Latest / Market Pulse / How the Rising Cost of Living Will Impact Lenders
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- Equifax Market Pulse podcast Ep. 19 (Swarnima Pandey) Transcript Professional Intro (00:01): Welcome to the Market Pulse podcast from Equifax, where we break down the latest economic and credit insights to help you navigate today's business landscape. Katherine Doe (00:14): To the Market Pulse Podcast. I'm your host Katherine Doe. I'm a product marketing director for our risk solutions portfolio here at Equifax. We're seeing the cost of living rising across the globe and it's having a significant impact on consumer wallets in the US and abroad. So what does this mean for the lending industry and what should we do to help build resilience into your 2023 plans? We'll answer those questions in today's episode, which is a continuation of our market pulse webinar from November that addressed how economic headwinds are impacting the US economy. We're joined by Swarnima Pandey, an analytics insights expert with Equifax Canada. She will share her database business insights for the lending industry and more. Welcome Swarnima. Great to see you. Swarnima Pandey (01:00): Hi Katherine. Thank you for inviting me. Katherine Doe (01:03): Yes. So let's get started. Let's talk about the global perspective. The IMF is predicting that global growth may slow to 2.7% in 2023 and global inflation may rise to 8.8%. Can you give us a latest update on global consumer insights and impacts? Swarnima Pandey (01:22): Inflation has been a big talking point for quite some time now. Consumer price index is rising across the globe and it's affecting not just consumers, it's also affecting businesses which are feeling the financial pressure from the rising cost of living and inflation affects our day-to-day lives, especially when it comes to cost of essentials, energy, gasoline, food, the costs of all these essentials have risen. And in Canada we did see a brief slowdown in the cost of energy and gasoline, but prices are still higher than pre pandemic. Food prices are extremely high right now in the UK the cost of energy has skyrocketed. They're expecting it to increase further and more consumers are transferring money from their savings to checking to accommodate for the rising cost. Now, both Australia as well as New Zealand have seen the fastest rise in inflation in the last 21 years, and price of utilities have risen at a much faster rate in every region. Swarnima Pandey (02:20): Now, this impacts consumers and businesses as their operational costs are rising, which will ultimately lead to these costs being transferred to consumers at some point. And as discussed in the marketplace webinar, the impact of inflation is affecting consumer payment behavior. More consumers are starting to miss payments now, especially on their non-mortgage products than they were 12 months ago. So in Canada, auto credit card delinquency levels are rising from the lows that we saw in 2021. And again, interest rates are also rising. And so payments for variable rate mortgages could put a lot of pressure on consumers monthly expenses. In fact, in Australia, the mortgage holders have already started seeking assistance with payments for their financial institution, especially those who opted for mortgage debt During the pandemic in the US we are seeing delinquencies on personal score loans rise and are exceeding the pre pandemic levels and other non-mortgage products are also approaching 2019 levels. So clearly across the globe we are feeling the impact of rising cost of living. Katherine Doe (03:29): Great. So let's drill down a little bit further from what you just shared to understand the US perspective a little bit further. You're reporting that consumer loans are exceeding the pre-covid delinquency levels. You mentioned auto loans originated earlier this year, have already started missing payments. So what does this signal and, and what does this mean for lenders? Swarnima Pandey (03:53): Okay. To understand how consumer payment behavior has changed, let's go back to 2020 and see what happened. Pandemic hit, lockdown started unemployment rates shut up for a very brief period of time, but then government intervened and provided consumers with financial support. This held a lot of consumers in paying off their debt and improving their credit performance. Hence, we saw a huge dip in delinquencies all through 2021. Fast forward 2022, as the financial buffer is depleting, consumers have certain missing payments and a lot of this is getting back to pre-pandemic levels, but now we also need to account for high inflation, which was not there back then. Now there is some additional risk coming through, especially when it comes to accounts that are recently open. So, and this may well be the result of consumers relying on credit more in a financially difficult time. So we do anticipate delinquencies to increase further in the future. Therefore, collection practices and identifying financially vulnerable consumers is more important than ever now. And as mentioned before, consumers tend to rely on credit as they feel financial pressure mounting. So reviewing application qualification practices to minimize any future losses will be essential as rising cost of living puts immense pressure on consumers. Katherine Doe (05:16): That's helpful insight. I want to jump back to the webinar that you presented on. And I know that we conducted a poll to try to get insight from the attendees Yes. And understand what they were most concerned about. And I know you've got those results and so I want to hear a little bit more from you on what you found surprising Yeah, about those webinar attendees and, and how they responded. Swarnima Pandey (05:42): Honestly, the results were not surprising at all. The top most concerns that came up in the poll were inflation and interest rates. Mm-Hmm. , I did not participate in that poll, but if I was there would be, that would be my concern too, because I have a variable rate mortgage right now with my monthly payment gone up by almost $500 in the last seven months. And my grocery bills are extremely high, so my savings are fast depleting. So it, it doesn't come as a surprise to me that these would be top concerns for most consumers and lenders. We are in a strange economic period where both inflation is high, interest rate is high. So normally when inflation rises, interest rate levels are increased to curb inflation because higher rates means to encourage savings and discourage borrowing. So lesser spending. So if you're spending less companies start lowering their prices, hence inflation comes down. Swarnima Pandey (06:37): The issue right now is we have had multiple interest rate hikes and which have had very muted impact on inflation so far. Both the US as well as Canada increased their rates by around 400 to 4 25 basis points this year. And we saw similar hikes announced in Australia and UK, but again, very little impact on inflation. Some of the reasons why inflation is still high is because of the increased disposable income during the pandemic as well as the current geopolitical tensions. Therefore, we are in a challenging economic period where consumers as well as businesses and lenders both are juggling inflation and interest rate. So it is causing a lot of concern. But one good thing that is helping the economy is a strong labor market, both in US as well as Canada employment rates are historically low, so consumers are not as vulnerable as of now as they would be if the labor market was weak. Katherine Doe (07:32): You said you weren't particularly surprised by those results and, and it does make sense to me as well. So if, if you think maybe back to the results or just advice you might have in general, what do you think lenders are not looking as carefully at that maybe they should be in order to still find opportunity now or be successful in a challenging environment? Swarnima Pandey (07:54): Two things comes to my mind. I think lenders need to remember that a lot of consumers have massively improved their credit health since 2020. Many of these consumers had financial difficulty before the pandemic. One in five consumer in Canada who took a payment de during the pandemic already had a delinquency of the on file pre pandemic and majority, like 75% of those consumers have already missed payments or at least one credit product. And the average revolving rates on their credit card is also higher than the average population. So monitoring this segment could really result in identifying early signs of financial stress. Another factor I think we can benefit from is if we look at the past to predict the future, when interest rates started rising back in 2018, the impact on consumer behavior was not immediately visible. It took some time. So in 12 months people started missing credit card payments. In 18 months they started going bankrupt and we saw a, a massive rise in non-mortgage delinquencies, especially for consumers with a variable rate product. So sometimes looking at a past interest rate rise can actually help us mitigate early risk. Katherine Doe (09:06): Okay. And so tell me Swarnima, what would you consider opportunities for lenders during this challenging environment? Swarnima Pandey (09:14): So yes, credit lending will get impacted by all these economic changes, but when opportunities that does rise is the interest rates are rising and they've slowed down the housing market a little. So the mortgage frenzy that we saw in 2021 with extremely low rates and crazy jump in house prices is finally going to come to an end. And yes, the cost of borrowing is very high right now, but there has been price correction in markets and market is getting less competitive. So it'll help a lot of first time home buyers with their home purchases who were previously being pushed out of the market due to these high prices. So even though you might see lower mortgage volume for some consumers, but there's still consumers and first time home buyers who will benefit from this. Another area for growth could be auto semiconductor shortage caused major supply chain issues in the auto industry and its impact was visible all across the group. Swarnima Pandey (10:12): Lower supply chain, high demand, pushed car prices up. And the biggest change we saw was in this used car market where used car market used car prices are now at historic highs and reducing affordability for many. But now that those supply chain issues are slowly getting resolved and car prices are stabilizing, it will give rise to more demand and less risky consumers so that they can afford. Because now they can afford these cars at lesser amortization term unlike what we've seen in 2020 or late 2021 and 2022, where people are taking higher loans and longer terms and now and now started to payments within three months on both. So more demand, less consumers, at least for the auto. Katherine Doe (10:56): Gotcha. Okay. And as we wrap up I'm curious for what your top recommendations would be for lenders and you've shared plenty, but I'm curious to get your top hits. Swarnima Pandey (11:08): Well, it's going to be more important than ever to understand your consumer's overall financial position and if they are at risk. So measuring their risk capacity is a great way to understand consumers financial health and risk. Capacity is basically a measure of the ability of consumer to take on additional risk and still have a strong likelihood of making their other payments. And often in financial crisis we'll see consumers take on more credit to pay off their mortgages or other loans. So getting a 360-degree view of consumers debt is important to assess that risk. And now looking at different types of credit products, mortgages are usually the last product the consumer will default on, but anyone with a variable rate mortgage is now feeling a lot of financial pressure. Even if we are not seeing mortgage delinquencies rise, they could start missing two payments on other products to cover their mortgage cost and hence another area to monitor would be credit card payment behavior because credit card is usually comes in the bottom of payment hierarchy, which means financially stressed environment, a consumer would rather default on their card than on their mortgage, which comes at the top of the hierarchy. Swarnima Pandey (12:14): If you see consumers start missing payments on their credit card, that could be an early sign to indicate that they're financially stressed. And even if they're not missing complete payments, they could be transactors, which are consumers who pay, who are paying their balances in full and switch consistently into devolving their balance. That means they're paying less than 90% or minimum payments and that will eventually put the consumer at the risk of defaulting. Being able to segment your population using payment amounts against the obligations and understanding the cash flow will definitely going to be a key to understanding whether or not you have a pocket of customers that are more at risk than others. Katherine Doe (12:51): Thank you so much for sharing that and for your time today on the podcast Swarnima and we hope you'll join us back again here soon. To learn more about our Market Pulse webinar series, go to equifax.com/market pulse or check the show notes today. You can find an on-demand version of the webinar that Swarnima participated in with us and you can also find the presentation slides for that as well. And all of this insight came from our Equifax Global Credit Trends report and there'll be a link to access that and more in our show notes today. We hope you'll join us next time for Market Pulse. Professional Outro (13:30): The information and opinions provided in this podcast are intended as general guidance only and are subject to change without notice. The views presented during the podcast are those of the presenter as of the date. This podcast is recorded and do not necessarily reflect official positions of Equifax. Investor analysts should direct inquiries using the Contact us box on the investor relations section at equifax.com.