Canada’s consumer credit market remains healthy overall, although some areas of softness are beginning to emerge. As we noted in our last Industry Insights Report, regional insolvency trends indicate that some consumers are feeling the pressure of a higher-rate environment. We’re also seeing a noteworthy shift emerging in terms of who’s driving consumer credit growth, as Millennials and Generation Z make up an increasingly larger share of the credit-active population. Lenders should look to understand the requirements, behaviours and preferences of these generations in order to respond effectively to the next youthquake.
Our 2019 forecast for the Canadian credit market is largely positive and, despite some regional volatility, the market is generally on solid footing. With almost 29 million Canadian consumers having access to credit (up 1.1% year-on-year), aggregate levels of debt continue to grow. Overall, average non-mortgage consumer debt balances increased to $30,257, a 3.6% rise from the prior year. At the same time, serious consumer delinquency rates are steady at 5.23% and the overall insolvency rate is still under 1% (at 0.94%).
We continue to see interesting trends across demographic groups. Changes in the generational mix of borrowers can have a material impact not just on overall portfolio behaviour, but also on how lenders should market to and engage with their customers for maximum effectiveness.
As consumer debt continues to increase, it’s clear that the youngest generations are playing a critical role in the consumer credit market. Millennials now make up over 26% of Canada’s credit-active population. At 30%, Baby Boomers are still the largest group of credit-active consumers, but the gap is closing — they’re down 1.3% from the previous year, while Millennials are up 2.75%.
Millennials are taking on additional balances as they reach significant life events that put pressure on their overall wallet—many of them are now supporting children, purchasing homes and acquiring additional vehicles. These costs may be financed through additional borrowing, so this growth in debt is not surprising. Millennials had the highest consumer serious delinquency rate at year-end 2018 compared to other age groups, at 7.3%. However, the delinquency rate for Millennials fell over the last year, dropping 23 basis points from Q4 2017. This improvement reflects the continued growth of this generation in their experience in managing credit, as well as likely income gains as Millennials move into higher-income life stages.
By far the fastest-growing segment, consumers in Generation Z are leading Canada’s youthquake. They may be just 7.7% of the credit-active population now, but with a growth rate of 29% per year, they’re the generation lenders should pay attention to. The Gen Z segment is still small as a share of the total market, and it is therefore not surprising that they are experiencing the highest growth rates. Their access to credit has also been empowered through the expansion of digital channels. This generation carried the lowest average non-mortgage debt at $7,900, and that average balance grew the fastest YoY at 16.6% from Q4 2017, after a 23% growth between Q4 2016 and Q4 2017.
Changes in the generational mix of borrowers can have a material impact not just on overall portfolio behaviour, but also on how lenders should market to and engage with their customers for maximum effectiveness. Organizations looking to grow their portfolios among this consumer segment should consider some of the trends the data is showing us about consumers in Gen Z, for example:
While their overall debt burden is lower than in older generations, the rate of credit growth among younger cohorts is increasing — and so are their delinquency rates.
Online consumer education tools and digital platforms for understanding and monitoring their credit scores could assist these relative newcomers to the credit market to manage their credit more effectively. Lending institutions that offer these services would also be creating a foundation for greater customer engagement and loyalty over the long-term.