New Study Shows Payment Choices Hong Kong Consumers Make During Times of Financial Stress
- Hong Kong consumers with multiple credit cards in wallet prioritise payment obligations of other unsecured credit products before their credit cards
- Personal loan payments are prioritised second in the consumer wallet, and revolving line payment obligations are the first to be paid
- Consumers’ preference for paying personal loans ahead of credit cards—known as the delinquency spread—has widened over the past year due to recent economic stress
New research* was released recently at TransUnion Hong Kong’s Financial Services Virtual Summit – the second in a series of annual events where TransUnion thought leaders share insights around key credit market related topics. The research sheds light on the priorities that consumers place on different credit products when faced with financial stress and have to make a choice in paying their obligations.
Presented by Marie Claire Lim Moore, CEO, TransUnion Hong Kong, the study is focused on identifying the type of credit products consumers prioritise and pay first, and the ones they place a lower priority on and pay last. The research observed the behaviour of consumers who held multiple unsecured credit products in wallet, before and during times of financial stress, and who had previously been current on all their payment obligations.
Credit card payment obligations are the last to be paid
Credit cards are the most widely-held consumer credit product in the Hong Kong market, with 96% of credit-active adults holding one or more cards. The average Hong Kong consumer has between four and five cards. When analysing consumers with multiple credit cards and personal loan(s), results showed that during times of financial stress, consumers were more than four times as likely to default on a credit card than they were their personal loan.
This hierarchy holds true even when observed for different risk segments and generations, although the delinquency spread between the two products did vary amongst different consumer segments. Below prime consumers (i.e. higher risk)** were roughly twice as likely to default on credit cards than a personal loan, as of June 2020 observations. For those considered prime or above (i.e. lower risk) it was six times as likely. The relative tendency to prioritise personal loan payment over credit cards is similar across generations, although the younger generations tend to have higher levels of delinquency generally.
The research looks to understand any recent impacts to the consumer payment hierarchy due to economic shifts spurred by the pandemic. The findings indicate that the delinquency spread between credit cards and personal loans has widened by 20 bps, as of June 2020 observations, indicating an increasing preference to pay personal loans ahead of credit cards. This is likely reflective of the negative impact on consumers’ financial health due to the pandemic which exacerbated the effects of the economic downturn that began in 2019.
“The findings of this study are significant, especially as the Hong Kong economy continues to experience a sustained period of negative economic growth. Our study shows how consumers prioritise payments during normal economic times and during times of distress. The study finding that credit cards are the last to be paid by a consumer who needs to make a choice between unsecured payment obligations is a key insight for lenders to uncover. Understanding consumer preferences and behaviours can help lenders manage and set strategy through these unprecedented times.” said Lim Moore.
Payment hierarchy reverses for consumers with single credit card in wallet
Importantly, when looking at consumers who had just a single credit card in their wallet along with a personal loan, the hierarchy was reversed, with the credit card payment being prioritised first. Consumers with one card in wallet prioritise differently potentially due to the lack of options available to them and hence the need to protect that single card for everyday transactions and as a source of ongoing credit. This is in contrast to the observed behaviour of consumers with multiple credit cards, where they can miss payments on one or two cards while still making payments on other cards and keeping those cards available for ongoing spending.
“The results suggest that consumers who have only a single card prioritise payment of this over personal loans, possibly because they need to preserve its utility especially in an increasingly digital shopping environment. This hierarchy is reversed when consumers have multiple cards. Here, they are able to keep the convenience and liquidity provided on one or more cards whilst still defaulting on others, and thus prioritise personal loans as a result,” said Lim Moore.
Consumer payment hierarchy sustains even with more unsecured products present in wallet
The TransUnion research also looked at another popular unsecured credit product combination – that of credit cards, personal loans and revolving lines in a consumer’s wallet. When conducting the same analysis with a group of customers holding all three products in their wallet over the same period of time, the hierarchy pattern remained the same. Consumers with multiple credit cards, personal loan(s) and revolving line(s), still prioritised the payment obligations of the other unsecured products before their credit card payments.
TransUnion’s analysis showed consumers in financial difficulty were most likely to prioritise the payment of revolving lines before personal loans, then credit cards. The June 2020 cohort results—the most recent monthly cohort in the study—showed that consumers holding all three products were twice as likely to default on personal loans than they were a revolving line, and more than four times as likely to default on a credit card than they were a revolving line.
“These findings suggest there is an opportunity for lenders to continue to provide much needed liquidity to consumers whilst still managing risk effectively. Our analysis suggests revolving lines may be a growth product for lenders, if correctly managed and understood,” observed Lim Moore.
Lenders must understand holistic wallet behaviour of consumers
Consumers’ credit product holdings are a function of one’s stage in life, financial needs, and journey through the credit lifecycle. Credit cards are often the first credit product consumers apply for and as their income and financial requirements change, they tend to hold other credit products. While financial behaviour tends to alter by age and risk tier, the consumer payment hierarchy observed in the TransUnion study continued to hold true. The only marked change in observing the hierarchy by risk and age was the magnitude of the hierarchy itself i.e. the delinquency spread measured between the various unsecured credit products held in wallet.
An earlier TransUnion credit card loyalty study presented at its 2018 Financial Services Summit, showed that consumers tend to pay their ‘top-of-wallet’ product first. Cards used for the majority of monthly spending and that are seen as top-of-wallet are less likely to be delinquent. Results showed that the last card in the wallet—the one with the least portion of monthly spending—is 70% more likely to be the card payment to be missed.
“Our analysis uncovers patterns in consumer preference for payment obligations. The payment hierarchy research implies that since card payment obligations tend to be the last to be paid and this preference is widening, lenders need to better understand how consumers prioritise their products. Armed with insights across a consumer’s holistic wallet, lenders can better strategize to identify and predict top-of-wallet behaviours. By using trended data and advanced analytical techniques, lenders can meet the needs of consumers to stay or become the top-of-wallet card, and monitor shifting consumer behaviours during times of stress,” concluded Lim Moore.
*About the study
The TransUnion Hong Kong study analysed the payment behaviours of consumers holding two types of credit product wallets. The first analysis looked at cohorts of consumers with at least two products—a credit card and a personal loan—that were all non-delinquent at the initial observation point. TransUnion evaluated the performance of these consumers 12 months later to measure what percentage of each cohort became delinquent, and on which products. Delinquency was measured as 30 days or more in arrears at the end of 12 months. The study looked at 18 of these consumer cohorts in total from January 2018–June 2019. The last cohort was evaluated at the end of June 2020.
The second wallet profile analysis looked at cohorts of consumers with at least three credit products—a credit card, a personal loan and a revolving line—that were all non-delinquent at the initial observation point and conducted the same analysis as those with two products.
** TransUnion CreditVision® risk score: super prime = AA; prime plus = BB; prime = CC; near prime = DD to HH; subprime = II to JJ. Prime and above = AA to CC; below prime DD to JJ.