Year of the Dog Begins with Emergence of Generation Z in the Hong Kong Consumer Credit Market

The first quarter of 2018 heralded the emergence of Generation Z, those consumers born 1995 or later, in the Hong Kong consumer credit market. TransUnion’s (NYSE: TRU) newly released Q1 2018 Industry Insights Report found that not only is Generation Z (Gen Z) experiencing the greatest growth rate in installment loans, it’s also introducing a new competitive dynamic.

Overall, total installment loan balances grew 1.9% in the first quarter, continuing a trend of year-over-year balance growth that was seen in every quarter in 2017. Younger borrowers are playing an important role in driving this growth.

Personal loan balances held by Baby Boomers (born 1946 to 1964) fell by 4.1% year-over-year in the first quarter, while balances held by Generation X (1965 to 1979) rose by 1.9% and balances held by Millennials (1980 to 1994) rose by 10.7%. These three major generations account for 98% of loan balances, but the youngest generation, Gen Z, experienced 78.5% year-over-year balance growth, albeit from a much smaller base level.

“Gen Z represents a very small part of the Hong Kong economy, but the immense growth we’ve observed by the youngest generation in such a short period is likely just the beginning of a transformative shift in the Hong Kong consumer credit market,” said Brendan le Grange, director of research and consulting for TransUnion Hong Kong. “As younger consumers with purchasing power enter the market, lenders will need to understand that their borrowing needs may differ from older generations – even from Millennials, who have long been viewed as the catalyst for credit growth in the market. It’s highly likely that digital channels will continue to be a key in reaching Gen Z consumers as we’ve already observed.

Number of Unsecured Credit Products (in thousands) as of Q1 2018

Beyond experiencing strong credit growth rates, TransUnion found that Gen Z consumers may disrupt the current lending competitive landscape. An example of this can be seen in the near prime risk tier (consumers with TransUnion CreditVision risk scores between DD to HH), which has the largest share of personal loan accounts and balances among all risk tiers. In this tier, where money lenders have a 28% share of total balances and a 24% share of Millennial balances, they have a 40% share of Gen Z balances. Money lenders include FinTechs, companies that provide unsecured personal loans via digital means. This higher penetration by money lenders may indicate a preference among Gen Z consumers to do business with this lender type.

According to the TransUnion report, the borrower profile for personal loans is younger than for credit cards, the largest unsecured account type. Millennial and Gen Z consumers held 36% of all personal loan balances in Q1 2018, compared to 27% of credit card balances. This younger profile of personal loan customers should support continued steady growth through 2018; for all unsecured credit products, Millennials and Gen Z are seeing year-over-year balance growth while older consumers, particularly Baby Boomers, are shrinking balances.

“Younger consumers–Millennials and Gen Z–are the major growth driver for unsecured credit balances. Lenders need to understand the preferences and value drivers of these segments in order to effectively serve them and build long-term loyalty,” added le Grange. “In particular, the Gen Z segment, who are newer to credit and have limited behavior and performance history, are still creating their credit story. It will be interesting to observe their journey forward and understand where there are unique differences from earlier generations.”

Year of the Dog Begins with Impressive Credit Card Balance Growth

The first quarter of 2018 showed strong year-over-year balance growth across all major retail lending products. Credit card balances, in particular, experienced a healthy growth rate of 5.2% between Q1 2017 and Q1 2018. This was a major change from the previous year, when balances rose less than 1% between Q1 2016 and Q1 2017.

“Government-published retail spending figures show total retail spending up by 13.9% year-over-year at the headline level, and up by even more among discretionaries such as luxury goods and electronic gadgets. This is likely driving some of the card balance growth. At the same time, the seasonal nature of credit card usage suggests balances will settle lower in the two quarters to come,” added le Grange.

Demand Rises for Tax Loans

Tax loans experienced a revival in demand, with a 42% year-over-year increase in loan inquiries in the first quarter. Tax loans by their nature have an older profile and Gen Z made less than 1% of those inquiries, but even here the volume of their inquiries is up 87.2% since the last season and year-over-year balances more than doubled. But Millennials, who now open 1 in 3 new tax loans, saw the largest year-over-year total balance increase of any age segment.

“Millennials are transitioning from up-and-coming consumers to mature borrowers with significant incomes; many of the older members of this segment are in their late 30’s and have become high earners. As they have already done with credit products like credit cards and mortgages, we expect Millennials to become an increasingly important segment of the tax loan market. At the same time, while Gen Z remains a very small portion of the tax loan portfolio today, the experience of the Millennial segment in recent years can serve as a guide for expected future growth of the Gen Z segment”, concluded le Grange.

Tax Loan Balances (in millions) as of Q1 2018

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