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.
Mapped: The Countries With the Highest Housing Bubble Risks
Which real estate markets have the highest risk of seeing a correction? These maps highlight housing bubble risks using data from four key indicators.
Mapped: Countries With the Highest Housing Bubble Risks
With a decade-long bull market and an ultra low interest rate environment globally, it’s not surprising to see capital flock to housing assets.
For many investors, real estate is considered as good of a place as any to park money—but what happens when things get a little too frothy, and the fundamentals begin to slip away?
In recent years, experts have been closely watching several indicators that point to rising bubble risks in some housing markets. Further, they are also warning that countries like Canada and New Zealand may be overdue for a correction in housing prices.
Key Housing Market Indicators
Earlier this week, Bloomberg published results from a new study by economist Niraj Shah as he aimed to build a housing bubble dashboard.
It tracks four key metrics:
- House Price-Rent Ratio
The ratio of house prices to the annualized cost of rent
- House Price-Income Ratio
The ratio of house prices to household income
- Real House Prices
Housing prices adjusted for inflation
- Credit to Households (% of GDP)
Amount of debt held by households, compared to total economic output
Ranking high on just one of these metrics is a warning sign for a country’s housing market, while ranking high on multiple measures signals even greater fragility.
Housing Bubble Risks, by Indicator
Let’s look at each bubble risk indicator, and see how they apply to the 22 countries covered by the housing dashboard.
It should be noted that most of the measures here are shown in an index form, using the year 2015 as a base year. In other words, the data is not representative of the ratio itself—but instead, how much the ratio has risen or fallen since 2015.
1. House Price-Rent Ratio
When looking at housing prices in comparison to rents, there are four countries that stand out.
New Zealand (196.8) and Canada (195.9) have seen ratios of housing prices to rents nearly double since 2015. Meanwhile, Sweden (172.8) and Norway (168.2) are not far behind.
Elsewhere in the world, this ratio is much more in line with expectations. For example, in Portugal—where house prices have skyrocketed over recent years—rents have increased at nearly the same rate, giving the country a 99.2 score.
2. House Price-Income Ratio
There are three familiar names at the top of this bubble indicator: New Zealand (156.8), Canada (155.3), and Sweden (145.7).
In places where rents are lagging housing prices, so are the levels of household income. For how long will people afford to buy increasingly expensive houses, if their incomes continue to lag?
3. Real House Prices
Real house prices have increased in all of the 22 markets, with the exception of Italy (95.5).
For this indicator, there are five markets that stand out as having fast-rising prices: Portugal (131.8), Ireland (127.6), Netherlands (121.9), Canada (124.1), and New Zealand (121.9). The latter two (Canada/New Zealand) have appeared near the top of all three bubble indicators, so far.
4. Credit to Households (% of GDP)
Exceedingly high debt ratios point to a strain on consumer finances – and when finances are strained, the chance of a default increases.
Switzerland (128.7%), Australia (120.3%), and Denmark (115.4%) top the list here with consumer debt far exceeding country GDP levels. However, Canada still makes an appearance in the top five with a debt-to-GDP ratio of 100.7%.
How the Modern Consumer is Different
We all have a stereotypical image of the average consumer – but is it an accurate one? Meet the modern consumer, and what it means for business.
How the Modern Consumer is Different
There is a prevailing wisdom that says the stereotypical American consumer can be defined by certain characteristics.
Based on what popular culture tells us, as well as years of experiences and data, we all have an idea of what the average consumer might look for in a house, car, restaurant, or shopping center.
But as circumstances change, so do consumer tastes – and according to a recent report by Deloitte, the modern consumer is becoming increasingly distinct from those of years past. For us to truly understand how these changes will affect the marketplace and our investments, we need to rethink and update our image of the modern consumer.
A Changing Consumer Base
In their analysis, Deloitte leans heavily on big picture demographic and economic factors to help in summarizing the three major ways in which consumers are changing.
Here are three ways the new consumer is different than in years past:
1. Increasingly Diverse
In terms of ethnicity, the Baby Boomers are 75% white, while the Millennial generation is 56% white. This diversity also transfers to other areas as well, such as sexual and gender identities.
Not surprisingly, future generations are expected to be even more heterogeneous – Gen Z, for example, identifies as being 49% non-white.
2. Under Greater Financial Pressure
Today’s consumers are more educated than ever before, but it’s come at a stiff price. In fact, the cost of education has increased by 65% between 2007 and 2017, and this has translated to a record-setting $1.5 trillion in student loans on the books.
Other costs have mounted as well, leaving the bottom 80% of consumers with effectively no increase in discretionary income over the last decade. To make matters worse, if you single out just the bottom 40% of earners, they actually have less discretionary income to spend than they did back in 2007.
3. Delaying Key Life Milestones
Getting married, having children, and buying a house all have one major thing in common: they can be expensive.
The average person under 35 years old has a 34% lower net worth than they would have had in the 1990s, making it harder to tackle typical adult milestones. In fact, the average couple today is marrying eight years later than they did in 1965, while the U.S. birthrate is at its lowest point in three decades. Meanwhile, homeownership for those aged 24-32 has dropped by 9% since 2005.
A New Landscape for Business?
The modern consumer base is more diverse, but also must deal with increased financial pressures and a delayed start in achieving traditional milestones of adulthood. These demographic and economic factors ultimately have a ripple effect down to businesses and investors.
How do these big picture changes impact your business or investments?
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