Tag: Consumer Finance

ASIC puts spotlight on the rapidly growing buy now pay later industry

ASIC has released its first review of the rapidly growing buy now pay later industry. The review of this diverse and evolving market has found that buy now pay later arrangements are influencing the spending habits of consumers, especially younger consumers. One in six users had either become overdrawn, delayed bill payments or borrowed additional money because of a buy now pay later arrangement.

They estimate 2 million active buyers use these services.

… and transactions are increasing.

They show that much of the revenue generated comes from merchant fees, but also includes some missed payment and other consumer fees.

A buy now pay later arrangement allows consumers to purchase and obtain goods and services immediately but pay for that purchase over time. While some buy now pay later providers offer fixed term contracts up to 56 days for amounts up to $2,000, other providers offer a line of credit for amounts up to $30,000.

ASIC found that the number of consumers who have used buy now pay later has increased five-fold from 400,000 to 2 million over the financial years 2015-2016 to 2017-2018. The number of transactions has increased from about 50,000 during the month of April 2016 to 1.9 million in June 2018. At 30 June 2018, there was $903m in outstanding buy now pay later balances.

ASIC Commissioner Danielle Press said ‘Although our review found many consumers enjoy using buy now pay later arrangements and plan to continue using them, there are some potential risks for consumers in using these products.

‘The typical buy now pay later consumer is young with 60% of buy now pay later users aged between 18 to 34 years old.  We found that buy now pay later arrangements can cause some consumers to become financially overcommitted and liable to paying late fees.’

One in six users had either become overdrawn, delayed bill payments or borrowed additional money because of a buy now pay later arrangement. Most consumers believe that these arrangements allow them to buy more expensive items than they would otherwise and spend more than they normally would. Providers also use behavioural techniques which can influence consumers to make a purchase without careful consideration of the costs.

‘The exponential growth in this industry, along with the risks we have identified, means this will remain an area of ongoing focus for ASIC. One area we will be targeting is where consumers are paying more than they need to for using a buy now pay later arrangement’, said Ms Press.

Given the potential risks to consumers, ASIC supports extending the proposed product intervention powers to all credit facilities regulated under the ASIC Act. Product intervention powers will provide ASIC with a flexible tool kit to address emerging products and services such as buy now pay later arrangements. This will ensure ASIC can take appropriate action where significant consumer detriment is identified.

Background

Buy now pay later arrangements allow consumers to defer payment for purchases from participating merchants and obtain the goods and services immediately.

Under the arrangement, consumers are generally not charged interest. However, some arrangements have an establishment fee and account-keeping fees. Consumers may also be charged a fee if they miss a payment.

Buy now pay later arrangements are available from a range of merchants. For example, these arrangements could be used to finance high-value purchases such as solar power products, health services, travel, and electronics. Buy now pay later arrangements are also available for everyday purchases from retailers such as Big W, Target, Harris Scarfe and Kmart.

These arrangements are not regulated under the National Credit Act and as a result providers are not required to be licensed or to comply with the responsible lending laws that prohibit a lender from providing credit that would be ‘unsuitable’ for the consumer. However, these arrangements are considered ‘credit facilities’ under the ASIC Act meaning that ASIC can take action where a buy now pay later provider engages in conduct that is misleading or unconscionable.

ASIC’s review

ASIC undertook a proactive review of these arrangements to develop a broad understanding of this growing industry and to identify potential risks for consumers. The review examined six providers, four of which are part of larger ASX-listed companies. The buy now pay later arrangements we reviewed were: Afterpay, zipPay, Certegy Ezi-Pay, Oxipay, BrightePay and Openpay.

To better understand how this industry is working in practice, we considered qualitative and quantitative data from July 2016 to June 2018. We also relied on independent consumer research which involved a survey of 600 randomly selected consumers who had recently used a buy now pay later arrangement.

ASIC also tested each of the providers performance in areas such as transparency, dispute resolution and hardship. As a result, all of the providers have made improvements that will benefit consumers. For example, all of the providers are now members of the new Australian Financial Complaints Authority, and all of the providers are reviewing their standard form contracts for potentially unfair contract terms.

ASIC will continue to collect data to monitor the adequacy of consumer protections in this sector and review changes made by buy now pay later providers.

ASIC’s MoneySmart website explains how buy now pay later services work and how consumers can avoid getting into financial trouble when using them.

Payday Pain Still Grips

Since the Government released the report of the Independent Panel’s Review of the Small Amount Credit Contract Laws in April 2016, three million additional loans have been written, worth an estimated $1.85 billion and taken by some 1.6 million households.

In that time, around one fifth of borrowers or around 332,000 households, were new payday borrowers.

We also know that over a 5-year period around 15% of payday borrowers will get into a debt spiral which leads to events such as bankruptcy. On that basis, an additional 249,000 households have been allowed to enter a debt path which leads to this unfortunate end. A larger number fall into other family or relationship issues when borrowing from this source.

Digital Finance Analytics was asked by the Consumer Action Law Centre to complete custom modelling using data contained in our rolling 52,000 per annum household surveys, focussing in on the question of the quantum and impact of delays in the proposed legislation relating to the sector.

Specifically, we estimated the incremental damage done to households in terms of the value of loans taken since the final review was published on 19th April 2016, as well as some observations as to the characteristics of borrowers over this period.

The data presented is this paper is somewhat indicative, in that we made a number of reasonable assumptions to support our findings.

  1. The survey remains as statistically robust sample (aligns with the most recent ABS census data).
  2. We have extrapolated 2018 figures on the current run rates per month.
  3. We have not tried to overlay the potential before and after impacts, had the proposed changes been made to payday sector, but we have considered the mix and impact of loans taken during this time.
  4. We use the term “payday loans” to refer to those loans made within the SACC (Small Amount Credit Contract) legislation, so this excludes medium term loans and other personal credit facilities.

The Current Size of the Payday Market

We continue to see some growth in the payday sector overall.

In 2016, the total loans written (loan flows) were in the order of $736 million and based on projections for the full year 2018, this will rise to $925 million. However, because payday lending is by nature short term, the incremental value of $189 million is not the full measure of loans written in the period. We will estimate this later in the paper.

Of note is the significant increase in online origination, with 83% of loans now accessed via a web site on a mobile device or another computing device.
The other important factor is to note the switch in types of customers being attracted by these services. As a result of tighter controls on loans to Centrelink recipients, and the rise in online services, the mix between those we classify as financially distressed (those with immediate financial needs and no alternative) and financially stressed (those with financial needs, with alternatives, but who reach for payday loans as a simple, quick and confidential alternative) has increased, and is facilitated by greater online access.

Since 2016, the total loan flows have risen by $191 million for financially stressed, but the value of loans to distressed households has remained static. But again the net value of loans does not tell the full story.

The Number of Households with Payday Loans

Value apart, the other perspective is the number of households taking payday loans. Since 2016, the number has risen by 149,000 households. Of that 13,000 are classified as distressed households and 136,000 are stressed households.

This once again reflects the refocussing of the industry of those in financial pain rather than distress. Within these numbers we note a continued rise in the number of women accessing payday loans. The number of women using payday loans has risen from 177,000 in 2016 to 226,000 in 2018. This represents a rise to 22.18% of all borrowers.

Within the women segment we see a large number of one-parent women accessing payday loans, representing 40% of women.

This is in stark contrast to males where just 6% are one-parent families.

How Many Loans, and What Value Has Been Written Since 2016?

The final part of our analysis we examined the run rate of loans written by volume and value to assess the impact of the Government inaction since April 2016.

Since April 2016 and June 2018, just over 3 million discrete payday loans have been written, worth in total around $1.85 billion by around 1.6 million households. These loans would have generated something in the order of $250 million in net profit to the lenders.

In that time, around one fifth of borrowers will be new borrowers, or around 332,000 households. We also know that over a 5-year period around 15% of payday borrowers get into a debt spiral which leads to events such as bankruptcy. On that basis, an additional 249,000 households have been allowed to enter a debt path which leads to this unfortunate end. A larger number fall into other family or relationship issues.

ANZ to suspend consumer asset finance in Australia

ANZ has announced it will suspend providing new secured asset finance loans for retail customers in Australia while it undertakes a detailed review of its business.

Consumer asset finance includes loans provided for motor vehicles, boats and caravans for retail customers. The announcement covers both direct and broker originated channels.

ANZ will continue to service its existing consumer asset finance customers and will continue to provide customers with access to personal loans during the suspension.

Its asset finance product for commercial customers is not impacted by this announcement.

ANZ Managing Director Retail Distribution Catriona Noble said: “Given the increased technology costs required to effectively compete in the secured consumer asset finance market, we have decided to suspend all new loans while we conduct a detailed review of the business.

“Our secured consumer asset finance product represents less than one per cent of revenue within our broader Australian business, so we need to assess if it is better for our customers, shareholders and employees if we focus our investment on areas of our business that are core to what we do.

“Providing asset finance solutions for commercial customers remains a core business for ANZ and we will also continue to service existing retail customers for the duration of their loans,” Ms Noble said. The suspension of new loans is effective 30 April 2018. The review is expected to be completed by 30 September 2018.

Who’s driving UK consumer credit growth?

From Bank Underground.

Consumer credit growth has raised concern in some quarters. This type of borrowing – which covers mainstream products such as credit cards, motor finance, personal loans and less mainstream ones such as rent-to-own agreements – has been growing at a rapid 10% a year. What’s been driving this credit growth, and how worried should policymakers be?

For many years regulators have relied on aggregated data from larger lenders to monitor which lenders and products are driving credit growth. These data are useful. But they also have important gaps. For example, they don’t include less-mainstream products that people with low incomes often rely on.

Crucially, such data do not show who is borrowing, or people’s overall debts across different lenders and products. This matters. If people borrow on many products, problems repaying one debt could rapidly spill over to others. Consumer surveys can offer some insights here. But surveys often have limited product coverage, are only available with a lag, and may suffer from misreporting.

To build a better, fuller picture of borrowing, the FCA requested credit reference agency (CRA) data for one in ten UK consumers. CRAs hold monthly data on most types of borrowing – including consumer credit, mortgages, and utilities. These data are really rich, going back six years, and can be studied at many different levels. For example, it is possible to scrutinise individual borrowing across products, or to focus on particular lenders or types of products.

We examined these data to assess possible risks from recent credit growth. This article summarises three particular insights which have emerged from this work:

  1. Credit growth has not been driven by subprime borrowers;
  2. People without mortgages have mainly driven credit growth;
  3. Consumers remain indebted for longer than product-level data implies.

Insight 1: Credit growth has not been driven by subprime borrowers

CRA data enables us to examine the distribution of credit scores among groups of borrowers. This is valuable because credit scores are excellent predictors of which types of borrowers are most likely to default or have high risks of suffering broader financial distress. A lower credit score indicates a greater risk of a person being unable to repay their debt. Those with very low credit scores are often referred to as ‘subprime’ borrowers.

In Figure 1 we show the share of outstanding consumer credit debt (net of repayments) by people’s credit scores. We divide the range of credit scores into ten buckets – the lowest bucket contains people with scores in the bottom tenth of the range (the riskiest borrowers).

Doing so reveals that a small proportion of all consumer credit debt is held by subprime consumers. There are some important differences when we compare people holding different credit products. Borrowing on credit cards with 0% offers and motor finance is concentrated among people with the highest scores. This contrasts with people borrowing on interest-bearing (non-0%) credit cards who more commonly have low scores.

Given motor finance and 0% credit cards have accounted for a majority of consumer credit growth since 2012, this suggests much of the growth is going to the borrowers least likely to suffer financial distress. This story is consistent with high-cost credit markets used by subprime borrowers not rapidly expanding – on the contrary, some are contracting.

In Figure 2, we turn to how the distribution of borrowing has changed over time. Here we find little difference in credit scores over the recent period of rapid credit growth. This holds when looking at both the outstanding stock and the flow of new borrowing. At face value, this indicates that lenders have not dramatically relaxed their lending standards. But observing a similar credit score distribution when the macroeconomic environment has slightly improved may be better interpreted as a deterioration. The only product where we find an increased concentration of subprime borrowing is interest-bearing credit cards.

History also offers some caution on the relative importance of subprime lending. Recent research on the US mortgage crisis found the pre-crisis growth of subprime borrowing was less dramatic and important to explaining the crisis than earlier studies implied.

Insight 2: People without mortgages have mainly driven credit growth

The recent credit growth has followed a tightening of mortgage lending requirements. Did this tightening have the unintended side-effect of turning mortgage borrowers away from extracting home equity and instead towards consumer credit?

We assess the interaction between these two markets by splitting the growth and stock in borrowing between mortgagors and non-mortgagors. This is shown in Figure 3. About half of outstanding consumer credit is held by those with mortgages. However, this group accounts for a minority of growth in credit balances, with 60% of the growth in credit balances coming from non-mortgagors.

It is comforting that mortgagors do not appear to be bypassing tighter mortgage regulation by amassing consumer credit debt. But a key question going forward is how much of the growth is coming from renters and how much from outright owners.

We know that renters tend to spend a higher share of their income on housing than mortgagors, and so may have less income available for debt repayments. Rapid increases in indebtedness among renters could therefore be a vulnerability.

It is also possible that outright owners are taking out credit, even if they don’t need it. Survey data suggest around 40% of households with consumer credit debt hold savings in excess of such debt. If driven by outright owners, rapid credit growth among non-mortgagors may be less worrying.

Insight 3: Consumers remain indebted for longer than product-level data implies

The Bank has previously argued that lenders’ consumer credit portfolios turn over relatively quickly, reflecting the short terms of consumer credit products (relative to mortgages). In theory, this rapid turnover means that the prudential risks from outstanding consumer credit could quickly increase (or decrease) if lending standards were to deteriorate (or improve).

While this may hold from a lender perspective, our analysis tells a different story from consumers’ perspective. We find that although a consumer may clear their debt on one credit product, it is not uncommon for them to remain in debt as they transfer balances, take out new credit products or draw down on existing credit lines (such as credit cards). As shown in Figure 4, 89% of the total outstanding stock of debt in November 2016 was held by people who also owed debt two years earlier. While approximately half of new borrowing is due to ‘new’ borrowers, these people are typically only able to access relatively small amounts of credit and therefore account for a small proportion of the overall stock of debt.

An implication of these findings is that regulators should not become too relaxed when they observe improvements in specific products at particular lenders. Unless the borrower population significantly changes, it is possible that the risk of consumer harm will simply be shifting from one part of the market to another rather than reducing. It is therefore important to regularly examine the financial health of people and their debts holistically using CRA (or similar) data.

Should policymakers be worried?

Credit growth not being disproportionately driven by subprime borrowers is reassuring. As is the lack of evidence that mortgage lending restrictions are pushing mortgagors towards taking on consumer credit.

But vulnerabilities remain. Consumers remain indebted for longer than previously thought. And renters with squeezed finances may be an increasingly important (and vulnerable) driver of growth in consumer credit.

Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.

GE ANZ Consumer Lending Business Sold

GE Capital has sold its Australian and New Zealand consumer lending business to a consortium in a deal valued at US$6.3 billion. This transaction, which needs regulatory approval, will see its three million customers transferred to KKR (the lead bidder), Deutsche Bank and Varde Partners.

The GE business provides personal loans and credit cards to consumers in Australia and New Zealand, as well as interest-free financing for products sold by local retail partners including homewares and electrical-goods retailer Harvey Norman. GE Capital will keep its commercial-finance unit, which provides loans and leasing to midsize businesses in Australia and New Zealand.

Other bidders who missed out, included Apollo Global Management which was a consortium that included Macquarie Group and Pepper Australia and a syndicate headed by TPG Capital, which industry observers had viewed as the most likely winner.

GE is focusing on its industrial businesses in Australia & New Zealand.

The WSJ commented

“the sale of the Australian unit also follows a trend of global banks looking to sell down their consumer-finance businesses as they focus on core operations and free up capital. Standard Chartered PLC in December agreed to sell its consumer-finance units in Hong Kong and Shenzhen as part of its strategy to dispose of noncore businesses, as the Asia-focused lender battles with declining profits and slower growth.

Earlier this month, Citigroup Inc. agreed to sell consumer-finance unit OneMain Financial for $4.25 billion to Springleaf Holdings, as the sprawling global bank continues to pare its operations in the wake of the financial crisis.”