Understanding the customer payment hierarchy
During times of economic strain, consumers feel pressure on their wallets — forcing many to prioritise which obligations to pay first. For lenders, the question is how can I ensure my debt is top on the list?
At TransUnion’s recent 2020 Hong Kong Financial Services Summit, Marie Claire Lim Moore, CEO of TransUnion Hong Kong, shared her insights on the subject. In her session — Understanding the Consumer Payment Hierarchy — What Gets Paid First? — she highlighted how different risk levels and consumer variables determine priority to pay specific products.
Looking at the payment hierarchy from the consumers’ point of view can be very useful. These insights can help refine product strategies to better suit the market — while enabling you to adjust products already in consumer wallets to better fit their specific requirements. This data is also valuable in the early detection of customers having difficulty meeting obligations, allowing you to provide assistance in repayment fulfillment.
Credit cards versus personal loans
Conventionally, the industry has a few assumptions about the consumer payment hierarchy. These include:
- Hypothesis 1: Consumers pay credit card(s) first, then their revolving lines, with personal loans paid last.
- Hypothesis 2: Younger consumers have a different payment hierarchy than older consumers.
- Hypothesis 3: Consumers with a personal loan from a bank versus a non-bank will have a different payment hierarchy.
Ironically, all the above assumptions are incorrect! Considering delinquency rate data from TransUnion’s database, Lim revealed how customers actually prioritised repayments when unable to pay off multiple credit products simultaneously.
- Hypothesis 1: Consumers with multiple cards tend to pay personal loans first, then credit cards. However, if the consumer only has one card in their wallet, they’ll pay their card first.
- Hypothesis 2: Consumers in all age tiers have the same payment hierarchy.
- Hypothesis 3: Bank and non-bank personal loan consumers have the same hierarchy.
Lim pointed out consumer preference to repay a revolving line first may be linked to how interest is calculated on these products. For personal loans, auto-pay arrangements and higher interest rates on revolving lines may induce consumers to make these payments first, followed by credit card. She concluded that money lenders can leverage data to identify and proactively engage customers in need of revolving lines of credit, and extend that credit based on risk appetite.
Identify card loyalty through repayment behaviour
While consumers may have multiple cards in their wallet, they may be dedicated to one card versus others — driving the decision to pay those they use most. TransUnion’s powerful CreditVision® algorithms can help predict top-of-wallet behaviours — such as consumer usage of credit cards — allowing organisations to tailor offers to further cement card loyalty.
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