Buy-Now-Pay-Later (BNPL) lenders face a tougher reality.
By Wolf Richter for WOLF STREET.
Credit card balances jumped $46 billion to $887 billion in the second quarter, which was still down 4.3% from the peak in the fourth quarter of 2019 and was just a hair above what it was in 2008, despite 14 years of population growth and inflation. Rampant inflation was responsible for much of the increase in the second quarter, according to the New York Fed’s Household Debt and Credit report.
Credit card balances also include balances that are paid off on the due date the following month, each month, so no interest accrues. Many Americans use credit cards only as a method of payment (and to get the 1.5% cash back or whatever), not as a method of borrowing.
A report by Fitch estimated that the total amount paid with credit cards for goods and services – in the United States reached $4.6 trillion in 2021, which would represent an average of $1.15 trillion in credit card purchases per quarter.
Yet total outstanding credit card balances in the second quarter only increased by $46 billion, showing just how heavily credit cards are used as a method of payment and the extent to which they are used as method of borrowing, which makes sense given the usurious interest. rates.
Credit card balances of $887 billion in the second quarter include transactions made roughly in June but paid in July that do not earn interest. And that’s been spurred by the surge in travel, much of which is paid for with credit cards.
Other consumer loans, such as personal loans, payday loans and Buy-Now-Pay-Later (BNPL) loans, all combined, reached $470 billion in the second quarter, below what they were 20 years ago, despite 20 years of inflation and population growth.
Trying to dodge the usurious interest rate scam: shrinking credit card debt.
People are borrowing a lot of money to finance home purchases and auto purchases where loan balances have increased from 2008; and they take out many student loans, the balances of which have been growing steadily since 2008.
But in order to avoid getting ripped off by usurious interest rates, people are pretty much restricted when it comes to credit cards – especially the huge sums that are paid in full every month and never generate cash. interests.
Credit card balances and other loans combined accounted for more than 16% of total consumer debt (including mortgages, auto loans and student loans). During the pandemic, this fell into the 8% range and reached 8.4% of total debt in the second quarter:
A Word About Buy Now Pay Later (BNPL)
New York Fed data does not detail BNPL loans. 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 credit card purchases. in the USA. BNPL loans are therefore tiny, but growing rapidly.
BNPL loans, often aimed at subprime clients, are short-term installment loans, such as one down payment, three more to pay, usually spread over six to eight weeks. These loans are often issued at the point of sale. They typically carry 0% interest and are subsidized by the retailer to encourage higher average tickets and fewer cart abandonments. Retailers can partner with a BNPL lender.
If it sounds like installment plans from decades ago, that’s because it is, but now imbued with the unerring aura of FinTech and AI.
One of the hottest BNPL specialty lenders in the US is Affirm Holdings [AFRM], a startup with less than $1 billion in revenue in 2021. It went public in January 2021 amid immense hype. In October, its shares reached $176.65, after which they plunged through the IPO price of $49 per share, and closed today at $31.55 per share, down 82 % from top.
The company lost tons of money every quarter, including $55 million in the first quarter and $430 million last year.
According to Fitch, BNPL lenders “have seen delinquency rates more than double in recent quarters,” while credit card delinquency rates have barely increased as subprime-rated customers take on BNPL loans are the most affected by runaway inflation.
And like so many times with FinTech and AI foolproofs, credit checks are only as good as the people who wrote the code, and apparently the code was designed to maximize revenue, not control risk. Fortunately, this is only a tiny part of the consumer credit scenario.
Credit card chargebacks rise from record highs, remain low.
There is still a lot of money circulating, but some people are running out. In 2020 and 2021, people used their stimulus checks and PPP loans, along with extra unemployment benefits and some of the money left over from having to pay rent or mortgages, to keep up to date. on their credit cards. And crime rates across the board have dropped to record lows.
For credit card delinquencies, this record was reached in the third quarter of 2021, when balances past due for 30 days or more fell to 4.1% of total credit card balances. Then they start to get up. In the second quarter, they rose to 4.8%, which was still below any pre-pandemic low.
For “other loans”, the record low for the over-30-day delinquency rate was reached in the fourth quarter of 2021, at 4.3%. In the second quarter, it rose to 5.2%.
In both categories, delinquency rates are increasing but remain below the Good-Times normal. Credit card delinquencies are growing faster and may soon reach good times normal and then bad times normal. A major jobs crisis, such as during the Great Recession, will lead to a sharp increase.
Note how pandemic stimulus payments of all kinds and the ability to skip rent and mortgage payments drove delinquency rates down through mid-2021. But that game is now over and there is a return to reality. This is a very similar trajectory to auto loan delinquency rates:
And the first increase in third-party collections.
The percentage of consumers with third-party collections rose to 6.3% in the second quarter, less than half of what it was in 2013 (14.6%). So far, so good:
The average amount collected per person has remained roughly stable at around $1,230 over the past three quarters, after declining during the stimulus period:
The number of consumers with new bankruptcy filings in the second quarter climbed a hair‘s breadth to 95,200, but remains at a historic low, after the long downward trend that began in 2010 when bankruptcies peaked during the Great Recession. Also note that the number of people who filed for bankruptcy in the second quarter was less than half the number of filings in 2006, the low point just before the Great Recession.
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