The unexpected consumers driving 2021 credit demand

While prime borrowers hesitated to take on new obligations, credit-invisible Americans quickly reengaged with lenders in a big way.

After a challenging 2020, lenders entered 2021 clearly hoping to return to pre-pandemic levels. Less clear was whether consumer appetite for borrowing would rebound in a similar fashion. Credit seeking is up this year, but it has hardly been a return to normal.

In examining the first two quarters of 2021, borrowers seem to share lenders’ desire to get back to business. According to internal LexisNexis Risk Solutions data, June 2021 saw a 45% increase in demand for banking products (credit cards, retail cards, unsecured loans, demand deposit account products and others) over June 2020 and a 28% increase over January 2020. But our new research suggests that the real surprise is in the type of consumers who are driving this surge in credit demand.

An interesting trend emerged in many lending markets when last year’s lockdowns began to lift. While prime consumers were hesitant to take on new credit obligations, credit-invisible consumers – consumers who may not be scorable by traditional credit scores – quickly reengaged with lenders.

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Our data shows that, by June and July 2020, the volume of credit-invisible applicants seeking new banking products rose 20% above January 2020 levels. Many attributed this rise in applications to the rise in unemployment. The theory was that consumers who had previously avoided traditional banking relationships turned to them in a time of financial stress. But comparing June 2020 to June 2021, we saw that unemployment was nearly halved while our data suggests that applications from credit-invisible applications rose an additional 30% over June 2020. Our takeaway is that financial stress can’t be wholly responsible for the increase in demand from this consumer segment.

What do we know about credit-invisible applicants, who as of summer 2021 represent roughly 25% of applicants for credit products and services in the U.S.?

We certainly know they aren’t monolithic. There’s a broad set of reasons a consumer may be credit-invisible. This includes everything from youth and recent immigration status to a distrust of traditional financial institutions, unfamiliarity with traditional credit products or a lack of access to those products in their communities.

The issue of access is particularly important. Geographic trends frequently reflect socio-economic status of an area – LexisNexis Risk Solutions data shows that 30% of consumers in socioeconomically depressed areas are invisible and a higher percentage of residents in rural areas are invisible in comparison to metro areas.

Pressure to build lending volumes will continue

Banks will be under increasing pressure to resume pre-pandemic lending volumes in the remainder of 2021 and into 2022. The ability to translate increased demand from credit-invisible consumers into portfolio growth may well be the defining factor in made or missed financial goals.

It’s critical to understand that credit-invisible consumers are not a 100% match to subprime consumers. Some do face similar challenges in stability and ability to repay as some subprime consumers. Most credit-invisible consumers, however, face lower debt burdens and many have more experience managing credit responsibilities than average subprime consumers.

The first step in converting this demand to new business is identifying which of these applicants meet existing risk criteria. While it may be challenging to identify creditworthy invisible consumers through traditional credit data, a wealth of alternative data is available to help lenders recognize these individuals. This is achievable through expanded insight into credit seeking, asset ownership, employment and long-term earning potential.

Beyond identifying which invisible applicants meet existing criteria, many financial institutions are exploring new entry-level credit products with rapid graduation paths, allowing them to bring more new-to-credit applicants into their portfolios with reduced risk exposure.

Credit-invisible consumers now make up 25% of applicants at traditional financial institutions, according to our data. This is partially due to a rise in credit-invisible credit demand and partially due to a reduction in demand from credit-visible consumers. As the year progresses, it’s likely that we’ll see a return to credit seeking within the prime consumer segment.

Even after these consumers fully re-enter the credit and banking landscape, the high engagement from credit-invisible consumers looks poised to remain. Institutions that manage to integrate credit-invisible individuals into their portfolios will set themselves up for long-term success.

Kevin King is senior director, credit risk strategy, at LexisNexis Risk Solutions.