Consumer credit has been constantly evolving for more than 5,000 years, but the reality is that the most drastic changes to the industry came fairly recently.
Modern credit systems are now powered by sophisticated algorithmic credit scoring, the use of trended and alternative data, and innovative fintech applications. While these developments are all interesting in their own right, together they serve as a technological foundation for a much more profound shift in consumer credit in the coming years.
The Future of Consumer Credit
In today’s infographic from Equifax, we look at the cutting edge of consumer credit, including the new technologies and global trends that are shaping the future of how consumers around the world will access credit.
It’s the final piece of our three-part series covering the past, present, and future of credit.
The biggest problem that creditors have always faced is well-documented. There is more to a borrower than just their credit score. Yet creditors do not always have a 360 degree view of a consumer’s creditworthiness in order to better assess their overall score.
Called “information asymmetry”, this gap has gotten smaller over the years thanks to advancements in technology and business practices. However, it still persists in particular situations, like when a college student has no credit history, or when a rural farmer in India wants to take out a loan to buy seeds for crops.
But thanks to growing amounts of data – as well as the technology to make use of that data – high levels of information asymmetry may soon be a thing of the past.
Forces Shaping Credit’s Future
Here are some of the major forces that will drive the future of consumer credit, addressing the information asymmetry problem and making a wide variety of credit products available to the public:
1. Growing Data
90% of the data in all of human history has been created in just the last two years.
2. Changing Regulatory Landscape
New international regulations are putting personal data back in the hands of consumers, who can control the personal data they authorize access to.
3. Game-changing Technologies
Machine learning, deep learning, and neural networks are giving companies a way to garner insights from data.
4. Focus on Identity
Authenticating the identity of consumers will become crucial as credit becomes increasingly digital. Blockchain and biometrics could play a role.
5. The Fintech Boom
The democratization of data and tech is allowing small and niche players to come in and offer new, innovative products to consumers.
The Credit Revolution
No one can predict the future, but the above forces are shaping the credit industry to be a very different experience for consumers and businesses. Here are how things could change.
More Data, New Models
Current credit scoring algorithms use logistical regressions to compute scores, but these really max out at using 30-50 variables. In addition, these models can’t “learn” new things like AI can.
However, with new technologies and an unprecedented explosion in data taking place, it means that this noise can be converted into insights that could help increase trust in the credit marketplace. New algorithms will be multivariate, and they will be able to mine, structure, weight, and use this treasure trove of data.
|Artificial intelligence||Machine learning can “learn” from massive data sets, and apply these lessons for better scoring.|
|Bayesian||Models can update probabilities as more information is available, helping to better predict creditworthiness.|
|APIs||Application programming interfaces (APIs) make it easier for developers to use technologies, data, and to build new applications.|
|Neural networks||Brain-inspired AI systems designed to replicate the way that humans learn are used for deep learning. This enables the processing of raw, unstructured, and often abstract data for new insights.|
Neural networks will be able to look at a billions of data points to find and make sense of extremely rare patterns. They will also be able to explain why a particular decision was made – and at a time where transparency is crucial, this will be key.
Data Will be in the Hands of Consumers
Today, much of consumers’ financial data – such as loan repayment histories – is held almost exclusively by banks and credit agencies.
However, tomorrow points to a very different paradigm: much of the data will be directly in the hands of consumers. In other words, consumers will be able to decide how their data gets used, and for what. In Europe, changes have already been made to transfer control of personal data to the consumer, such as the PSD2, GDPR, and Open Banking (U.K.) initiatives.
Experts see the trend towards open data growing globally, and eventually reaching the United States. Open data will allow consumers to:
- Regain control of checking, mortgage, loan, and credit card data
- Give up more information voluntarily to unlock better deals from creditors
- Grant access to third parties (fintech, apps, etc.) to use this data in new applications and products
- Gain access to better rates, new lending models, and more
Identity Will Be Just as Important
As transactions become more digital and remote, how lenders verify the identity of borrowers will be just as important as the lending data itself.
Why? Credit is based around trust – and fraud is the biggest risk for lenders.
But fraud an be prevented by new technologies that help detect anomalies and prove a borrower’s identity:
Distributed, tamper-resistant databases can help secure people’s identities from fraudulent activity
Fingerprints, facial recognition, and other biometric identification schemes could help secure identities as well
New Game, New Players
With the vast expansion in types and volume credit data, new technologies, and standardized data in the hands of consumers, there will be a new era of third-party companies and apps that can provide useful and relevant services for consumers.
Here are just some emerging fields in lending:
|P2P Loans||Does a bank need to be an intermediary?
With peer-to-peer loans, you are matched to an appropriate lender/borrower.
|Microlending||Lending doesn’t always need to be in big amounts, like for a mortgage or auto loan.|
|Alternative credit scoring||Psychometric testing or the use of other data streams can be used to power this less traditional form of lending.|
|Niche services||With an open playing field, companies will fill every gap imaginable.|
In the future, consumers may not have to even request credit – it may be automatically allocated to them based on behavior, age, assets, and needs.
Consumers will have more control, and more options than ever before.
The History of Interest Rates Over 670 Years
Interest rates sit near generational lows — is this the new normal, or has it been the trend all along? We show a history of interest rates in this graphic.
The History of Interest Rates Over 670 Years
Today, we live in a low-interest-rate environment, where the cost of borrowing for governments and institutions is lower than the historical average. It is easy to see that interest rates are at generational lows, but did you know that they are also at 670-year lows?
This week’s chart outlines the interest rates attached to loans dating back to the 1350s. Take a look at the diminishing history of the cost of debt—money has never been cheaper for governments to borrow than it is today.
The Birth of an Investing Class
Trade brought many good ideas to Europe, while helping spur the Renaissance and the development of the money economy.
Key European ports and trading nations, such as the Republic of Genoa or the Netherlands during the Renaissance period, help provide a good indication of the cost of borrowing in the early history of interest rates.
The Republic of Genoa: 4-5 year Lending Rate
Genoa became a junior associate of the Spanish Empire, with Genovese bankers financing many of the Spanish crown’s foreign endeavors.
Genovese bankers provided the Spanish royal family with credit and regular income. The Spanish crown also converted unreliable shipments of New World silver into capital for further ventures through bankers in Genoa.
Dutch Perpetual Bonds
A perpetual bond is a bond with no maturity date. Investors can treat this type of bond as an equity, not as debt. Issuers pay a coupon on perpetual bonds forever, and do not have to redeem the principal—much like the dividend from a blue-chip company.
By 1640, there was so much confidence in Holland’s public debt, that it made the refinancing of outstanding debt with a much lower interest rate of 5% possible.
Dutch provincial and municipal borrowers issued three types of debt:
- Promissory notes (Obligatiën): Short-term debt, in the form of bearer bonds, that was readily negotiable
- Redeemable bonds (Losrenten): Paid an annual interest to the holder, whose name appeared in a public-debt ledger until the loan was paid off
- Life annuities (Lijfrenten): Paid interest during the life of the buyer, where death cancels the principal
Unlike other countries where private bankers issued public debt, Holland dealt directly with prospective bondholders. They issued many bonds of small coupons that attracted small savers, like craftsmen and often women.
Rule Britannia: British Consols
In 1752, the British government converted all its outstanding debt into one bond, the Consolidated 3.5% Annuities, in order to reduce the interest rate it paid. Five years later, the annual interest rate on the stock dropped to 3%, adjusting the stock as Consolidated 3% Annuities.
The coupon rate remained at 3% until 1888, when the finance minister converted the Consolidated 3% Annuities, along with Reduced 3% Annuities (1752) and New 3% Annuities (1855), into a new bond─the 2.75% Consolidated Stock. The interest rate was further reduced to 2.5% in 1903.
Interest rates briefly went back up in 1927 when Winston Churchill issued a new government stock, the 4% Consols, as a partial refinancing of WWI war bonds.
American Ascendancy: The U.S. Treasury Notes
The United States Congress passed an act in 1870 authorizing three separate consol issues with redemption privileges after 10, 15, and 30 years. This was the beginning of what became known as Treasury Bills, the modern benchmark for interest rates.
The Great Inflation of the 1970s
In the 1970s, the global stock market was a mess. Over an 18-month period, the market lost 40% of its value. For close to a decade, few people wanted to invest in public markets. Economic growth was weak, resulting in double-digit unemployment rates.
The low interest policies of the Federal Reserve in the early ‘70s encouraged full employment, but also caused high inflation. Under new leadership, the central bank would later reverse its policies, raising interest rates to 20% in an effort to reset capitalism and encourage investment.
Looking Forward: Cheap Money
Since then, interest rates set by government debt have been rapidly declining, while the global economy has rapidly expanded. Further, financial crises have driven interest rates to just above zero in order to spur spending and investment.
It is clear that the arc of lending bends towards ever-decreasing interest rates, but how low can they go?
$69 Trillion of World Debt in One Infographic
What share of government world debt does each country owe? See it all broken down in this stunning visualization.
$69 Trillion of World Debt in One Infographic
Two decades ago, total government debt was estimated to sit at $20 trillion.
Since then, according to the latest figures by the IMF, the number has ballooned to $69.3 trillion with a debt to GDP ratio of 82% — the highest totals in human history.
Which countries owe the most money, and how do these figures compare?
The Regional Breakdown
Let’s start by looking at the continental level, to get an idea of how world debt is divided from a geographical perspective:
|Region||Debt to GDP||Gross Debt (Millions of USD)||% of Total World Debt|
|Asia and Pacific||79.8%||$24,120||34.8%|
In absolute terms, over 90% of global debt is concentrated in North America, Asia Pacific, and Europe — meanwhile, regions like Africa, South America, and other account for less than 10%.
This is not surprising, since advanced economies hold most of the world’s debt (about 75.4%), while emerging or developing economies hold the rest.
World Debt by Country
Now let’s look at individual countries, according to data released by the IMF in October 2019.
It’s worth mentioning that the following numbers are representative of 2018 data, and that for a tiny subset of countries (i.e. Syria) we used the latest available numbers as an estimate.
|Rank||Country||Debt to GDP||Gross Debt ($B)||% of World Total|
|#1||🇺🇸 United States||104.3%||$21,465||31.0%|
|#3||🇨🇳 China, People's Republic of||50.6%||$6,764||9.8%|
|#6||🇬🇧 United Kingdom||86.8%||$2,455||3.5%|
|#13||🇰🇷 Korea, Republic of||37.9%||$652||0.9%|
|#34||Taiwan Province of China||35.1%||$207||0.3%|
|#54||United Arab Emirates||19.1%||$79.1||0.11%|
|#107||Congo, Republic of||87.8%||$10.2||0.01%|
|#108||Trinidad and Tobago||45.1%||$10.2||0.01%|
|#115||Papua New Guinea||35.5%||$8.2||0.01%|
|#119||Congo, Dem. Rep. of the||15.3%||$7.2||0.01%|
|#121||Bosnia and Herzegovina||34.3%||$6.9||0.01%|
|#157||South Sudan, Republic of||42.2%||$1.9||0.00%|
|#160||Antigua and Barbuda||89.5%||$1.4||0.00%|
|#169||Central African Republic||49.9%||$1.1||0.00%|
|#173||Saint Vincent and the Grenadines||74.5%||$0.6||0.00%|
|#174||Saint Kitts and Nevis||60.5%||$0.6||0.00%|
|#178||Hong Kong SAR||0.1%||$0.4||0.00%|
|#180||São Tomé and Príncipe||74.5%||$0.3||0.00%|
|#184||Micronesia, Fed. States of||20.3%||$0.1||0.00%|
In absolute terms, the most indebted nation is the United States, which has a gross debt of $21.5 trillion according to the IMF as of 2018.
If you’re looking for a more precise figure for 2019, the U.S. government’s “Debt to the Penny” dataset puts the amount owing to exactly $23,015,089,744,090.63 as of November 12, 2019.
Of course, the U.S. is also the world’s largest economy in nominal terms, putting the debt to GDP ratio at 104.3%
Other stand outs from the list above include Japan, which has the highest debt to GDP ratio (237.1%), and China , which has increased government debt by almost $2 trillion in just the last two years. Meanwhile, the European economies of Italy and Belgium check the box as other large debtors with ratios topping 100% debt to GDP.
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