How the retail credit market can thrive in tough times

By Andries Zietsman, TransUnion VP. For the retail credit sector, it's getting harder to lend in an already tight market. But it is possible to drive profitable growth in this challenging environment.

By Andries Zietsman, TransUnion VP. South African consumers are feeling the squeeze of a struggling economy and the impact of rising inflation. Discretionary spending has been severely impacted by higher fuel prices and several interest rate hikes. For the retail credit sector, it’s getting harder to lend in an already tight market. But as some savvy retailers are showing, it’s possible to drive profitable growth in this challenging environment.

TransUnion’s Q4 2022 Consumer Pulse Study indicated that consumers are already cutting back on discretionary spending, and consumer debt levels are on the rise. This clearly indicates that South Africans are seeking greater access to liquidity to finance the rapidly rising cost of living. But while higher interest rates often signal an increase in defaults, TransUnion’s Q4 2022 South Africa Industry Insights Report shows that delinquencies are actually improving year-on-year as consumers prioritise paying off debt faster in the face of rising borrowing costs.

So, how can retailers guard against challenging economic times and the pressures this brings on consumers? It’s all about getting the balance right between cross-selling and upselling to established customers, and predicting and managing impairments smartly. Previous recessions, and the most recent COVID-19 downturn, have shown there is a clear payment hierarchy behaviour in South Africa. In other words, if a consumer has various lending products in their wallet, what do they choose to pay first?

Not all credit is equal

Consumers know not all credit payments are the same. As a result, they prioritise the payments they make, considering the funds available to them and the most effective way of maintaining access to funds. Making a credit card payment preserves their liquidity, as the revolving nature of the facility means the funds are available again almost immediately. Conversely, paying off a fixed-term personal loan reduces the balance owed, but does not preserve liquidity, because the funds can no longer be accessed. As a result, if the consumer only has enough money to pay one instalment, they will often choose to pay off the credit card.

The pressure on disposable incomes is also driving increased demand for short-term (0-to-3 months) loans in the market. As a result, we’re seeing a growing number of Fintech lenders take hold of that entry level demand in the lending cycle. Solutions like ‘Buy-Now-Pay-Later’ (BNPL), although not formally regulated at this time, could complicate the personal loan value proposition given the clients’ need. This is something the retail industry should keep an eye on, as this form of payment is experiencing a strong uptake from retailers and consumers alike.

In addition, the South African Reserve Bank (SARB) recently announced the launch of PayShap, a real-time rapid payment platform that is aimed at offering safer, faster and more convenient payment options for South Africans. This will go a long way in solving for various retail payment challenges and support retailer digitisation strategies. As a retail credit market, it provides an opportunity for collaboration due to the interoperability provided from a lending and payments point of view.

New business vs risk

In a tough economy, the temptation is always there to become more risk averse. That’s not always the right thing to do. Retail credit lenders can’t focus too much on delinquencies without bringing in new business. We learned some hard lessons during the pandemic, and we’re seeing a strong drive for new account origination. You’ve got to make sure you algin to prevailing market conditions, and get the balance right between new, existing and bad debt. The best way to do that is by using credit and alternative data and analytics smartly. While risk management remains important, leverage alternative early warning solutions to help grow, expand and retain your existing customer base. There is no better time to consider taking a closer look at your loyalty base and turning that into profitable clients. There’s no doubt times are tough. But for smart retailers, there are numerous opportunities to not only weather the economic storms, but to thrive.


Receive the Retailing Africa newsletter every week • Subscribe here