Coronavirus payment shifts require a new credit strategy

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The coronavirus has changed payment and spending habits and that has implications for credit risk around cards and other lending.

March 2020 brought dramatic changes to the U.S. economy with shelter-in-place orders, the temporary closing of nonessential businesses and spikes in unemployment insurance claims. Organizations today are grappling with uncertainty that has challenged credit strategies regarding modern risk management.

The crisis that unfolded in March and April 2020 had unique qualities, considering both the degree of economic turmoil and how quickly and unexpectedly it developed. The defining quality of Spring 2020 has been uncertainty — and it will likely remain this way for the foreseeable future.

One of the few clear implications from the initial two months of the lockdown with the changes to consumer behavior and the uncertainty ahead is the imperative for organizations to regain clarity on credit risk by obtaining a more complete picture of consumer creditworthiness.

Both alternative credit data and alternative non-tradeline event data expand an organization’s visibility into consumer creditworthiness and stability. This helps creditors maintain and strengthen the integrity of lending strategies across the customer lifecycle.

Our research, produced with ID Analytics, analyzed internal data to measure the impact of the lockdown in March and April. We identified shifts in credit-seeking behavior, how these shifts affected different demographics and early indicators of credit instability. The analysis revealed trends in credit behavior that demonstrate the changing shape of consumer credit risk as lenders and other organizations navigate unchartered territory.

One of the consistent themes observed in the Changing Shape of Credit Risk Study is that consumers did not seek out new credit unless it was necessary. Many consumers with prime credit scores did not seek new credit during this period given their relative financial flexibility. Younger prime consumers were more actively seeking credit.

Consumers between 18-30 years old with prime credit scores drove a sharp increase in credit-seeking across retail, bankcard, auto and wireless industries. This trend may be the result of several factors. Younger consumers may lack the same financial flexibility as older consumers. This requires them to rely more heavily on credit during times of financial stress. Younger consumers are also likely to have more comfort in seeking credit through digital channels, as this is the most convenient option available during lockdown with organizations shuttering their doors temporarily.

The application patterns of consumers seeking credit also changed in March and April in addition to shifts in the credit mix of new applicants. The analysis identified two interesting credit-seeking behaviors: higher rates of credit applications across an organization and an increase in loan stacking attempts in the online lending marketplace.

Credit-seeking consumers on average applied to 10% more organizations in April 2020 compared to the same 30-day period in 2019, which indicates they were seeking various lines of credit simultaneously.

Online lenders saw more than a two-thirds increase in loan stacking attempts in mid-March. These lenders appear to have responded by tightening their stacking defenses and adopting more conservative lending requirements. This led to a drop in loan stacking attempts in April.

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