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.
$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.
Visualizing the Meteoric Rise of Bond ETFs
Bonds are a staple in every portfolio, but up until recently were hard to own. Here’s how bond ETFs changed that, reaching $1 trillion in global AUM.
Visualizing the Meteoric Rise of Bond ETFs
Bonds are a staple in almost any investment portfolio — but up until very recently, they weren’t exactly the easiest thing to own.
Despite the bond market being bigger than the equities market, bonds mostly trade over-the-counter (OTC) and not on any centralized exchange.
In fact, traders mostly swapped bonds over the phone, negotiating prices and making deals. However, this “old school” approach came with several disadvantages, including high transaction costs, illiquidity, and a lack of true transparency in the market.
A New Way to Play
Today’s infographic comes to us from iShares, and it shows that over the last two decades, the bond market has been dramatically transformed and democratized from the “old school” approach that relied on phones, traders, and giant bond calculators.
The biggest factor in this transition: the use of exchange-traded funds (ETFs) in the bond market, which just hit a new global milestone of $1 trillion of AUM in June 2019.
Let’s look at the journey of how this rapidly rising segment of the market took off, the factors driving it, and what the future may hold for Bond ETFs.
Bond ETFs: Journey to $1 Trillion
Below is a year-by-year account of new innovations in bond ETFs, and how the usage of them has changed over time:
2002: New tech
A new financial technology, the ETF, shakes up the bond market for the first time – and the first fixed income ETFs launch in the United States.
2003: More variety
Just one year in, and there are already numerous types of bond ETFs that allow investors to fulfill different portfolio needs:
- Government bond ETFs
- TIPS ETFs
- Corporate bond ETFs
- Aggregate bond ETFs
2006: Achievement unlocked
The global bond ETF industry hits $25 billion in AUM.
2007: Bond ETF innovations
The bond ETF universe continues to expand as investors demand even more options:
- Mortgage-backed security bond ETFs
- Muni bond ETFs
- High yield bond ETFs
2008: A new source of liquidity
Liquidity for individual bonds dries up during the 2008 Financial Crisis. However, bond ETFs step up to the plate by providing a new source of liquidity and volume increases, allowing investors to efficiently access fixed income markets.
2010: More precise strategies
The first term-maturity ETFs launch. These special bond ETFs specifically hold bonds that all mature in the exact same year.
2012: Achievement unlocked
The global bond ETF industry hits $250 billion in AUM.
2015: More product innovation
At this time, factor-based bond ETFs start to hit the mainstream. These use a rules-based approach to employ multiple investment factors, such as low volatility, quality, value, or momentum.
2016: Achievement unlocked
The global bond ETF industry hits $500 billion in AUM.
2017: Green bonds
Green bonds ETFs provide investors with the ability to invest in bonds that are tied to sustainability purposes.
2018: Market volatility and bond ETFs
In the second half of 2018, markets get volatile and investors turn to bond ETFs to help reduce their overall portfolio risk, specifically diversifying their exposure to stocks.
2019: Achievement unlocked
The global bond ETF industry hits $1 trillion in AUM, with now over 1,300 bond ETFs available.
The Path to $2 Trillion?
In just 17 years, bond ETFs have grown to be a significant part of the investment universe, reaching $1 trillion AUM in 2019.
Impressively, it won’t likely take long to double the last milestone. According to BlackRock, it’s anticipated that ETFs will hold $2 trillion in AUM by the year 2024 — just a few short years down the road.
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