More than 9 Million Canadians are Either Credit Unserved or Underserved; Approximately 14% Migrate to Being Credit Active Every Two Years
TransUnion releases global study that underscores the importance of financial inclusion
More than 9 million consumers are considered to be either credit unserved[i] or underserved[ii] in Canada, according to a new global TransUnion (NYSE: TRU) study – “Empowering Credit Inclusion: A Deeper Perspective on Credit Underserved and Unserved Consumers”. However, the study found that about 14% of consumers who started as credit underserved were found to have migrated to becoming more credit active in a two-year window prior to the pandemic. During the height of the pandemic, this percentage of consumers becoming more active decreased slightly, to 12%, with the profile of those consumers skewing younger than the pre-pandemic sample.
In addition to Canada, the TransUnion global study observed consumer credit behavior in Colombia, Hong Kong, India, South Africa and the United States, to get a better sense of the market size of these unserved and underserved consumer segments.
“Our study clearly points to hundreds of millions of consumers around the globe being credit unserved or underserved,” said Matt Fabian, director of financial services research and consulting at TransUnion. “These credit disadvantaged consumers are often unable to access financial products and services because they have no, or little, credit history. This study served to better understand how many people are truly under- or unserved from a credit perspective while also determining paths for them to gain opportunities for access to credit.”
The study explored the characteristics and behaviours of credit unserved and underserved consumers and their overall sentiments towards credit, while offering key insights into the credit journeys of these consumers. Unserved consumers are defined as any person who has never had an open traditional credit product (such as a credit card, personal loan or auto loan, to name a few) as reported on the TransUnion consumer credit database. The underserved population have minimal credit participation, limited to a single type of credit product and no more than two open accounts of that type, and have been active in the credit market for at least two years.
This study specifically excluded new-to-credit consumers – those who have opened their first product within the past two years – from the underserved population, as many of those new-to-credit consumers become more fully credit active soon after opening their first product. The study sought to understand those consumers who remain unserved or underserved over a longer time period.
Two cohorts of consumers were studied, each over a two year time period – the first during the pre-pandemic period beginning March 2018 through March 2020, and the second beginning in June 2019 and studied through the pandemic time period of June 2021, to determine if there were any pandemic-related shifts in consumer credit migration trends.
Global Market Sizing of the Credit Unserved and Underserved Populations
Number of unserved consumers
Percentage of adult population that is unserved
Number of underserved consumers
Percentage of adult population that is underserved
While some unserved (also called credit inactive) consumers may have traditional credit scores when they open their first credit product, many do not. This lack of a credit score and any history of credit activity is certainly an impediment for these unserved consumers to get their first credit product, as many lenders are hesitant to extend credit to consumers without any credit history or score. For these traditionally unscoreable consumers, they face a “chicken or egg” conundrum of how to get that first credit product when they lack a credit history.
“This reality underscores the importance of incorporating alternative and consumer contributed data into the financial ecosystem, so that fewer consumers find themselves as credit invisible. Broader views of a consumer allow lenders to determine where there might be new opportunities for growth and allow consumers to potentially qualify for more credit at lower rates, supporting credit inclusion,” said Fabian.
Once Canadian Underserved Consumers Become Credit Served, They are Likely to Apply for More Credit
Every year a portion of the underserved consumer population – those with minimal credit activity – become more fully credit active by opening additional credit products, while many remain in that underserved segment. To better understand how underserved consumers transitioned to becoming more fully credit active, the study looked at which credit products consumers opened within the two-year period. For the purpose of the study, underserved consumers transitioned to served if they opened additional product types over the two-year study period – for example, when a previous credit card-only consumer also opens an auto loan. Alternatively, they could become credit active if they opened additional products of the same type – for example, if they opened additional accounts of the same product type and reached three or more open accounts over the two-year study period.
The most common first credit products held by underserved consumers in Canada were credit cards (84%), which held true in the United States as well, but was seen to a lesser degree (44%). This mirrors broader trends that TransUnion has observed in these regions, where credit cards are the most common first product for consumers entering the credit market. This varied by country; however, as the study found that in emerging markets like Colombia, India and South Africa, the product type most commonly held by underserved consumers were microcredit, agricultural loans and clothing loans, respectively. In Canada, over 90% of underserved consumers that migrated to credit served within the two year period did so by opening a second product type. The most commonly opened second product types were credit card (for consumers that did not already have a credit card) and personal loans.
The study also found that consumers who migrated from underserved to served (opened at least one new product type, or opened additional products of the same type) over the two year period had more inquiries – applications for new credit – than consumers who remained underserved. While some of that higher inquiry activity was attributable to the fact that they opened new accounts, the overall higher level of inquiry activity by those consumers who migrated to the served segment implies that these consumers have significantly higher demand for new credit, and that this demand is not necessarily being met by lenders.
“The number of new credit inquiries was materially higher for consumers that migrated to served compared to consumers who remained underserved. These consumers appear to be actively seeking additional credit, but they are not necessarily able to access the credit they want, potentially due to their limited credit history. This highlights an opportunity for lenders who are seeking to grow and add new customers. Many of these underserved consumers would likely be well-performing and profitable borrowers, but because of their limited credit history, lenders are reluctant to extend them credit. Expanding the use of alternative data on consumers into lending decisions could enable lenders to get a fuller picture of the financial capacity of underserved consumers and make credit available to more of them,” added Fabian.
Unserved or Underserved? Survey Confirms Varying Levels of Credit Satisfaction
TransUnion also commissioned an online global survey[iii] of more than 11,100 adults (ages 18 years and older) to gather sentiment from unserved and underserved consumers on the topic of credit. The countries studied included Canada, Brazil, Colombia, the Dominican Republic, Philippines and the United States. The findings revealed consumer beliefs, attitudes and experiences with credit that may be influencing current and future behaviours.
Depending upon the country, respondents cited they are interested in applying for credit in 2022 to varying degrees. In Canada, for example, 33% of unserved consumers – those without any credit products – plan on applying for credit, compared to 36% of underserved consumers. The reason for the slightly higher level for underserved consumers may be due to the fact that it is typically easier for underserved consumers, who generally have at least one credit account, to secure credit than consumers who are completely credit inactive.
When comparing the consumer sentiment of unserved consumers with underserved consumers, there tends to be a pronounced difference in the level of satisfaction with their current amount of credit. In Canada, 71% of underserved consumers were satisfied or extremely satisfied with their current amount of credit, while only 56% of unserved consumers, those with no credit currently, had the same level of satisfaction. Additionally, 12% of unserved consumers were not satisfied at all with their level of credit while only 6% of underserved consumers expressed dissatisfaction. This potentially speaks to differences in awareness of the potential uses and benefits of credit between those with some limited credit activity and those with no credit at all.
“Financial inclusion is important as it supports consumers in day-to-day living, and helps families and businesses plan for everything from long-term goals to unexpected emergencies. Promoting financial inclusion starts with gathering a better understanding of the different nuances between the unserved, underserved and served populations and what makes them tick. For example, what drives unserved consumers to apply for credit, and why underserved consumers may need a different type of credit product, may vary greatly. As lenders continue to be better able to meet the unique needs and educate these unserved and underserved segments on ways they can build and improve their credit profiles, a larger percentage of consumers that want to will become actively engaged in the credit system,” concluded Fabian.
For more information and insights on the global TransUnion study, “Empowering Credit Inclusion: A Deeper Perspective on Credit Underserved and Unserved Consumers,” please download the report.
About TransUnion (NYSE: TRU)
TransUnion is a global information and insights company that makes trust possible in the modern economy. We do this by providing an actionable picture of each person so they can be reliably represented in the marketplace. As a result, businesses and consumers can transact with confidence and achieve great things. We call this Information for Good.® TransUnion provides solutions that help create economic opportunity, great experiences and personal empowerment for hundreds of millions of people in more than 30 countries. Our customers in Canada comprise some of the nation’s largest banks and card issuers, and TransUnion is a major credit reporting, fraud, and analytics solutions provider across the finance, retail, telecommunications, utilities, government and insurance sectors.
[i] Unserved: Consumers that have never had an open traditional credit product, based on reported accounts on the TransUnion consumer credit database. To size the unserved, we started with the total adult population as reported by the United Nations. We then subtracted the underserved, new to credit and served consumers. The remaining number is the unserved.
[ii] Underserved: Consumers with some, but limited, credit presence. Specifically, they have:
· Been active in the credit market for at least the past 2 years
· 0-2 currently open traditional credit accounts
· Only ever held 1 type of credit product
[iii] TransUnion’s online global survey included responses from 11,128 adults and was conducted between August 3 2021 – January 5 2022 by TransUnion in partnership with third-party research provider Qualtrics® Research-Services.