Millennials (aged between 27 and 42 years old) and GenZs (aged between 11 and 26 years old) constitute a large proportion of the South African population. As individuals build their careers, students enter the labour market and learners mature into young adults, they represent the economically active citizens of the future. As such, their entry into the credit market is an important aspect of the drive towards financial inclusion.
The number of new-to-credit consumers who opened their first credit product in 2022 amounted to 810,000 – a more than 8% increase from the previous year. In 2023, GenZs made up 57% of this total and stated that the reason for taking out a credit product was related to having a new expense. Almost 60% of these borrowers chose a clothing account as their first credit product. This was according to a report entitled, ‘Empowering Credit Inclusion: A Deeper Perspective on New-to-Credit Consumers’ - published by TransUnion.
Clothing accounts top of mind for next-gen shoppers
For Regan Adams, Chief Executive Officer at retail consumer finance provider, RCS, these findings highlight the important role that clothing account providers have in providing the next generation with access to credit and information on how to use it responsibly.
As he explains: “Clothing stores are the gateway to the credit market for young South Africans. In a very real sense, clothing accounts provide the youth with an introduction to debt, how the concept of interest works, how to calculate the affordability of monthly instalments and how to budget accordingly. These aspects provide a training ground for personal financial management.
Furthermore, by building relationships with the next generation of shoppers, clothing stores can capitalise on factors such as customer loyalty and bolster their database with new customers. Not only is this important for individual businesses, but it is also key to developing a more financially inclusive credit environment.”
New-to-credit users present a low-risk opportunity
Another encouraging finding by TransUnion was that new-to-credit consumers are relatively better at managing their debt than more established, credit-served shoppers. According to the report, the credit card delinquency rate of first-time credit users was 3.6%, whereas customers who were already a part of the credit market had a delinquency rate of 4.8%.
This is good news for lenders, particularly those in the fashion and retail space, who provide the first exposure to credit for South African youth.
First-time credit accounts as an avenue to unlock future finance
Starting early as a credit-active member of society has several advantages, the most significant of which is the ability to develop a good credit history and healthy credit score. By making payments on time, maintaining a diverse credit mix, keeping credit utilisation in check, and managing debt responsibly, consumers can establish a positive credit history. This, in turn, could enhance their creditworthiness, improve their credit score, and open doors to a wide range of financial opportunities.
For example, a positive credit track record can make it easier for GenZs and millennials to qualify for loans, mortgages, and other forms of credit later on in life. Moreover, a strong financial track record can lead to better insurance rates, lower security deposits, and increased negotiating power when dealing with financial institutions.
A bigger picture: the issue of financial inclusion
From a broader perspective, fostering and encouraging a generation of credit users who practice responsible money management will have a positive impact on the economy as these individuals mature and grow their wealth.
Primarily, financial inclusion provides young people with a solid foundation for personal financial management. This knowledge equips them with the tools to make informed financial decisions, avoid debt traps, and plan for their short-term and long-term goals. In a country with high levels of poverty and income inequality, these skills can be instrumental in breaking the cycle of poverty and achieving economic mobility.
In addition, financial inclusion plays a crucial role in promoting social inclusion and reducing inequality. South Africa still faces significant disparities in wealth and opportunities, particularly among marginalised communities. By extending financial services to young people from disadvantaged backgrounds, financial inclusion helps bridge the gap and provides them with equal access to resources and opportunities. It empowers them to participate fully in the formal economy, build assets, and improve their socio-economic status.
Greater financial inclusion can also enhance social cohesion by fostering a sense of belonging and inclusion among young people, as they gain recognition and respect within their communities through economic empowerment.
As Adams concludes: “For the youth in South Africa, achieving financial inclusion holds immense significance as it empowers them to secure a prosperous future, overcome economic barriers, and participate actively in the country's development. As credit providers, we have the opportunity to steer the conversations around how to achieve financial wellness, how to plan for the future and what role credit plays in helping young South Africans achieve their goals.”
