There’s been a lot of “great” micro eras packed into less than three years — the great pandemic, the great digital shift, the great reopening and so on — and with inflation at a 40-year high, it’s credit’s turn as the great consumer credit reset comes to the lending space.
Almost without saying it, we know that buy now, pay later (BNPL) features prominently in this discussion, as consumers reexamine usage at the same time lenders scrutinize borrowers.
Nandan Sheth, CEO at BNPL provider Splitit, told PYMNTS’ Karen Webster, “The escalating CPI is a clear signal of growing inflationary pressure, and it means that the average consumer took a pay cut and real wages fell by about 60 basis points, which is quite a bit in a single month.”
As the Federal Reserve uses rate hikes as a countermeasure, Sheth said, “I see 50 basis point increases coming for the next two, three, maybe four quarters. All of this creates what I’m calling a perfect credit risk storm of rising rates, rising prices and rising debit levels. I think this creates a problematic environment for consumers, for consumer lenders, and frankly banks and issuers.”
With PYMNTS data showing that six in 10 Americans are now living paycheck to paycheck, including one-third of those earning $250,000 a year or more, consumers at every level will be more inclined to use installment credit to manage monthly bills — if they can qualify anymore.
“The problem is that A, demand is going to go up, but B, the supply is going to come down a little bit,” Sheth said. “Lenders are going to get much more constraint in who they lend to. For the ones that do get instant credit, for example, the big question there is what’s their propensity to pay, and how does that change as inflation goes up and their paychecks are worth less?”
See also: Exploring Varying Uses of BNPL Options Among Generations and Income Groups
While BNPL wasn’t designed to be a line of credit for helping meet household expenses, it’s being used that way more now as prices soar and pandemic-era savings start running out.
“At the heart of it is escalating cost,” Sheth said. “The consumer that relies on instant credit as a means to subsist in some areas of spend, I think that category’s going to be the most under pressure in the next six months. Then over time, the individuals that do have more liquidity, they’re going to see their lending rates go up across the board in other consumer financed loans and possibly even their mortgages.
“It’s going to have an economy-wide impact.”
Inside the Great Credit Reset
Credit card balance revolvers are increasing — another signal that wages aren’t cutting it and more people are using credit to make ends meet.
Noting that some $841 billion in credit card balances from the first three months of 2022 haven’t been paid down, Sheth said the coming crunch “is going to start with consumers that are originating new loans, leaning on instant credit as a mechanism to kind of reduce the wedge that they’re facing today. For those consumers it’s going to get much harder, because instant credit for those consumers is an add-on to the burden that they already have.”
Webster pointed out that installment credit users break down into two basic types: those who use it because they couldn’t make a purchase without it, and those who use it so as not to tap into pricey credit card debt or spend the cash reserves they’ve accumulated.
For users with access to revolving credit, he said, “Their open to buy is going to shrink a little bit, but they’re still not going to be willing to pay interest. They’re going to lean more toward, ‘I have credit … how can I leverage that credit without paying interest to extend my payments?’ Splitit and others that are trying to do something similar, I think we become a little bit more attractive for that segment and give them a unique way to leverage existing credit.”
As this consumer calculus happens, BNPL providers and lenders generally will “be forced to tighten up,” he said. “That tightening up is going to create, for merchants, fewer approvals unfortunately in the short term. When money was cheap and VC capital was fueling the growth of [BNPL], it was a lot easier. Now the tide is going to turn. It’s going to be much more difficult to get an unsecured loan,” especially for consumers with several BNPL loans outstanding.
Read more: Splitit Joins Visa Ready for BNPL Program
Trading Down: Lessons in Living Leaner
As credit pulls back in one area, it will look for other places to expand. That may bring more borrowers with good FICO scores into the BNPL fold for the convenience it offers.
“I think what we’re going to see is an increase in higher-value buy now, pay later attracting consumers that already have credit,” Sheth said, mentioning that he recently purchased a $1,500 iPad using BNPL.
“It was a no-brainer for me to put it on the 24-month plan. It just made sense,” he said. “You’re going to see more of that. I think [about] discretionary purchases. For example, you don’t know when your washing machine’s going to go out, but if it goes out and you’ve got to shell out $600 and there is an option for you, on an interest-free basis, to extend that payment over six to 12 months, why won’t you do it?”
The other response will be trading down to lower priced goods and brands that don’t require borrowing, or reviewing which BNPL providers may be more willing to finance due to lower price points equaling a higher probability that loans will be repaid in a timely fashion.
“I think the American consumer has not seen this level of inflationary pressure [before], but I think the American consumer is smart,” Sheth said. “They will figure it out. You’re going to need milk. You’re going to need bread. You’re going to need eggs, but maybe you buy the store brand. That trade down, you’re going to see that, but I have a lot of faith in the American consumer.”
Believing that a harsh dose of financial reality will leave a stronger, better-informed consumer base in its wake, he told Webster, “I think it’s healthy. We’re going to start thinking at least how my parents were thinking, and maybe yours, and there wasn’t this instant gratification.”
If it means putting off that $2,000 item until the holidays, so be it.
“There’s going to be a bit more thought and people are going to be more patient,” he said. “You’re going to see a little bit more fiduciary responsibility come into the consumer base, and I think it’s good.”
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