The fundamental economic principle of a correlation existing between inflation and interest rates has long been established. In New Zealand, the Reserve Bank (RBNZ) is solely responsible for managing inflation using the OCR as the primary tool to control inflationary pressure on the purchasing power of the New Zealand Dollar, thereby safeguarding against rampant cost of living increases and keeping down the cost of raw materials sourced outside of the border.
The reality of globalisation and interconnection of economies makes any market-based economy susceptible to forces outside of their control to manage inflation. New Zealand is no different. Recent occurrences such as the use of quantitative easing, global pandemic, war in the Ukraine, soaring oil and energy cost or the massive supply-chain issues effecting essential materials, have collectively impacted market economies who are bearing witness to some of the highest levels of inflation observed in decades.
Sufficed to say as many other central banks have found, the RBNZ has had difficulty curtailing the aftermath of events leading us toward undesirable inflation. But what does that mean for the credit market? And by extension what does that mean for the NZ Economy?
In a recent article from Newshub, Centrix credit bureau Managing Director Keith McLaughlin had highlighted the impact on the NZ credit market resulting from climbing inflation. The mix of consumer credit households are currently undertaking is changing. Home lending is in decline, however, the rise in personal loans, credit card applications and buy now pay later services have taken a noticeable increase. That coupled with 10.6% of credit consumers with credit accounts falling into in arrears (up 2% year on year) highlights that households are “facing the squeeze” to make ends meet.
The banking sector is also paying close attention to inflationary issues. Westpac Senior Economist Satish Ranchhod noted that “Around 90% of New Zealand mortgages are on fixed rates, and many of those are still locked in at the very low interest rates that were on offer in the early stages of the pandemic. That’s meant large numbers of households are yet to feel the impact of rate hikes to date, which has allowed them to maintain their spending patterns. He further highlighted “That picture will change dramatically over the coming months, with more than half of all mortgages coming up for repricing over the next 12 months. In many cases borrowers will face refixing at rates that are 3 percentage points higher than those they are currently on. And as that occurs, we’re certain to see a slowing in domestic demand.”
Climbing interest rates unseen in recent years, particularly in mortgage lending, are likely to have a significant effect on household spending, and by extension, most portions of the credit market in NZ.
At such times, competition within the credit market will become more difficult, and providers may need to rely on other mechanisms to attract new customers, while satisfying the current customer base. With the inability to offer enticing competitive interest rates due to the likely increasing level of default risk in the market and the increase in wholesale interest rates set by the RBNZ, finance providers of New Zealand will need to work with the customer to do business on their terms.
According to the Harvard Business Review, a successful supplier of any service must generate a comprehensive list of “Value Elements” – any aspect of the business that can add a positive benefit to the customer. Of which the removal of bottlenecks to business is certainly well known.
BNZ has long held the belief that competition for market share has been expanding from traditional banks, through to neo-banks and onto fintechs, and as such they have taken the approach of being “Digital First, Human When it Matters” to be readily accessible to customers for day-to-day transactions or enquiries, but also to have capable personal interaction where further attention is required. Paul Littlefair, CTO of BNZ presented the new alignment to digital first. He noted that the “removal of bottlenecks” and doing more with less customer requirement empowered their customers to “be good with money” which resonated with customers who were looking for more than a transactional banking supplier. Through the BNZ platform, customers were given the power to manage their entire portfolio at any time, any place without the need of cumbersome interactions with outdated systems and processes.
However, in a time where consumers are proving to be increasingly nomadic- moving towards providers who can best suit their needs, it stands to reason for credit providers to make themselves increasingly accessible to customers on whatever platforms consumers dictate. At this current point in time, digital platforms for customer management are becoming more the rule to the exception. Utility providers, stock trading platforms, fintechs and disruptors of every creed understand that to survive and thrive in the modern-day environment, a user friendly, functional, and nimble customer facing interface is vital to removing bottlenecks and empowering customers at every stage of their lifecycle.
If you would like to find out more about being customer accessible during this turbulent time, Credisense offers a truly no-code solution including digital onboarding, workflow and decisioning, digital documentation and signing through to broker and customer portals. The Credisense solution helps businesses of all sizes streamline their operations while simultaneously providing a fantastic customer experience. The question must be asked – Could the deployment of such tools help provide an opportunity in tough market conditions driven by tough inflationary times? And at the same time, what is the cost of relying on the status quo?