Saturday, October 1 2022

Buy-Now-Pay-Later (BNPL) lenders face a harsher reality.

By Wolf Richter for WOLF STREET.

Credit card balances rose $46 billion in the second quarter to $887 billion, still down 4.3% from the fourth-quarter 2019 peak and just a hair above 2008 levels despite 14 years of population growth and inflation lay. Rapid inflation is responsible for much of the second-quarter surge, according to the New York Fed Household debt and credit report.

Credit card balances also include balances that are paid out each month on the next month’s due date, so no interest accrues. Many Americans only use credit cards as a method of payment (and to get the 1.5% cash back or whatever) and not as a method of borrowing.

A Fitch report estimates that the total amount of credit cards paid for goods and services in the United States will reach $4.6 trillion in 2021, which would translate to an average of $1.15 trillion in credit card purchases each quarter.

Yet total outstanding credit card balances grew by just $46 billion in Q2, showing how massively credit cards are being used for payment and how little they are being used for borrowing, which makes sense given usurious rates.

Credit card balances of $887 billion for the second quarter include transactions made around June but paid in July that do not accrue interest. This was favored by the increase in trips, most of which are paid for with credit cards.

Other consumer lending, such as personal loans, payday loans, and buy-it-now loans (BNPLs), combined rose to $470 billion in the second quarter, below 20-year levels despite 20 years of inflation and population growth.

Trying to avoid usurious interest rates: the dwindling importance of credit card debt.

People are borrowing heavily to finance home and car purchases, where loan balances have shot up compared to 2008; and they take on many student loans, the balances of which have skyrocketed since 2008.

But in order not to be ripped off by exorbitant interest rates, they are practically reticent when it comes to carrying interest-bearing debt on credit cards – this is shown by the huge amounts that are spent on credit cards and paid in almost in full every month and it falls no interest on: Last year, $4.6 trillion was spent on credit cards, and yet credit card balances only grew by $40 billion over the same period.

In 2003, credit card balances and other loans combined accounted for over 16% of total consumer debt (including mortgages, auto loans, student loans). During the pandemic, this first dropped to the 8% range and rose to 8.4% of total debt in the second quarter:

A word on Buy Now Pay Later (BNPL)

New York Fed data fails to break BNPL lending. but Fitch estimates that in 2021 $43 billion (with a B) of purchases were made using BNPL loans – compared to $4.6 trillion (with a T) of US credit card purchases. So BNPL loans are tiny but growing fast.

BNPL loans, often aimed at subprime customers, are short-term installment loans, e.g. B. a down payment, three more, which are usually spread over six to eight weeks. These credits are often issued at the time of purchase. They typically carry 0% interest and are subsidized by the retailer to encourage larger average tickets and fewer cart abandonments. Retailers can work with a BNPL lender.

If that sounds like the installment plans of decades ago, that’s because it is, but now imbued with the unfailing fintech and AI aura.

One of the most hyped specialty BNPL lenders in the US is Affirm Holdings [AFRM], a startup with less than $1 billion in sales as of 2021. It went public in January 2021 amid immense fanfare. Shares hit $176.65 in October, after which they tumbled through the IPO price of $49 per share to close today at $31.55 per share, down 82% from the high.

The company has lost tons of money every quarter, including $55 million in the first quarter and $430 million last year.

According to Fitch, BNPL lenders “have more than doubled in recent quarters” while credit card defaults have barely risen as subprime-rated customers borrowing from BNPL are hardest hit by raging inflation.

And as is often the case with infallible FinTech and AI, the credit checks are only as good as the people who wrote the code, and it seems the code was designed to maximize revenue, not control risk. Fortunately, this is only a tiny part of the consumer credit scenario.

Credit card defaults are rising from record lows and staying low.

There is still a lot of money in circulation, but some people are running out of money. In 2020 and 2021, people used their stimulus checks and PPP loans, plus the extra unemployment benefits and some of the money left over from not having to make rent or mortgage payments, to update their credit cards . And default rates across the board fell to record lows. For credit card defaults, that record low was in the third quarter of 2021, when balances that were 30 days or more past due fell to 4.1% of total credit card balances. Then they started to rise.

In the second quarter, credit card delinquencies longer than 30 days rose to 4.8% of total credit card balances, which was still below any pre-pandemic bottom.

For “other loans,” the 30+-day delinquency rate rose to 5.2% of total “other” balances in Q2 (the record low was 4.3% in Q4 2021).

In both categories, the default rates are increasing but still below the Good Times norm. Credit card defaults are accelerating and may soon reach normal good times and then normal not-so-good times. A major jobs crisis, like during the Great Recession, will result in a major rebound.

Notice how the pandemic stimulus payments of all kinds and the ability to skip rent and mortgage payments have reduced delinquency rates through mid-2021. But that game is over now, and there’s a trip back to reality. This is a very similar trajectory to auto loan default rates:

And the first uptrend in third-party collections.

The proportion of consumers who picked up third-party customers rose to 6.3% in the second quarter, less than half the figure for 2013 (14.6%). So far, so good:

The average amount of collections per person has remained roughly stable at around $1,230 over the past three quarters after falling during the business cycle:

bankruptcies

The number of consumers with new bankruptcy filings edged up to 95,200 in the second quarter, but remains at an all-time low after the long downward trend that began in 2010 when bankruptcies peaked during the Great Recession. Also note that the number of bankruptcy filings in the second quarter was less than half what it was in 2006, the low point just before the Great Recession.

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