Lending Briefing: Q3 credit lines are at all time high while delinquencies rise
- Earlier this year, lenders were becoming more comfortable to lend to subprime borrowers due to record low delinquency rates across products.
- However, with a recession on the horizon and inflation closing in, the winds of change are blowing with many trends returning to their pre-pandemic patterns.
Earlier this year, lenders were becoming more comfortable to lend to subprime borrowers due to record low delinquency rates across products. However, with a recession on the horizon and inflation closing in, the winds of change are blowing with many trends returning to their pre-pandemic patterns.
Delinquencies are hovering precipitously close to their levels in Q3 2019 and those on unsecured personal loans have surpassed their pre-pandemic levels as shown by TransUnion's recent Credit Insights Report.
The growth in unsecured personal loans as well as delinquency rates foretell a story of rising financial vulnerability. Although wages have been trending upwards since the pandemic, rising inflation has wiped out any further progress.
As lenders tighten spending and avoid risk, minimum payments due are trending upwards across all risk sectors but are most pronounced for non-prime consumers.
“In this inflationary environment, consumers are increasingly turning to credit, as evidenced by the record total bankcard balances this quarter. This is particularly true among the subprime segment of consumers. Delinquencies are rising, which is to be expected given the increase in consumers getting access to credit, many for the first time. However, the numbers remain in relative alignment with historical pre-pandemic levels of 2019,” said Paul Siegfried, senior vice president and credit card business leader at TransUnion.
Fintechs continue to emerge as worthy competitors in the sector: over half of the new balance added by unsecured personal loans originated from fintechs.
Unsecured Personal Loan Balances rose to $40 Billion, with 53.2% coming from fintechs – a new record relative to prior years, where the share stood at around 40%.
Meanwhile, credit unions were the second largest contributor at 17.7% - a decreasing proportion compared to previous years.
Unexpected entrants: Gen Z and Millenials have emerged as an increasingly active segment in the last year, with their average balance per customer exceeding pre-pandemic pandemic levels by 72% and 32%, respectively.
The number of credit cards has increased by 7.7% year-on-year to 511 million, while average debt per borrower rose by 12.7% to $5,474. With the number of credit cards increasing, balances have reached a record high of $866 billion in Q3 2022, which represents a year-over-year increase of 19%. However, the average balance across most risk tiers has not yet surpassed pre pandemic levels.
Interest in offering credit to non prime consumers was noticed earlier this year, as consumer credit trends looked healthy post-pandemic. This has continued through the second quarter, with bankcard originations up by 10.7% year-on-year, especially within the subprime and super prime consumer segment, which grew by 12.5% and 15.2%, respectively.
Credit cards that originate from retail-bank partnerships and offer consumers revolving debt plans as well as rewards at specialty stores, or private label cards, have risen in originations as well – up by 8.4% year-on-year to 12 million, while the subprime share of overall private label originations was up 22.5%.
“We are likely to see continued growth in credit card usage as increased interest rates and inflation continue to put pressure on consumers while employment numbers remain strong,” according to TransUnion's Seigfried.
The number of Unsecured Personal Loans has hit 26 million, as consumers combat shrinking credit lines and high inflation and average Debt Per Borrower has seen a 14.5% year on year growth.
According to Liz Pagel, senior vice president of consumer lending at TransUnion, expansion in non-prime risk tiers by lenders has been central to the rise in unsecured loan originations, observed in the last few quarters. Similarly, higher interest rates and the resulting uptick in prices across all lending products has driven consumer balance growth.
"As expected, increased lending to higher risk tiers drove higher overall delinquency rates, with serious delinquencies now exceeding pre-pandemic levels. As we look into next year, lenders will likely shift their originations' focus towards prime and above credit risk tiers as they look to moderate risk in their portfolios while continuing to grow.” she added.
What we’re reading
US banks increased credit loss provisions in the first half of the year in anticipation of loan deterioration and have started to make other moves to prepare for potentially weaker economic conditions, the Federal Reserve said Thursday in a semiannual report.
One of the biggest obstacles limiting consumers with complicated financial histories is the ability to build and improve their credit scores. Through innovative programs — and a degree of trust — credit unions are helping the underbanked get back on their feet.
The first credit card Square offers to its small business users will integrate directly with the firm’s broader ecosystem, helping sellers to organize their finances on the same platform where they run their business.
Flex Loan, to be rolled out nationwide later this year, gives eligible customers $250 for a flat $12 fee, or $500 for a $20 fee — to be repaid in four equal monthly installments.
JPMorgan Chase is launching a national program to try to get more loans into the hands of minority small-businesses owners, quietly piloting a special-purpose credit program this year.
Cultural and operational issues might be standing in the way of co-founder Nik Storonsky’s ambitions, insiders say.
Chart of the week
What we’re writing
Deep Dive: What’s in the black box? The challenges of explainable AI in digital finance
In the wake of reports of discrimination and negative impacts on consumer wellbeing, regulatory scrutiny is increasing on FIs that use AI models. AI is central to digital finance – but do we understand how it truly works?
How fintechs performed in Q3 2022: Nubank, SoFi, MoneyLion
The economic environment is tough but fintechs are doing well - NuBank, SoFi and MoneyLion reported growth in their customer base, revenues, and profits.
Stepping aboard the BaaS train: 5 questions with Simon Khalaf, CPO at Marqeta
Simon Khalaf, Chief Product Officer at Marqeta, tells us what went behind the company’s move beyond its card issuing business to step into the BaaS realm.