perspective might be on, on what this additional data might do for consumer wallets and, and what, what you foresee the future looking like. David Fieldhouse (23:10): Yeah, I think it's great. We definitely need to figure out how to give people more access to credit. I was looking at some statistics from the fed survey of consumer expectations. And, you know, there are a fair number of people who expect to be rejected from getting a loan. I was looking at auto loans, it's off, 26% credit cards is 31% mortgage is 38%. Now imagine that you can take in some of this other data that Jeff is speaking about and actually you know, bring it into the lending decision and, and give those people more confidence. It may not even be applying right now. You could actually give them some confidence to actually apply. So I, I think, I think it's great. And then there, there's all kinds of impacts. If you don't have a have credit, maybe you can't get a credit score. This affects certain minority populations as well. So I think, you know, beyond just the average wallet, I think this makes, you know, society a little bit more equitable, which and I think there's a lot of benefit from that. And so I, I look forward to more of this data being used in the decisioning process. Katherine Doe (24:16): Yeah. And I, I think that for sure makes the three of us since this really is in many ways changing lives you know, for, for some people it's, it's not just a car, but it's a way to get to work and change the position that they could be in and especially talking about under underserved markets. Well, thank you both for being here today. We really appreciate all your input and your time dedicated to market pulse. For our listeners today who would like to learn more about Envestnet Yodlee or credit forecast.com our joint offering with Moody's analytics. Please be sure to check the show notes for our episode links.