Why Financial Inclusion Matters Now More Than Ever

This post summarises Melanie's 2022 ARCA Credit Summit presentation, where she talked about how rich data and advanced analytics can help providers reliably expand access to credit. Also, the role financial literacy plays in preventing financial stress and over-commitment.

Global insights warn of worsening economic conditions

• A decline in savings: globally, in Equifax markets, we're seeing evidence of a shift away from savings post-pandemic. In the last year, UK consumers have started moving funds from savings to current accounts, a rise of 13% in July 2022 compared to September 2021. In Australia, we also see a drop in household savings.
• Mortgage demand is changing: in the US where 30-year fixed-rate mortgages are the norm, refinancing has halted. The opposite is occurring in other countries where homebuyers are rolling off their fixed rate periods. Locally, we expect high refinancing volumes into 2023 as consumers hunt for a better deal.
• Delinquencies are rising: interest rates began rising in the US in September 2021 to curb inflation and in Q3, delinquency in unsecured credit surpassed pre-pandemic levels. In Canada, where interest rates have risen sharply over a short period, delinquencies are fast approaching 2018 levels. In Australia, more consumers are turning to unsecured credit as the cost of living increases, interest rates rise, and saving buffers dwindle.

Mortgage indebtedness in Australia is higher than it was pre-pandemic

Higher levels of mortgage indebtedness have been generated from the pandemic. Analysis from Equifax shows that overall opened mortgage limits increased 14.5% between January 2020 and May 2022. The average loan size in October 2022 was $595K, down from a peak of $618K in January this year but still 24% higher than in February 2020 pre-pandemic¹. 

The squeeze on household budgets is tightening due to a confluence of market forces, including sharp interest rate rises and inflation, falling household savings and the rising cost of living. Against this backdrop, we are also seeing SME owners use their personal finances or assets to prop up their businesses, particularly in the construction sector.

Unsecured credit drives growth in credit demand

The volume of consumer credit applications is increasing, driven by a demand for unsecured credit. The Equifax Consumer Credit Demand Index shows consumer credit applications increased by 17.1% in the September quarter compared to the same quarter last year. Specifically, credit cards were up 31.5%, and personal loans were up 22%. Demand was down by -6.1% for mortgages and -3.8% for auto loans. 

Unsecured credit demand is being fuelled by a rise in domestic travel post-Covid, people re-opening credit cards closed to meet mortgage affordability requirements during the housing boom and by Australians trying to manage their household budget squeeze. BNPL enquiries also continued to grow but demand slowed to 9.9% in September, with fewer new BNPL providers entering the market.

Business lending is holding up, but insolvencies continue to rise

Overall, business lending is holding up despite interest rate rises. Equifax Quarterly Commercial Insights show that commercial credit demand improved by 3.1% in September, with business loans continuing to grow by 2.6% compared to the previous year's period. 

Insolvencies were up 45% in October 2022 compared to the previous year's period but remained 30% lower than pre-pandemic levels². The construction industry is a significant contributor, with insolvencies in this sector up by 139% in September compared to the previous year's period. Insolvency levels in the food services/accommodation and retail trade industries also increased. Although rising economic pressures contributed to the uptick, this increase continues the upward trend in insolvencies observed throughout 2022 as volumes move closer to pre-Covid levels.

Australians who have never previously had financial difficulty are now showing signs of mortgage stress

With these market forces as a backdrop, Equifax analysis shows a new cohort of Australians who are under financial stress. This group bought into the housing market at the peak when interest rates were at all-time lows, using Covid savings to purchase a first home or upgrade. They were previously up-to-date with mortgage repayments and didn't experience a hardship event during the pandemic but are now in need of financial assistance. Their situation came about not from one event but from various colluding factors, including rapidly changing financial pressures and poor financial literacy skills that led to credit overcommitment.

Even though the overall mortgage arrears (30+DPD) rates of this group are below pre-Covid levels, there has been a gradual 16% increase in the number of accounts requiring assistance over the past six months. These homeowners have high levels of indebtedness and haven't yet built equity. 

As inflationary and cost of living pressures increase, financial education and literacy are critical for this group. Empowering homeowners with the knowledge and learning to construct healthier saving and spending habits helps to promote wiser monetary decisions. As in the broader community, improved financial literacy ultimately paves a path to financial inclusion as opportunities open up for those who develop demonstrable healthy financial behaviours.

The longer consumers are in financial assistance, the lower the likelihood they will come out of it

We know that early intervention drives better outcomes. Borrowers who approach their lender for assistance early in the arrears cycle have less chance of ending up in a worse situation. Equifax analysis from May 2021 pre-Covid shows that for those in early stages of arrears, 1-29 days before receiving assistance, the chance of them being worse off is 11%. Those in later stages of arrears, 90-plus days, before entering assistance were twice as likely to get back into difficulty (20%). Covid amplified this pattern: those who asked for assistance at 90+ days past due were almost three times more likely to be worse off than those who spoke up before 30+ days past due. 

The earlier lenders help borrowers recover, the better. Education is critical to ensure customers know not to delay asking for help. For lenders, knowing when to intervene is essential to customer experience and how quickly a customer can get back on their feet. A proactive pre-delinquency strategy uses data analytic insight to achieve a 360 view of customers and their commitments. With prior warning of financial stress, lenders can step up their support and reach out to customers much sooner.  

Empowering Australians to secure and own their financial futures

In 2022, 2.5 million Australians have limited or no information on their credit files. Without a credit report or score, the ability to reliably gauge creditworthiness, these people have traditionally been excluded from accessing credit. 

Within this group are young people, members of the indigenous community and those new to the country. There are also those who have re-entered the credit market after a period of absence, like a marriage breakdown or financial hardship and small business owners, whose credit applications can often fall short of proof of income requirements. 

At Equifax, we’re working to close these gaps and help build a more financially inclusive nation. In ‘helping people live their financial best’, we’re bringing about the data analytic innovation necessary to capture a fuller picture of financial behaviour. With a 360-degree view of credit risk, financial service providers can arrive at more accurate lending decisions. And in turn, consumers can more effectively demonstrate their eligibility for credit through healthy spending and saving behaviours.

By taking a holistic approach incorporating data security, fraud and identity, and credit reporting, we support vulnerable people and educate consumers at every stage of the credit lifecycle. Here are some of the ways we're continually innovating and pioneering to ensure our work drives a positive impact:

• Helping lenders make credit decisions that are informed and explainable

A key challenge has been explaining credit scoring decisions to consumers. Our award-winning next-generation credit score, Equifax One Score, uses patented Neuro Decision Technology™ to make our scores more explainable. 

With this groundbreaking ability to understand the ‘why’ behind the credit decision, plus new fairness and bias detection, lenders have the opportunity to build consumer engagement and trust. Consumers also can understand how their credit behaviours influence the score outcome and take control of their financial wellbeing.

Equifax One Score is our most predictive credit score to date, and with this accuracy comes constancy and confidence in the decisions both lenders and consumers make. We want to help lenders approve more people and approve more fairly so that we all work towards greater financial equality as an industry.

• Using alternate data sources to aid decision-making where traditional credit information is not available

Lenders traditionally rely on credit reports and scores to assess a loan – but what happens to the 2.5M Australians with little or no credit history? With data insights and industry relationships, we can help enable greater access to credit and reduce the number of Australians on the fringes of the mainstream financial system. This includes broadening our data to use non-traditional ways to assess financial history and behaviour. We continue evolving our scores and insights to help lenders say yes to more people. 

Using alternate data sources, Equifax can help complete the view of consumers and enable an additional 4 - 12% of consumers with limited credit history to be included in the credit market and reach their financial goals. We created a Financial Health Index to enrich traditional credit bureau information with bank transaction data to help decisions where conventional credit information is unavailable. 

Every transaction tells a story and can reveal patterns and signals indicating credit repayment ability. These signals are all indicators that can help lenders better predict risk where traditional credit information is not available or where decisions seem to sit on the fence. It’s an approach designed to improve access and reduce prices for those with limited credit records, increasing financial inclusion.

• Developing a secure alternative for sharing payroll information that benefits employees, employers and third parties

When an employee seeks a life goal, whether buying a car or moving onto the property ladder, they are faced with a tedious and insecure process of emailing or uploading copies of their payslips to complete the loan application. 

We’re completely changing how employment income is verified, providing a secure, digital alternative that helps employees, employers, and third parties mitigate the risk when verifying employment income through our Verification Exchange. A triple winner at the Australian Business Awards 2022, the exchange provides a seismic upgrade in security, privacy and convenience by removing the need for printed payslips to be the accepted behaviour for verifying employment income in Australia. 

• Building buyer confidence in the construction industry

Imagine buying off the plan or building your dream home, only to find it is unlivable. After the publicity surrounding a series of faulty high-rise buildings, the industry came together to see how it could restore trust in the sector. One of the outcomes is the introduction of an independent construction industry ratings tool, iCIRT, which Equifax developed in close consultation with the public and private sectors. iCIRT provides a star-rating outcome to help purchasers find trusted building professionals with whom to build, renovate or purchase a new home or apartment. The rating tool is designed to assess and provide an independent view for identifying which building professionals are risky and which are not.

In May this year, the first tranche of developers and builders were rated as ‘trustworthy’ through the iCIRT star-rating regime. Now those seeking to purchase a home or an apartment have a register they can search to find developers and builders with a proven track record of quality and integrity, supported by objective evidence of their past capability. This tool creates an opportunity to build trust and add value for construction industry participants across Australia.

Ultimately, this improved transparency gives buyers confidence that their hard-earned savings are for a home or property that can be relied on into the future. 

• Providing frictionless identity verification to transact online safely

One of the first steps for financial inclusion is identity verification. It is critical for someone new to the country or young and just getting started financially to have their identity verified to support their application for a loan. Yet conventional methods of confirming a customer’s identity, such as emailing in ID documents or visiting a branch to confirm identity, present security risks to the consumer, lack fraud protection for the business and are cumbersome. 

Our Equifax Biometrics Identity Verification Solution makes quick, efficient and secure identity verification possible. Providing frictionless verification in seconds to enable Australians to transact online safely, ultimately levels the playing field to allow access to credit. There are still some pockets in the population without a significant socio-economic digital footprint, such as young people, new migrants and the First Nations population. We are always looking for data sets and innovation to help us close that gap.

Equifax Biometrics is an Australian-owned and hosted solution. It combines all identity verification and fraud protection elements into a single seamless interaction, strengthening protection against identity fraud while providing an efficient and intuitive experience for improved financial inclusion.

• Extending fraud protection with a multi-layered approach

Following recent significant cyber breaches, we are yet to see the impact of fraud flow through; however, there will be a long tail. Equifax has an important role in helping minimise this long-term impact. In addition to our traditional fraud solutions, we are working on how we can identify abnormal patterns of enquiry volumes as an early warning to fraudulent use of data through to back-end fraud. Our multi-layered approach aims to help customers not just at origination but across the financing lifecycle.

• Connected data for faster, more accurate decisions

Data integrity and security are paramount when data is unstructured or scattered across disconnected information silos. Connected data, and the safety, consistency and standardisation it brings, are foundational to protecting data and delivering optimal business decisions. At Equifax, we’re unifying previously disconnected data silos into a seamless, globally distributed data fabric. Logical separation and governing rules ensure airtight controls over privacy, security, quality, compliance and access. Data is accessed across the fabric and made available through products and solutions like scores, analytics dashboards and models. 

Centralised access to data via a single unified view enables the consistent application of data quality standards, security and governance, and greater visibility to power better business decisions. Whether it’s enhanced identity assessment and fraud prevention, more reliable and precise credit decisioning or even predictive analytics and marketing insights, connected data creates an ecosystem for reliable data management.

Interested in a deep dive?

To discuss any of the topics raised in this Paper or understand how Equifax can support you please get in touch.
helloAU@equifax.com

Listen to Equifax Australia Group Managing Director Melanie Cochrane talk to Gemma Acton about Why Financial Inclusion Matters

Listen to Kari Mastropasqua, Executive General Manager Data and Analytics at Equifax, about how she and her team are making credit scores more transparent and predictive

Equifax makes information useful for people to make decisions in an ever-changing world. Confident choices, informed by reliable data, can improve the lives of all Australians.
 

¹ Australian Bureau of Statistics, Lending Indicators, Oct 22

² ASIC Insolvency statistics

DISCLAIMER
The information in this release does not constitute legal, accounting or other professional financial advice. The information may change, and Equifax does not guarantee its currency or accuracy. To the extent permitted by law, Equifax specifically excludes all liability or responsibility for any loss or damage arising out of reliance on information in this release and the data in this report, including any consequential or indirect loss, loss of profit, loss of revenue or loss of business opportunity.