ANDRIES ZIETSMAN: Leading influences in SA’s credit patterns in the coming months

SA’s economic environment is influenced by myriad factors as diverse as exchange rates, load-shedding, interest rates and sociopolitical events. Together, these factors are driving demand for credit, with more than 810,000 South Africans having opened their first credit product in 2022 — an increase of 8.2% from 2021. Furthermore, 60% of these new-to-credit consumers see their need for credit increasing in the next three to five years.

Increased demand for credit extends further than new consumers: TransUnion’s third-quarter Consumer Pulse Study indicated that consumers were cutting back on discretionary spending while consumer debt levels were on the rise to meet retail consumption needs.

In addition to trends already well established in the local environment, other influences are likely to affect the country’s credit environment in the coming months, including changes to pension fund withdrawal rules, new credit reporting imperatives and the growing popularity of “buy now, pay later” offerings.

Pension fund reform

New legislation coming into effect on March 1 2024 will restructure current pension fund savings into two buckets. The first will be a 33.3% allocation that allows consumers to withdraw lump sum payments from their pension funds, irrespective of their age. The second will maintain 66.7% of consumers’ pension savings, which will remain due on retirement.

In a market where consumers are under severe financial pressure, this could offer some immediate financial relief. However, strong words of caution have been offered. Consumers who erode their retirement savings to the point where fully funded retirement may not be viable could create significant financial distress later in life.

To mitigate the effects of large-scale withdrawals from pension funds, consumers will initially be limited to a R25,000 lump sum. Even so, there is concern over the effect this will have on fund portfolios and the liquidity they need to accommodate the change.

Pension fund managers will have to plan around what is expected to be a mass depletion of savings, and will have only a few months to determine how they will do so. While the potential for great innovation in this sector exists, it remains to be seen how quickly solutions can be implemented, and what their efficacy will be.

It is possible that the demand for credit could lessen in favour of consumers having an interest-free lump sum available.

Overdraft facilities 

Historically, overdraft facilities were not reported to credit bureaus and thus were not been included in consumers’ credit profiles. However, a new reporting format used by lenders to submit data to credit bureaus now includes reporting on this credit exposure.

Over the past year we have been engaging with lenders about incorporating overdraft facilities into credit assessment reporting and understanding the implications on consumers’ affordability and risk profiles. On the one side of the balance sheet we will see an increased level of indebtedness and exposure that will affect consumers’ ability to qualify for further credit. On the other, we will be better placed to adjust credit risk strategies on a more comprehensive view of a client’s exposure.

Buy now, pay later

We are seeing an upswing in both the number of buy now, pay later options available and in the uptake of these products. TransUnion’s latest Consumer Pulse Study shows that 42% of SA consumers would use buy now, pay later products, and anecdotal evidence from retailers indicates that this uptake is not just from the sub-prime market; educated consumers are using these products because they are an interest-free line of credit.

As buy now, pay later has not yet been formally regulated and is therefore not reported as traditional credit in SA, it is difficult to take a stance on the effect this exposure will have. Buy now, pay later case studies from around the world are often mixed. However, we will need to assess the effect based on our market conditions and regulatory requirements. We continue to work with the industry and regulators on buy now, pay later data reporting requirements and expect that the results could be material.

Even given these concerns, finding “good risk” customers in this constrained market is possible and provides opportunities for confident growth. As an example, the delinquency rate for new-to-credit consumers is comparable to, or even better than, that of more established credit-served consumers, and new consumers are loyal to the institutions that offer them their first credit accounts. This knowledge allows us to look at these clients differently, potentially including data other than that used in scoring to date.

More good news: while higher interest rates often bring an increase in defaults as affordability becomes constrained, our data shows that delinquencies are improving year on year as South Africans across the credit market prioritise paying off debt faster in the face of rising borrowing costs.

It remains important that every stakeholder in the credit market should promote financial literacy and equip consumers to manage their credit exposure effectively. Using credit and alternative data and analytics insights smartly, and applying due consideration to emerging trends, will help strike a balance between acquiring “good risk” clients and managing longer-term impairments and losses.

• Zietsman is head of financial services at TransUnion Africa.