The Dynamics of New-to-Credit Consumers - TransUnion

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?


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


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


0.9x 0.7x1.0x 0.4x

1.9x

1.3x

2.8x

1.4x

South Africa

United States


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

)


• 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


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


Hypothesis 1: New-to-credit consumers are younger

Age distribution of consumers


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


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


Hypothesis 2: A consumer’s first score is a subprime score


% 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%


Typically, consumers start their credit journey by opening

a retail trade or a personal loan


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.


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


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





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


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


* 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%




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


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)


0%

5%

10%

15%

20%

25%

30%

Subprime Near Prime Prime Prime Plus Super Prime



3+

MIA

rate

New to credit

Established

The score rank-orders delinquency–

lenders can price for this


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


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


• 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?


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


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



• 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

The Dynamics of New-to-Credit Consumers - TransUnion

Documents

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