After years, this week, I was watching TV switching between CNBC and Bloomberg. Every show had a few talking heads saying that we are heading towards a recession and the panel always had a ‘Contrarian’ claiming otherwise. Kevin O’Leary was emphatically proclaiming that there is a zero chance of a recession. Ravin Gandhi of GMM Coatings claimed that the recession is here but not evenly distributed yet.

Side note: Someone should count the number of utterances of the idiom – ‘Canary in the coal mine’. It is likely to strongly correlate with an impending recession.

Ironically, my dominant affairs at work this week took me to a credit bureau. I went to their office, shaking hands with the good folks while greeting them with ‘Irasshaimase!’. They are all fans of ‘Curb Your Enthusiasm’ or at least that’s what I hope.

Credit and Credit Scores

As I was sitting through the meetings, the irony didn’t escape. There is a whole generation of consumers who are getting their first debt exposure with BNPL products that aren’t covered under traditional credit scoring. It’s only a matter of time that credit bureaus incorporate the BNPL transactions in their credit reports. Even as it may happen, BNPL is the starter pack for those who cannot get credit cards yet and still have a way to build their credit scores – eventually building enough history to get credit cards.

According to the 2022 Global Payments Report by the Worldpay (FIS) Buy now pay later (BNPL) will account for about $438 billion, or 5.3%, of the global e-commerce transaction value by 2025, up from 2.9%, or $157 billion in 2021. In North America, BNPL accounted for almost 4% of the e-commerce sales in 2021, compared with 1.6% a year earlier. Globally BNPL is estimated to grow at a CAGR of 32.5% from 2022 to 2028.

Credit cards still dominate

Credit cards still dominated eCommerce payment methods in both Canadian (50%) and US consumers (30.2%) in 2021. By 2025, the share of credit card transactions are projected to reduce to 27%. The transfer of share from cards will mainly go towards digital wallets and BNPL (which are projected to gain 4% and 5% additional market share respectively from all other methods).

Nevertheless, debit and credit cards will remain a significant payment method for a few years as absolute transaction values are only going to increase despite shrinking share in volumes.  More than 80 percent of American adults had at least one credit card in 2020, according to the Federal Reserve and there were 365 million open credit card accounts in the US at the end of 2020, according to the American Bankers Association.

In comparison, Klarna has around 147 million active BNPL customer accounts globally. Paypal has around 18 million BNPL accounts while Affirm has around 11.2 million active customers. While the BNPL providers saw phenomenal growth (Affirm saw a 150% growth in customer accounts from 2021) the numbers still pale in comparison to the card volumes. Credit cards still underline consumer behavior in the United States and Canada.

It’s for this reason that the latest credit card numbers are bound to make any market observer very nervous.

Credit card debt is ballooning

The consumer credit report for March is out. The revolving credit (credit cards) is at $31B. Total consumer debt (and not just credit card debt) grew by $52B in March – a 2x increase over the expected number of $25B. Inflation and card payments are evaporating savings.

If you look at the card delinquency rates, it is very misleading. Until Q1 and even now, the delinquency rates are plummeting or flattening. Good news, right? One way I’d interpret it is that the stimulus checks helped. They fueled (credit card) spending and card repayments. Checks have stopped, inflation is still high but wage increases (other than tech) haven’t been uniformly distributed. Inflation-adjusted personal earnings have fallen by 2.3%.

Credit card debt is increasing while delinquency rates are falling

‍Credit card debt has increased back to 2019 levels in Q4 2021.  Without stimulus checks, Americans are swiping credit cards more frequently compared to a year ago. However, the utilization of available credit fell to less than 30% in Q2 2020 for the first time in 1999 and has remained so till the end of 2021. While credit limits have been increasing through the years, the fall in 2020 was due to lower credit card debt.

While delinquency rates have fallen since the pandemic and are continuing to fall, the effects of inflation might push them back to debt. Pandemic relief programs such as rental assistance, advanced child tax credits, and stimulus payments had enabled Americans to save more and pay down debt.

Personal savings are being emptied out

The inflationary pressures are going to affect the group that has the lowest savings. People below 35 typically had a savings of USD 11,250 in 2019 according to the Federal Reserve’s Survey of Consumer Finances. Where credit scores will prevent sub-prime and highly-leveraged spenders from further digging themselves into a hole, BNPL with no such checks and balances (at least, for now) will see all the tailwinds in this economy. Yes, it is a perverse case of moral hazard but it will play out nonetheless.

The tailwinds for BNPL

The inflation coupled with the shrinking of personal savings post-pandemic can move people in the lower age groups to BNPL. A study by Qualtrics found that nearly 60 percent of consumers believe the inflation will drive them towards BNPL to pay for purchases. However with discretionary spending coming down (More than a third of respondents in the EY Future Consumer Index said they would be buying less apparel and electronics), and consumers willing to pay higher for essentials, the popular BPNL categories like Apparel, Beauty Products, Jewelry, Electronics and Appliances, and Furniture will see lower volume sales.

Regulatory oversight can affect BNPL

BNPL attracted regulatory scrutiny back in December 2021 when the Consumer Financial Protection Bureau launched an investigation into the business practices of the sector with concerns of debt accumulation, regulatory arbitrage, and data harvesting. Last week the CFPB invoked dormant authority to conduct examinations of BNPL companies to determine if they pose any risks to consumers. Such regulatory vigil apart, consumers aren’t relenting. I am unsure if it is the pandemic-induced YOLO or the habit of easy money, spending hasn’t reduced. In fact, card spend has doubled in March. Employment numbers are holding up well too. So will the party simply move from cards to BNPL as inflation & job losses catch up or will we see a glut in BNPL adoption too?

I don’t know. The world needs the American consumer to buy. Fed stimulated the economy towards buying. When you have easy money and it is spent on consumption rather than creation, too much money will eventually devour any available supply. Inflation will go out of hand. Haven’t we seen it all already?

As I already said YOLO → BNPL → SSDD