As the world continues its gradual pivot from managing the COVID-19 crisis to recovery and the reopening of economies, it’s clear that the last two years, and especially periods of extended lockdown, have had a profound impact on consumer behaviour.This is manifest in all areas of life, from how we work, how we shop, how we interact with others, how we entertain ourselves, and of course, how we manage our finances. While many of the longer-term changes in consumer behaviour are still being formed, one thing is clear: the future is here, and smart businesses who are prepared to follow consumers in their new decision journeys have an opportunity to help shape the ‘new normal’ when marketing and communicating with them.

So how is changing consumer behaviour specifically impacting on borrowing and what are the implications for lenders?

The COVID-19 pandemic has seen new behaviours emerge across all spheres of life, from a surge in e-commerce, to changes in brand preferences. There’s also been a significant decline in discretionary spending, compounded by uncertainly around the ongoing impact of COVID-19 on the economy, the threat of inflation and political unrest.

Of course these behaviour changes are not linear, and their stickiness will depend on how satisfied consumers are with new experiences. However, in a recent report Swiss Re Institute has identified five key trends emerging from the impact of COVID-19 that are likely to remain.[1]

Increased digital adoption. People have increasingly shifted to digital platforms for their day-to-day needs.
Change in mobility patterns. People are using public transport less and many people will choose to continue working remotely, notwithstanding increasing pressure from business to a return to the office.
Change in purchasing behaviour. There has been a marked move to value-based purchasing and online shopping.
Increased awareness of health. People are much more conscious of their personal health and safety, as evidenced by their continued willingness to wear masks, practise social distancing, increased hygiene, eating more healthily etc.
Changes in interpersonal behaviour. The pandemic has been characterised by increased divorce rates, pet adoption, and career pivots out of choice as much as necessity.
Most significant of these from the perspective of lenders, is a noticeable shift to more value-based purchasing, which prioritises obtaining maximum value for the consumer for the money spent. According to a report published by McKinsey & Co in late 2020, consumers have focused on essentials and reduced discretionary spending, but their expectations are higher when they do. Likewise, consumers have shown themselves more willing to try out new brands when their normal purchasing pattern is disrupted, and if these yield better value there is a high chance that they will stay with a new brand. [2]

And for personal loans particularly?

First and foremost, while the past two years have resulted in higher levels of disposable income amongst our traditional target market, it would be unwise to assume they will simply revert back to pre-COVID spending and payment habits. A more likely scenario is that consumers will continue to be more conscious about what they buy and more focused on obtaining value from their borrowings. In terms of personal loans, we expect caution to persist in the short to medium term, with customers more likely to borrow for physical ‘things’ like cars and home renovations rather than ‘experiences’ such as travel and weddings.

It will also become increasingly imperative for lenders to increase the appeal of personal loan products by adapting to changing consumer experiences and expectations. Specifically, they will need to identify products and services of most interest to customers and find ways to make their offering meaningful & immediate. Consumers do not expect to wait days for a decision and for funds to appear in their bank account – they expect immediate decisions and same day funding

Lastly, lenders will need to adapt to these new behaviours and expectations; if nothing else the pandemic has undoubtedly increased consumers’ sense of insecurity and spurred greater demand for interconnected products and services that are adaptive to changes in the environment.

In turn, that will mean a recalibration of the predictive models dealing with the last two years. Payment behaviour observed by lenders has materially changed as disposable income has increased. Non-bank lenders have seen their delinquencies reduce by as much as 50% from Q1 2020 ( pre COVID) levels.

While the reasons for this are varied, the premise of models that drive the industry is that past performance is the best representation of the future. How does this hold when government stimulus, working from home and lockdowns have materially changed the economic dynamics for many households? These phenomena will likely persist in varying degrees to shape our future. So how will lenders consider their impact when using data from the last two years to model the future? It can’t be ignored, but neither can it be assumed to be the new normal.

Or maybe it can. As the pandemic has taught people unfamiliar with the practice, modelling doesn’t try and predict the future; it just tells us the likelihood of certain outcomes occurring (and unfortunately, media seemed to take the low probability, extreme severity outcome as the prediction when it came to COVID modelling!!). How credit modellers incorporate data from the last two years in their new models will indicate how they think about how permanent the change in consumer behaviour is.

To guide this endeavour, predictive modelling will benefit from greater vigilance in monitoring change. This is not just about being more attentive to trends within a lender’s portfolio, but also about being more externally focused on the economy (e.g. forward interest rates) and other socio-demographic changes. For example, have lockdowns and travel restrictions created higher disposable income that is here to stay? Or will consumers revert back to the same behaviours of pre-covid. The most likely outcome is a bit of both – how much of each is the key question for predictive modelling.

Conclusion

The experience of living through COVID has irrevocably changed the world in which we live and also our behaviour. Changes that provide positive experiences are likely to last longer, particularly those driven by convenience and well-being, such as digital adoption, value-based purchasing and increased health awareness.

This provides an opportunity for businesses like ours to stay relevant and adapt by offering innovative, value-based and integrated products that best meet customer needs and underscores the importance of continually monitoring the types of customers we’re attracting to ensure our processes can accommodate changes to the ever-evolving socio and economic environment in which we operate.

[1] All change: how COVID-19 is transforming consumer behaviour, Swiss Re Institute, December 2020, https://www.swissre.com/institute/research/topics-and-risk-dialogues/health-and-longevity/covid-19-and-consumer-behaviour.html

[2] How COVID-19 will permanently change consumer behavior, Accenture, April 2020. https://www.accenture.com/_acnmedia/PDF-134/Accenture-COVID19-Consumer-Behaviour-Survey-Research-PoV.pdf#zoom=40