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SIMON BROWN: I’m chatting with Jaco van Jaarsveldt. He is chief strategy and innovation officer at Experian. Jaco, I appreciate the time. Some data that came out – your latest Consumer Default Index – showed a 14% year-on-year improvement in default rates. On the surface really good news. Is there some scratching that we need to do to get to a truer picture, or are South Africans really managing their money much better than many thought?
JACO VAN JAARSVELDT: Simon, thank you for having me. There’s a bit of scratching to be done there. If you look at it on the surface, absolutely. We’ve seen an improvement in the rate of first-payment default when we look at the consumer experience, the Consumer Default Index, which is a good story.
However, when one starts looking a bit deeper into the numbers, we tend to identify that the reason for this improvement is less consumer behavioural improvement or consumer financial improvement.
It’s more a function of reduced lending.
We can clearly see it from a credit supply side across the industry, across all products, where supply is significantly lower than where it was pre-Covid and it has never returned to where it was at pre-Covid levels, with approval rates on average across all credit products roughly around the 30% mark, whereas consumer demand has far outstripped pre-Covid levels. In fact, it is probably 10-20% higher than it was before Covid. Therefore, there’s a demand-and-supply gap that needs to be looked at.
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Naturally, there are two ways to manage exposure. From a credit provider perspective – either your profits, you reduce exposure and manage your impairments, which is typically what we see happening now. So we mustn’t confuse the good banking results in financial institution results with more money being generated from revenue.
It’s more impairment savings and reduced impairments and focused lending to specific consumers whereas, if you look at the average South African consumer, while there’s no doubt that some are finding the lower interest rates and the improved affordability beneficial the majority of consumers are actually exposed to multiple credit cards, multiple credit products. And it’s the same segment of the market that’s targeted by everybody.
And when we look at that specific segment, when we look at it from an experience perspective, we segment the market into six groups and 30 types. But if we look at it at the macro group level, around 12.5% of the total credit-active population holds more than 85% of total outstanding debt. Those individuals are the most distressed, and those are the individuals that are continuously lent and have been lent to over the last 24 months by all financial institutions, because they are typically perceived to be the safest.
Once you start scratching in those segments you identify pockets where, [you say] hold on a second, this is a segment where we see increasing data, review applications and increasing entrants into debt review, et cetera.
SIMON BROWN: I get your point around it. So there are segments of the market who are getting their access. Some aren’t, but many are and they’re the vulnerable. To your point, they’re the ones who are getting debt review and the like. They are the segment – and you phrase it in the notes you put out recently – [with] effective credit control. It sounds very technical but in essence it’s things like cleaning up debt and trying not to get more debt, checking credit scores, improving your credit score, all the sort of the basics that can really improve a household’s finances and balance sheet.
JACO VAN JAARSVELDT: Absolutely. It’s no different from everyday finance management. The thing that I think a lot of South African consumers do not do and do not realise is that the data, your data, your financial data, is freely available to you from the credit bureau. You can literally log onto your credit bureau profile and access your credit report, free, as many times as you want, as frequently as you want. It needs to be made available to you.
So at Experian we make it available through our consumer app. Once you log on there, the key thing that it shows you is your score and all your debt exposure, so all credit accounts that you hold. And it gives you a clear indication of how missed payments or payments negatively or positively impact your score. That is the key thing that as a consumer you need to look at. The more credit lines you have and the less affordability you have to pay all this credit, you start missing payments.
The moment you start missing payments your score drops. Your score drops and you get less access to credit, less access to low-cost credit, but potentially access to high-cost credit.
Where the challenge starts happening with consumers is when they’re in desperate need of credit and they’re getting into financial distress and start missing payments. It doesn’t immediately mean you’re not going to get access to credit, especially if you are an active credit participant, because it’s technically easier to lend to someone who is active in credit. And when a credit provider looks at it, they’ll say: ‘Well, Jaco has five credit products. He pays them very well. I can see he’s paying them, so I’ll give him another credit product.’
But what they don’t know is that from a cash-flow perspective I am potentially distressed. The only entity that will know whether I’m cash-flow distressed is the entity that holds my transaction data. Any other entity that doesn’t see my transaction data won’t pick up any distress until such time as I start missing payments on a credit product.
SIMON BROWN: Gotcha. That then brings in the risk. It comes to your point around that credit score. Way back, 20 years ago, credit scores were impossible to get hold of. I check mine pretty much every month these days – and that should be the standard. Keep an eye on it. See what’s happening.
There’s also the other benefit. You can see if there’s anyone trying to impersonate you. There are all of those benefits to really making it part of your sort of monthly budgeting process. Check the credit score.
JACO VAN JAARSVELDT: Absolutely. And I think the most beneficial thing, as you said there, is that number one, you get to see if there have been any enquiries on your credit profile. So you will very quickly pick up if there have been 10 enquiries this month. If you didn’t make any of them, you can go see who’s making these inquiries, and that’s an early potential fraud indicator.
The second thing you can look at is – I looked at my credit report about five years ago, and I noticed that I was still a director of an active company that I had when I’d just finished university. Hold on a second – that company was closed when I started working. And then you go through the process with CIPC, the Companies and Intellectual Property Commission in South Africa, to say this company is not active, though it was active for 20-plus years.
So it gives you an opportunity, because all that data is considered when your score is looked at. It is not only your credit profile and your payment of credit, even though that’s the highest weight in terms of contributing to your score.
Other data shows whether you are a director of a company, et cetera. That information is also important and therefore it’s critical that each consumer accesses the report and hen actually communicates with the credit bureau to get it fixed if anything needs to be addressed.
SIMON BROWN: If there are errors. But I hadn’t thought – of course, it’s way more than just credit. There’s a ton [of information] on there.
But we’ll leave it there. Jaco van Jaarsveldt, chief strategy innovation officer at Experian, I appreciate the time.
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