How is the cost-of-living crisis really affecting your customers?

The credit market
Understand your customers
How we can help
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We’re all familiar with the headlines. Interest rates increased for 10 consecutive months and only recently has there been some reprieve with a pause in April. The interest rate increases have added almost $1,200 per month to the average NSW mortgage amount for variable rate customers¹ and added over 10% to rents nationally². While inflation has fallen from its December peak of 7.8%, it’s still more than twice the Reserve Bank of Australia’s (RBA) target and the cost of essential goods and services continue to rise strongly³.

If you look at the broader picture, GDP is expected to slow this year to 1.5% and remain around this rate until the end of the forecast period in mid-2025². However when you look at other key indicators of economic stress the picture seems a little brighter, for now. The labour market recovered well from the pandemic and the unemployment rate is forecast to remain low at around 3.5% until mid this year before rising as growth in output slows⁴.

We may not be in a recession but for many Australians it had already started to feel like one. Consumer sentiment remains weak. In March it was holding near 30-year lows before surging in April off the back of the interest rate pause but was still 10.4% below April last year before the tightening cycle⁵. It’s also expected that consumer spending will be lack-lustre until at least mid-2024⁵. The financial wellbeing of Australians had already declined in the first three quarters of 2022 and the latest figures revealed nearly one in five people are now battling to meet everyday commitments⁶. The economic position of Australians is at its lowest level since the report began a decade ago⁶.

Last year we saw that while increases in the cost of living placed pressure on household budgets with spend for everyday essentials jumping 27% for fuel, 34% for groceries and 45% for utilities, Australian consumers were still keen to catch up on life after lockdowns with a 12% increase in spend on events and a 323% increase in average transaction size for travel⁷. However in recent months we’ve seen this contract.

This is having a knock-on effect on businesses. During the pandemic, fewer than 250 companies would fold each month⁸. Fast forward to February this year and it has surged to more than 700 insolvencies per month, with concern the upwards trend shows no signs of slowing⁸.

What’s happening in the credit market?

It may be too early to say what the full impact will be for the credit market, but the indicators are starting to give us some clues.

If we look at credit demand, mortgage enquiries continue to track at a lower level than 2021, however after the usual dip through the Christmas period we saw increased volumes at the end of the first quarter this year⁹. Credit card volumes plateaued over the Christmas period and into the new year with recent volatility coming from across the market⁹. Personal loans across the Big 4 are continuing to increase as favourable rates reverse previous inroads by fintech leaders in the market⁹. In the Buy Now Pay Later (BNPL) space, enquiries are still heavily driven by campaigns and seasonal drivers, however the more recent increase could also be in part due to a new provider in the market.

A trend observed since the start of last year has been the rise in the use of short-term finance options by Australians. In our Forrester 2022 Business and Consumer Insights Report, 71% of Australian consumers surveyed said they had used a BNPL service in the last 12 months and this was reflected in the data with a 73% increase in BNPL transactions⁷. We’ve also seen an over 400% increase in payday lender transactions⁷. Whilst BNPL by itself is not an indication of risk, the use of multiple BNPL providers and the shift to short-term lending does indicate riskier behaviour.

In our Forrester 2022 Business and Consumer Insight Report we explore business and consumer views on a range of topics. Take a look at our interactive summary.
View summary

When it comes to credit delinquency (one or more missed payments), we’ve seen personal loan delinquency trending up and observed a similar trend with auto loans showing delinquency back to pre-Covid levels⁹.

When we look at progression of financial stress, in 67.4% of the cases where an Australian consumer missed a payment between May 2021 and April 2023 (and missed none in the previous two years) and held a credit card, the credit card was the first to miss a payment. Comparatively, in 33% of cases where a consumer missed a payment and held a mortgage, the mortgage was the first to miss a payment.

How well do you know your customers?

There’s little doubt that many Australian consumers have found it difficult to balance their household budgets, and it is expected this will in the coming months. It’s increasingly clear that traditional indicators of risk are no longer reliable predictors of stress. In our latest Risk Radar Report, 53% of risk experts surveyed said their organisation can’t reliably identify a customer is in financial stress until they miss a payment. In today’s world, it’s about real income and the effect that the rising cost of living is having on people’s finances.

In our latest Risk Radar Report we shine a spotlight on credit risk management processes amid a rapidly changing economic landscape

Download now

Customers will turn to credit, and that means more than ever, lenders will need to understand who is at risk and who isn’t. So, how exposed is your current portfolio? Can new customers afford to pay now and, in the future, when the economy predictably worsens? What do your customers need now to head off difficulties down the road?

Despite the risks, there are opportunities, particularly with younger customers. What’s interesting is that they may be relatively insulated from the cost-of-living crisis. Some 24% of under-30s have no mortgage debt and are still living at home. A quarter of these have an excellent credit risk score and are active in the credit market. Could they be the quality customers you’re looking for?

How Experian can help

In order to fully understand the levels of risk and opportunity in both new and existing customers, it’s vital that you have the right data, scorecards and models.

Understand portfolio risk at a customer level

At Experian, we can provide account-level reporting with simple red-amber-green indicators, so you can easily make decisions. Customers are stress tested against a range of factors, including cost of living, income shock, and unemployment for example.

Drive effective affordability strategies into the heart of your decisions

Both traditional and non-traditional data can provide a golden source of insight into a customer’s affordability too. Whether that be derived from bureau, income and expenses or Open Banking data sources for example. Enhanced models, such as affordability balance insights, offer further analysis into a customer’s transaction account balance. For example, how it is, or has been changing, for better or worse.

Understand exposure, and make informed customer acquisition strategies

In addition to data, new analytics can provide further clarity of risk and exposure, but also unearth valuable insight into new lending opportunities – whether that be new customers, or through new product or markets. We can provide access to Experian’s bureau data for you to perform your own analysis and experimentation.

Balance risk and reward, through improving your decision baseline

A key part of balancing risk, and opportunity is ensuring the decisions you make are made based on the most accurate view of your customers, and the economy. Our on-demand analytics platform can enable you with the environment to test the impact of changes to your policy or strategy rules – and subsequently change them, fast. Monitoring of your models is also where we are seeing instant value. Model monitoring helps ensure you are always making decisions based off the most predictive and performant base. You can be alerted if your models degrade or require attention – and harness Machine Learning as a catalyst for greater confidence.

Make customer-centric decisions, through personalised communications and treatments

There are many more areas where we can support. From driving personalised customer treatments, managing credit limits, to triggering communications that help your customers take early action. Our decisioning capabilities allow you to test and analyse different trends and scenarios before executing them with speed to support your customers – whatever risks they face, whatever opportunities they present. Based on whatever choices your business makes.

Experian is here to help you find a way through. If you’d like to better understand how the cost of living affects your portfolio and how Experian can help, please get in touch with us using the form below.

[1] Lenders’ Interest Rates, Reserve Bank of Australia
[2] Monthly Housing Chart Pack, Core Logic
[3] Inflation falls from peak, but still more than twice the top of the Reserve Bank’s target for interest rates, ABC News
[4] Statement on Monetary Policy – February 2023, Reserve Bank of Australia
[5] Westpac MI Consumer Sentiment April 2023, Westpac
[6] The ANZ Roy Morgan Financial Wellbeing Indicator – Quarterly Update March 2023, ANZ
[7] Experian Digital transaction insights, Experian
[8] Worst default wave since global financial crisis, Australian Financial Review
[9] Experian Credit Bureau insights, Experian