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Market Pulse is a monthly podcast by Equifax, in partnership with Moody’s Analytics. Equifax hosts bring you interviews with industry experts on the latest economic and credit insights that can help drive better business decisions. Whether you’re in financial, mortgage, auto or another service industry, we help make sense of the latest economic conditions that impact you. This podcast series supplements our Market Pulse webinars, which occur on the first Thursday of each month.
Intro (00:02):
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.
Olivia Voltaggio (00:15):
Welcome to the Market Pulse Podcast from Equifax. I'm your host, Olivia Voltaggio, senior content Manager for the US Information Solutions business here at Equifax. Our March Market Pulse webinar really hit a chord with our audience. The topic explored the nuances of affordability and its impacts on individuals financial situations. We had an incredible all female panel that included Amy Crews Cutts, president and Chief Economist at AC Cutts and Associates, and three of my Equifax colleagues, Maria Urtubey from our risk advisory practice, Anna Fisher, vice president of Specialty Finance Consulting, and Mariette de Meillon, director of Pre-Sales Analytics. They had such a great presentation that the audience wanted more time for q and a. So our panel is back today to answer your burning questions about the economy, credit and affordability. Before we jump into our main discussion, let's get a quick economic update from David Fieldhouse, director of Consumer Credit Analytics at Moody's Analytics. Thank you, David. These are just a few of the numerous questions we received from our audience today in advance of the webinar, but they seemed to cover the main themes that were emerging in many of your questions. I'll start with you Mariette. Are newer, lower prime vintages performing better than higher prime vintages in consumer unsecured loans.
Mariette de Meillon (01:51):
Good afternoon, Olivia, and thank you very much for having me today. We have certainly seen a lot of changes in the consumer lending space over the last four years. To the question of whether the higher prime vintages are performing worse than the lower prime vintages, the short answer to that is no. From the data that we are looking at, the vantage score is still rank ordering risk. And so we do see that lower prime vantages are doing worse than the higher prime vantages. That being said, if we go back over time, we can certainly see that recent originated vantages do have a higher risk of default than older vintages. And I think a good context to bring to that is that there has been enormous growth in the space in the last four years with many new lenders stepping into this lending space, and that we have seen a slight loosening of underwriting standards over the past four years. As an example of that, consumers who are taking up unsecured personal loans right now have an average of a five point higher debt to income ratio than they did back in 2019. And so this, at least in part, explained the, the higher risk that we are seeing in that space.
Olivia Voltaggio (03:12):
Are we seeing revolving utilization trends start to drive higher delinquencies in the near prime credit area?
Mariette de Meillon (03:18):
There certainly has been a pretty sharp increase in utilization in the last few months. And just a couple of months ago, utilization has now reached pre pandemic levels. Now that by itself may not sound like a, like a big deal. We've just reached pre levels of utilization, but I think the important context to provide there is that credit limits are now 26% higher than they were pre pandemic. And so what we're saying is, yes, we're back to the same level of utilization, but of, of a much higher basis credit limit. And so yes consumers are spending more and we do understand that higher utilization is associated with increased risk, and we know this to be true both at the point of origination and also at the point of account management. So when a consumer has a sudden increase in their rate of utilization, then yes, their likelihood to default increases significantly.
Mariette de Meillon (04:23):
What we can say about the near prime space that the question was about specifically is that we do see a very similar trend. So yes, we are at the same utilization levels than pre pandemic, but again, we do have a much higher credit limit also in the near prime space. And that credit limit is now 14% higher than pre pandemic. So to recap, I do think that the increase in utilization is something to keep an eye on, but I think that when we do so, we should also look at it in combination with the consumers' actual credit limit.
Olivia Voltaggio (05:01):
Absolutely. And continuing on the theme of delinquencies, Anna, what are some additional insights you can share on delinquent loans, specifically regarding near prime and subprime credit profiles?
Anna Fisher (05:11):
Thanks, Olivia, and good afternoon. Good morning to everyone. Thanks for joining us today. Happy to be here. If we look specifically at the subprime space, we are seeing some leveling off in delinquency rates, but we're still about 5% higher than we were pre pandemic. When we start looking into the near prime and subprime space, I think what's even more interesting than the delinquency trends, which are pretty visible across the board, like that's, that's data everybody has, it's much more interesting to start looking at the consumer profiles of people in that space. It's not always the trend that you'd expect people seeking financial services in what we'd historically consider a subprime industry area are not limited to this financially fragile 600 and lower credit score that we are used to thinking about. When we look at the data coming through our subprime channels, we see consumers with scores spanning the entire spectrum.
Anna Fisher (06:07):
We see 20% with credit scores that are near prime, and depending on the segment, 15 to 40% of consumers with traditional credit scores that are prime or super prime. And these are consumers seeking these more non-traditional, again, historically subprime kind of products. And maybe that's not surprising given Amy's data, given the pricing issues, given the things that we're facing in the economy right now, affordability is a real issue from the end of 2023. Reports are still indicating that 60% of people were living paycheck to paycheck. That's clearly more than the set of folks in this under 600 bucket. And so that's a, that's a kind of scary statistic. And within that, even close to another 20% are struggling to make payments. So how do you, how do you decipher where there's true hardship versus just this increase in consumer spending? Mariette said it, Amy said it.
Anna Fisher (07:09):
We know that consumers are spending, utilization is up, limits are up. And an interesting term that I came across recently was this concept of money dysmorphia and the idea that there's a big disconnect between my true financial, the influences I'm getting from social media and the, the digital Joneses and trying to keep pace with that and just spending money. And so as we think about delinquency and we think about how to navigate this, it's important to think about how consumers are navigating it. Another report indicated that many are choosing to rely on overdraft protection, which introduces a whole new set of risk and a different kind of delinquency component for the lenders and the consumers themselves. And so trying to think about how to help consumers and really understand some of their intrinsic motivation is an interesting way to start thinking about how to stay ahead of delinquency in this space.
Olivia Voltaggio (08:05):
For sure. Amy, along the lines of rising prices and delinquency rates, this next question is for you. Some of our audience members wonder, given this environment what it would take to slow consumer spending.
Amy Crews Cutts (08:17):
It's a great question, and I think economists have been a little bit flummoxed by the strength in consumer spending. I think that part of this really was driven by the pandemic era relief payments, a lot of that went into checking our savings accounts and stayed there. I look at, at places several of the largest banks have really nice research institutes and report on the balances that are in consumer checking accounts or savings accounts at those institutions. And they're still reporting that there's a little bit of gas left in the tank, although it's getting pretty close to, to empty. But again, it's, you know, it's an income level kind of thing. When you make 150,000 plus a year, it's a whole lot easier to balance that budget even in the face of higher costs unless you've got teenagers. But you know, it's a lot easier to balance those costs.
Amy Crews Cutts (09:09):
But if you are in a job that you know where you're making significantly less than that, even worse if you have variable hours. So it's very hard to manage from, from week to week even, what the income is that, that you're going to have. Or you're a consultant and you know, it takes a while between invoices and payments and you know, that cash flow issue really matters. And the less money you, you make on average and sort of your aggregate, the more financially vulnerable you're going to be. And so we are seeing that stress much, much stronger in sort of low income. And, and, and I'll sort of say that by, by at the household level, not so much, you know, one worker in a family that that maybe doesn't earn as much, is not what I'm talking about. I'm talking about the household level.
Amy Crews Cutts (09:58):
And you know, I think that kind of goes back to some of these discussions we've just had about subprime and near prime credit. When somebody is in a subprime credit situation, they often get there because income flows are uneven and hard to predict. And some people of course can't, can't really manage their finances. They haven't really learned how to do that, but many of them just simply are not in a, in a good place where they keep getting shocked month to month. So there's a lot going on there, but I think it's indicative when you say Mariette that newer subprime and near prime vintages are not performing as, as well as they did previously. When we talk about new accounts, especially are very indicative of the risk that people are seeing because those who were seeking credit more often are in need of credit, not just shopping for the best points value. So I think that, that we're starting to see a in the armor of consumers and Taylor Swift concerts. Not withstanding demand is starting to shift for some of the other sort of discretionary spending, seeing a little bit of it in, in like the hotels and restaurants side of things. So I think it's starting already.
Olivia Voltaggio (11:10):
Speaking of consumer behavior, Maria, I know one topic we've covered on previous market pulses is student loans and many of today's registrants wanted to know how student loan debt is affecting consumer behavior. Do you have any data on that yet?
Maria Urtubey (11:24):
Yes. federal student loan payments resumed last October, but with the on-ramp program, delinquency is not going to be reported until the end of this year. So we have yet to see the full disclosure of the impact on consumer behavior. Historically, student loans have been relegated to the bottom of the payment hierarchy and income driven repayment plans such as save half cap back payments for some individuals all the way down to zero and new features still to be disclosed through this summer. So that would facilitate making these payments, but individuals are also being strategic on whether they pay or not given things are still being disclosed. So we, we don't have a full picture just yet.
Olivia Voltaggio (12:10):
Yes. Another registrant asked, is there a lumen problem with student loan debt or will the issue kind of fade away? And to your point given that we don't have that full picture yet, it makes sense that we should just stay on top of our accounts and monitor them for these kinds of changes to financial situations. Which brings me to another question for you, Mart one of our registrants indicated a desire to learn more about how they can calibrate their models to post pandemic consumer behavior. What are your thoughts on that?
Mariette de Meillon (12:39):
I think that is a, a very, very interesting question. And we have heard from multiple customers that there is currently an observed shift in the arts associated to those scores and those models. And so the question really is how do we handle this? What, what can we do to mitigate that? It definitely makes sense to review the decisioning strategies to get those that alignment between the consumer's current risk behavior into your decisioning strategy. And so in a situation where your model is no longer separating out the goods and the bads as well as it previously used to, that would be a good opportunity to start bringing in more data points into that decision strategy. And that could involve looking at alternative data scores. It could involve looking at any other secondary score like a bankruptcy score. It could involve any data point that will help you better understand your customers, your consumers current credit date commitments and their spend capacity. And so I, I think it is definitely recommended and advisable at this point in time that if you are seeing that shift in odds on your current score or model that you have in use to consider going to some deal decision strategy at this point.
Olivia Voltaggio (14:08):
Speaking of solutions, Anna, are you seeing more credit unions and financial institutions using complex algorithms that is models outside the traditional credit score?
Anna Fisher (14:18):
I love this question because it really opens up a more philosophical debate around complexity as a whole. Is complexity always better or not? And in many cases, we see folks trying to simplify and streamline. It's really about finding a model that works for you and your business. The big hurdles to complexity are implementation and fair lending requirements, and if you can adapt to those and accommodate them, great. Then complexity may have a, it may have a big role to play there, but as Mariet was just saying, what's even more interesting is getting creative with the business model. Are you layering in alternative data? Do you have multiple strategies deployed for different channels for different product lines as opposed to using a blanket sort of one size fits all approach? These aren't necessarily novel ideas, but it's really about when it's difficult to adapt to complexity. What are the easy levers you can pull to implement now, change now without going through a major regulatory overhaul, without having to make major structural changes to how you're doing business. But the goal is the same. Can you get more targeted offers that are going to be more profitable and have better performance? Can you get higher conversion rates? Can you increase retention? You can, there are more levels than just complexity and making a better single magic model that will get you there.
Olivia Voltaggio (15:48):
Following up on that, Anna, what innovative tactics can financial institutions deploy for better credit portfolio management?
Anna Fisher (15:56):
Seeing customers use portfolio management as a response to the turbulence of both the less recent pandemic times and now the more current economic changes is really exciting. Again, not necessarily innovative, but certainly being adopted more and more is a change in frequency. We heard from Amy, we heard from Marriott consumers, we ourselves are changing our own outlook on our financial standing month to month. We are making changes about how we're spending money, we are making changes about where we're looking for financing at a much more accelerated velocity than maybe historically. And if consumers are doing that, why can't lenders do it too? And we've seen cases where increasing from an annual review or a quarterly review to a more frequent even monthly review can have an ROI of three to six x, which is huge for the lender and can provide a lot of benefits for the consumer if you can help them stay ahead of some of these looming problems that we've been discussing today that can really help you increase loyalty.
Anna Fisher (17:05):
And I think that's where people on the cutting edge of portfolio management tactics, that's where we're starting to think about things like AI and not AI for decisioning, but AI for pattern recognition. How can you use the technology that's available to us today to anticipate consumer behavior, to think about trends to redefine your strategy for the next five, 10 years in addition to staying on top of your business and managing the portfolio. And that's going to be particularly useful in this current climate where we know there's higher debt exposure, there are more options for funding and customers are seeking those. Again, we saw high utilization, et cetera. And so how can you be the, the phone call they make, how can you anticipate what they're looking for, offer them the products they need, come up with new products. Can you, can you build alternatives to what's out there in the market today so that you become the trusted advisor, the trusted partner, trusted partner, the the payment they're making, and really use your portfolio management, not just as a tactical tool to manage the business and the cash flow, but also to think about your business as a whole more strategically.
Olivia Voltaggio (18:22):
Thank you Anna. And finally, to close out on a forward looking question, Amy, what do you feel economic trends are going to look like for the next two to three years?
Amy Crews Cutts (18:31):
So it's a great question. The challenge of course is that there's so many unknown unknowns looking ahead. Sort of in the big picture though, I anticipate that we will see a normalization of the yield curve. I'm hoping that happens without a recession, but I think that's a, that's a pretty safe bet. That means that at least relative to short-term rates, long-term rates will, will go back to being higher than short-term rates. And the, and the mechanism that I anticipate this to happen is that short-term rates come down first and that long-term rates will then, will then start to follow. Markets, of course can go very quickly and the market right now seems to think that the Fed is very serious about inflation. With that said, I think that GDP, even if we do end up with a mild recession, that will start to get closer to back where we were pre pandemic, that things will get once again back on trend, especially with disposable personal income and that economically we'll start to feel a little more like it's a better economy, not just the statistics showing.
Olivia Voltaggio (19:31):
Thank you Amy, Maria, Anna and Mariette for sharing your insights With all of us. Know that if you have submitted a question on today's webinar that we have not addressed live, we will include a summary of today's audience questions in a blog post that we'll share with you soon after the webinar. As a reminder, today's webinar will be recorded and we will share the recorded and slide deck with all registrants within a few days. Thank you to all of you who brought your questions to enrich our conversation. If you're considering what you've learned as well as what to do next, know that you can turn insights into action with data analytics and expertise. Maria, as a member of the Equifax Risk Advisory team, what are some recommendations you have for our audience in 2024?
Maria Urtubey (20:15):
Olivia here are a few of our recommendations to turn insights into action. First all Equifax data and insights presented today come from the Equifax consumer credit trends reports, which are available at equifax.com/market pulse. Increase the cadence of account reviews to assess changes in your customer's credit situations and better limit losses by taking action faster. Go beyond traditional scores with deeper insights on customer payment histories and financial behaviors. To learn how to apply these recommendations to your organization, please contact the Equifax Risk Advisory team at risk advisors@equifax.com.
Olivia Voltaggio (21:06):
Thank you for your expertise today. Ladies, if you enjoyed today's episode, tell your friends about us and subscribe. If you'd like to send us questions or suggested topics for future episodes, email us at Market Pulse podcast@equifax.com. And don't forget to register for our Market Pulse webinar series at equifax.com/market Pulse. Our team of experts works hard to provide relevant economic and credit insights to help your business make more confident decisions and build resilience to help you focus on forward. Thanks for listening and please join us next time.
Speaker 8 (21:42):
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 has recorded and do not necessarily reflect official positions of Equifax, investor analysts should direct inquiries using the contact desk box on the investor relations section@equifax.com.