2019 in review
This year the Australian economy entered unchartered territory; economic and wages growth stagnated while interest rates approached zero and negative interest rates were not just considered a possibility, but perhaps a necessity. The finance sector has also had to navigate the final report of the Banking Royal Commission and the focus on compliance and new regulation that has followed. The unique economic and regulatory environment of 2019 has driven the agenda for participants in the retail credit industry in particular.
Responsible lending has been in the spotlight since the Royal Commission hearings began, and headlines highlighted the need for lenders to improve their assessment of a borrower’s expenses and capacity to repay well before the final report was released this year. And sure enough, early this year the final report confirmed responsible lending practices as a key focus point moving forward, while ASIC also kicked off its review of its responsible lending guidance. At the start of the year it seemed certain that industry would need to make significant changes to lending processes. At the time of writing we are awaiting the outcome of ASIC’s review to its responsible lending guidance, but it looks like lenders will be asked to do better, not necessarily more, work.
This year has also seen digital disruption, and a wave of new entrants have braved the otherwise challenging economic and regulatory front to take on the incumbents. 2019 has seen a number of newly-minted ADI holders intending to disrupt the mainstream market. These entrants are primed to benefit from economy-wide initiatives such as the Consumer Data Right, the widespread adoption of comprehensive credit reporting and consumers’ embrace of the data-driven and online retail economy.
While some new entrants are focussed on mainstream lending products, some mainstream lenders have this year fixed their sights on the rapidly growing buy now pay later sector. Players in that market report at least 4 million customers this year (double the 2018 figure). It’s not clear how that business model – or the regulation that currently only brushes it – will evolve. But it’s clear from developments over the last 6 months in particular, that more established lenders such as Latitude, Flexigroup and even CBA are not going to let newer entrants go unchallenged in that market.
Another theme that has emerged through 2019 and will continue to influence the agenda for 2020 is the impact of the economic, regulatory, and competitive environment on access to credit for consumers sitting outside lenders’ risk appetites. Increased focus and cost around regulatory compliance will shorten credit providers’ spectrum of acceptable risks. Announcing the RBA’s October rate cut, Governor Philip Lowe said, “Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality”. I agree, and I’d suggest that most new neobank and fintech market entrants are seeking to cherry pick the best quality customers rather than target the underserved. On the flipside, unregulated lending products (which are not subject to rigorous lending assessments) are growing and pay day lending continues to serve consumers that are less attractive to risk-averse lenders.
And on that note: while I hope industry, government and regulators will work together to ensure 2020 further develops the positive trends we’re seeing in the power of data to increase competition, innovation and customer experience, I also see a need for all stakeholders to keep consumer awareness and education in mind too. Low levels of data literacy mixed with low levels of financial literacy creates a dangerous cocktail. This year, ARCA members supported ongoing funding of our consumer education campaign, CreditSmart.org.au. Over the last 12 months in particular the CreditSmart resources and public relations campaign has supported customers through industry’s transition to comprehensive credit reporting. ARCA members’ continued support for consumer education means we’ll be able to bring customers along as industry navigates the challenges and opportunities ahead in 2020.
- Mike Laing
- Chief Executive Officer
- Australian Retail Credit Association
- E: firstname.lastname@example.org
- T: 61 3 9863 7859
December 2019 - FNSCRD504 - Manage the credit relationship - FNS51520 Diploma of credit management