Major banks are secretly prying into customers’ spending – including the amount of petrol going into the family car – to identify those who are heading toward a home loan default well before they miss a repayment.
One technique, using technology developed by London-listed Experian, involves identifying borrowers who used to fill up their petrol tank to the top every time they visited the bowser – but now are only paying a round number and driving away with less than a half-filled tank.
This may seem like a reasonable response to stubbornly high retail petrol prices, as the average cost of a litre of fuel has stayed above $1.90 since early August, driven by geopolitical volatility and pressures on supply. But banks see the behaviour as a red flag a customer may be struggling more broadly with the rising cost of living, making them more at risk of becoming late on repayments compared to a driver filling up to the brim.
“This is a signal people are starting to find it tough,” says Jordan Harris, head of innovation at Experian. “Some banks are getting more sophisticated, looking at behavioural things people do.
“These are not the sort of things they have had to do in the past. But with interest rates higher, there are new ways to look at customers in stress and spot hardship at an earlier stage.”
Using Experian’s tools, banks can match up customer payments with particular merchants – like the petrol station – allowing them to see where, and how much, home loan customers are spending.
Banks feed the data into credit risk algorithms that help them determine the level of loan provisions that may be needed in a forward financial year to cover for defaults; and also which customers to proactively call to ask whether they are coping and to provide advice on budgeting to make sure they can meet commitments to the lender.
Banks scan payments data across the retail economy to detect “basket switching”, which can also raise an alarm that soaring living costs are starting to bite.
Lenders look at customers who move down market – shifting from a more expensive grocer to Woolworths, then to a discount supermarket such as Aldi. Or swapping from a local wine cellar to BWS.
More obvious tools include flagging customers who start using more buy now, pay later loans, and those with direct debit payments connected to a phone or energy company being dishonoured.
“The big banks have complex models, considering thousands of potential signals,” Harris says. “The name of the game is to find out who looks like they are experiencing a bit of financial stress, even though they haven’t missed a repayment, and are up to date on all lending facilities.”
It’s not only home loan customers that major banks monitor in this way. “We have similar credit flags on the business side,” says National Australia Bank’s head of business banking, Andrew Irvine.
“We have data engines constantly working to update us on how businesses are trading compared to historic trading patterns,” he says.
“If we see flags, we can have a conversation with them. We might do that six or nine months before they move into what might typically be viewed as ‘hardship’ and they are actually missing payments.”
The action is a response to official interest rates being at 4.35 per cent, the highest level since December 2011, and helps to explain why the recent bank full-year reporting season showed bad debts remain low, helping the big four maintain cash profits at a record high: lenders are more on the front foot reaching out to customers doing it tough and are offering them assistance well before a loan needs to be formally restructured.
The banks’ growing scrutiny of customer payment behaviour comes as Fitch Ratings said this week that 1.12 per cent of borrowers were late on their mortgage repayments by 30 days or more during the third quarter, the first-rise in that three-month period in at least 15 years. “Fitch believes the increase most likely indicates borrowers are facing stress due to inflation and rising interest rates,” the ratings agency said.
“The RBA’s high cash rate is likely to drive up mortgage arrears further in 2024 and may be worsened by the high ratio of household debt to disposable income, and the dominance of floating-rate loans.”
According to Experian, 93 per cent of risk professionals across the finance sector believe Australia will see higher credit stress, missed repayments and delinquencies in the next 12 months, while 96 per cent said it is likely some borrowers will experience increased hardship in the next 12 months.
Meanwhile, Roy Morgan said this week that 1.5 million mortgage accounts, or 30.1 per cent of the total, were “at risk” of mortgage stress in the three months to October. That number increased by 707,000 since May last year, when the RBA began to lift interest rates.
If the RBA raises interest rates by 0.25 percentage points in December, it forecasts mortgage stress will increase to 1.58 million mortgage holders by early next year.
Furthermore, the number of mortgage holders considered to be extremely at risk is now 967,000, or 19.7 per cent of accounts, well above the long-term average over the last decade of 14.1 per cent.
Michele Levine, Roy Morgan’s chief executive, says analysing payment patterns shows many borrowers are willing to pull in spending to make sure they can afford their loans, increasing their overall creditworthiness.
“While banks are less likely to lend to those who might be ‘stretched’, people seem to be doing everything to reduce their mortgage such as downsizing and selling other assets,” Levine adds.
“When home loan interest rates were low, people used their home loans to fund what we might call the business of life – small businesses, trips, home improvements, school fees, second and holiday homes.
“During this period, home loans were a cheap form of financing. The increase in interest rates has encouraged people to think again about this kind of funding – and they’re making different choices.”
The RBA is closely monitoring the health of borrowers in liaisons with banks and small businesses, but it does not appear to be going into the same level of detailed spending analysis as the major banks. Experian’s Harris says its data insights are “not something credit bureaus are actively sharing with regulators – but that would be an interesting conversation to have”.