This is, frankly, a really awful sign for the economy and probably an indicator of imminent recession. Check out this video from Modern MBA for a better overview of the topic then I can give, but...
Exemplary
This is, frankly, a really awful sign for the economy and probably an indicator of imminent recession. Check out this video from Modern MBA for a better overview of the topic then I can give, but the gist is that these buy now, pay later (BNPL) services offer a seemingly compelling value add for consumers: zero interest short term loans, with incredibly easy approval processes, but this side of the business is of course not a good revenue stream. Afterpay, Klarna and Affirm are kept afloat by charging high non-payment and late fees, and offering larger loans with much more aggressive interest rates. That would probably be bad enough -- companies essentially acting as payday loan providers for Zoomers with very low purchasing power -- but worse, BNPL companies are also packaging these subprime loans into securities and selling them on exchanges, which both indicates that they have convinced investors that trading on payday loans is a reliable investment in the current economy, and has echoes of the subprime mortgage-backed securities that were the first domino of the 2008 recession.
That BNPL consumers are increasingly taking on debt to pay for basic necessities is alarming, both for these consumers' future purchasing power (as, in addition to paying for everything else, they must now service these debts) and for the economy at large; if people can't even afford groceries without going into debt, demand for luxury goods is going to collapse, debts are going to default, and of course the securities sold by Affirm and the like are going to collapse in value. A soft landing looks less and less likely every day.
They don't make most of their money from late payment fees. Most of them have very low fees, as least relative to the market. They actually make their money from very high merchant fees - that is,...
Exemplary
They don't make most of their money from late payment fees. Most of them have very low fees, as least relative to the market. They actually make their money from very high merchant fees - that is, the per transaction cost the merchant pays to have this payment option be available. Of course, they also all don't make money - none of them are net profitable, which is the other half to "how do they make their money back" - well, they don't.
The issue with 2008 MBS is that a) credit agencies were misreporting their quality and b) the debt market for mortgages are a VERY VERY VERY VERY big market in the US c) the prevalence of CDS's among certain investment banks amplified the credit risk from MBS ten-fold.
Is there any indication that a) investors are being "misled" - unlike mortgages, I'm pretty sure everyone knows BNPL is effectively revolving interest, an investment doesn't need to reliable to be invested it, it just needs enough yield to make up for the risk b) that banks have anywhere near enough exposure to it for it to be anything but blip it if goes tails up? You can add up the net assets from Klarna, Afterpay, and Affirm and it's infinitesimal compared to the US banking industry.
Furthermore, why is there necessarily risk to the US? I'd note that Afterpay is Australian, and Klarna is Swedish.
I certainly don't mean to suggest that BNPL companies are going to cause a recession, only that their prevalence is a worthwhile indicator. I mean, these companies are at the end of the day not...
I certainly don't mean to suggest that BNPL companies are going to cause a recession, only that their prevalence is a worthwhile indicator. I mean, these companies are at the end of the day not even profitable (I didn't remember the thing about merchant fees; thanks for bringing that up.) The problem is not that these companies are lying; probably they aren't. It's that they are providing high risk loans to consumers and have successfully normalized them as a way to afford luxuries and necessities that they otherwise could not, which is not a sustainable promise. The comparison to MBS comes in because the high-risk BNPL securities carry most of the same risks as those did in 2008 (just on a smaller scale) which is worrying when combined with other recession indicators.
There is risk to the US (though I don't mention the US in my comment?) because any recession that happens will be global. As it happens, the US is outperforming much of the world in a lot of metrics like inflation, but when the global economy goes ass up, so will ours (or vice versa).
I'm not really sure I understand the comparison to 2008. MBS defaulting at unexpected rates is as much an indicator of 2008 as a car hitting a brick wall is an indicator of a car crash. I would...
I'm not really sure I understand the comparison to 2008. MBS defaulting at unexpected rates is as much an indicator of 2008 as a car hitting a brick wall is an indicator of a car crash. I would also note that high risk debt is not in-it-of-itself anything, the issue in 2008 was specifically debt where the risk was mislabeled. High risk debt has been around for as long as humans have charged interest, the interest just needs to be enough to make up for it.
Consumer debt can be a negative indicator, but BNPL is a loss-leading industry trying to enter the market of revolving consumer credit and is eating into credit cards because, well, they're loss leading. If more people are using it, it's difficult to know from what the article is reporting how this is related to the broader economy.
Yeah but BNPL can't be eating into credit card debt that substantially because credit card and all other forms of debt balance continues to grow. BNPL growth is not happening in a vacuum; it is...
Yeah but BNPL can't be eating into credit card debt that substantially because credit card and all other forms of debt balance continues to grow. BNPL growth is not happening in a vacuum; it is part of an extremely concerning trend of consumers taking on unsustainable debt with the buy-in of institutional investors.
I've used BNPL for smartphone purchases in the past and it has always shown up on my credit report as "revolving credit." So wouldn't it just be lumped into the credit card category in a chart...
I've used BNPL for smartphone purchases in the past and it has always shown up on my credit report as "revolving credit." So wouldn't it just be lumped into the credit card category in a chart like this? Or does BNPL not count towards household debt at all?
What about the other 34,791 indicators we've all been hearing since January of 2022? I'm only a little joking here, so try not to take this too personally. There is literally almost every day one...
probably an indicator of imminent recession.
What about the other 34,791 indicators we've all been hearing since January of 2022? I'm only a little joking here, so try not to take this too personally.
There is literally almost every day one article after another about how the car loan situation is so bad that the whole industry is going to crash any moment now. First, it was the worst since 2015, then it's the worst since 2009, then the worst since 2001. This has been happening since June 2021 when I financed my current car. People may have been calling for a car loan crash before then but I only started noticing it after I got a car loan. I'm not saying there won't be a crash of some sort in the auto loan industry, but most people have paid off their cars and bought new ones in the last few years since we started yelling "the cloud is falling" in the auto loan industry.
I have no idea whether a recession is coming or not and what will cause it, but this is just another person calling for recession based on one article.
For many consumers BNPL can make a lot of sense though. This is if and only if you are the kind of person who manages their cash flow very carefully and makes sure to only take on debt when it...
For many consumers BNPL can make a lot of sense though. This is if and only if you are the kind of person who manages their cash flow very carefully and makes sure to only take on debt when it makes sense. If you have the cash, then by delaying the payment you effectively get to pocket extra interest.
That's true, actually! I've used BNPL a few times myself, there's a pretty undeniable value to it. I'm more worried about what it means that use of such services is growing so significantly in...
That's true, actually! I've used BNPL a few times myself, there's a pretty undeniable value to it. I'm more worried about what it means that use of such services is growing so significantly in conjunction with other forms of debt.
Is there any signs of increasing debt overall for individuals? The growth in BNPL just seems to be new apps eating away at credit cards and other kinds of short term loans. For all the hate that...
Is there any signs of increasing debt overall for individuals? The growth in BNPL just seems to be new apps eating away at credit cards and other kinds of short term loans.
For all the hate that BNPL gets, the loan terms are actually very favourable for the user compared to basically any other loan.
For a quick summary on what Klarna/Affirm/BNPL are, here's a short video I came across on by Two Cents: Are Buy Now Pay Later Loans a Good Idea? It's the neue credit card. Low barrier to entry and...
It's the neue credit card. Low barrier to entry and it definitely takes advantage of the younger consumer base. About half of users are 30y and younger.
I've noticed the option on online sites for years but avoided them since I only saw them as a means to fuel consumerism. I've never used the services but I wonder if it's popular among my peers as a <30y...
Like all lending services, they're great when used appropriately. I paid for my Lasik with Care Credit. I had just enough in my account to pay for the Lasik in full, but I knew that if a big...
Like all lending services, they're great when used appropriately.
I paid for my Lasik with Care Credit. I had just enough in my account to pay for the Lasik in full, but I knew that if a big expense had come up soon after it would have put me in a bad position. I took the $166/month for two years option. Zero interest paid and I got to keep my safety cushion. It was the right call because my car shit the bed 3 months later. One of those weird moments in life where you just feel like you knew the future.
I used Afterpay to buy my wife a nice gift for her birthday. I had the money to buy it right then and there, but again, 4 interest free payments of $60 was easier for me at the time. I knew I would pay it in time no matter what. I knew it would make the payment easier to stomach in the short term since I wouldn't be digging into my safety cushion money.
I can easily see a younger person falling into the trap though. I fell into the credit card trap when I was young and partying too hard. Luckily it wasn't an insane amount of money and I managed to pay it off without tanking my credit. It took me two years though, and I am forever changed because of it.
I've used them a couple times. I usually only use it on stuff I need(i recently had to replace an office chair for my work from home setup for example), but the timing inconvenient(other bills, I...
I've used them a couple times. I usually only use it on stuff I need(i recently had to replace an office chair for my work from home setup for example), but the timing inconvenient(other bills, I need it a specific date etc). It can easily be a trap, but it has uses. I stay away from using it frivolously.
This is, frankly, a really awful sign for the economy and probably an indicator of imminent recession. Check out this video from Modern MBA for a better overview of the topic then I can give, but the gist is that these buy now, pay later (BNPL) services offer a seemingly compelling value add for consumers: zero interest short term loans, with incredibly easy approval processes, but this side of the business is of course not a good revenue stream. Afterpay, Klarna and Affirm are kept afloat by charging high non-payment and late fees, and offering larger loans with much more aggressive interest rates. That would probably be bad enough -- companies essentially acting as payday loan providers for Zoomers with very low purchasing power -- but worse, BNPL companies are also packaging these subprime loans into securities and selling them on exchanges, which both indicates that they have convinced investors that trading on payday loans is a reliable investment in the current economy, and has echoes of the subprime mortgage-backed securities that were the first domino of the 2008 recession.
That BNPL consumers are increasingly taking on debt to pay for basic necessities is alarming, both for these consumers' future purchasing power (as, in addition to paying for everything else, they must now service these debts) and for the economy at large; if people can't even afford groceries without going into debt, demand for luxury goods is going to collapse, debts are going to default, and of course the securities sold by Affirm and the like are going to collapse in value. A soft landing looks less and less likely every day.
They don't make most of their money from late payment fees. Most of them have very low fees, as least relative to the market. They actually make their money from very high merchant fees - that is, the per transaction cost the merchant pays to have this payment option be available. Of course, they also all don't make money - none of them are net profitable, which is the other half to "how do they make their money back" - well, they don't.
The issue with 2008 MBS is that a) credit agencies were misreporting their quality and b) the debt market for mortgages are a VERY VERY VERY VERY big market in the US c) the prevalence of CDS's among certain investment banks amplified the credit risk from MBS ten-fold.
Is there any indication that a) investors are being "misled" - unlike mortgages, I'm pretty sure everyone knows BNPL is effectively revolving interest, an investment doesn't need to reliable to be invested it, it just needs enough yield to make up for the risk b) that banks have anywhere near enough exposure to it for it to be anything but blip it if goes tails up? You can add up the net assets from Klarna, Afterpay, and Affirm and it's infinitesimal compared to the US banking industry.
Furthermore, why is there necessarily risk to the US? I'd note that Afterpay is Australian, and Klarna is Swedish.
I certainly don't mean to suggest that BNPL companies are going to cause a recession, only that their prevalence is a worthwhile indicator. I mean, these companies are at the end of the day not even profitable (I didn't remember the thing about merchant fees; thanks for bringing that up.) The problem is not that these companies are lying; probably they aren't. It's that they are providing high risk loans to consumers and have successfully normalized them as a way to afford luxuries and necessities that they otherwise could not, which is not a sustainable promise. The comparison to MBS comes in because the high-risk BNPL securities carry most of the same risks as those did in 2008 (just on a smaller scale) which is worrying when combined with other recession indicators.
There is risk to the US (though I don't mention the US in my comment?) because any recession that happens will be global. As it happens, the US is outperforming much of the world in a lot of metrics like inflation, but when the global economy goes ass up, so will ours (or vice versa).
I'm not really sure I understand the comparison to 2008. MBS defaulting at unexpected rates is as much an indicator of 2008 as a car hitting a brick wall is an indicator of a car crash. I would also note that high risk debt is not in-it-of-itself anything, the issue in 2008 was specifically debt where the risk was mislabeled. High risk debt has been around for as long as humans have charged interest, the interest just needs to be enough to make up for it.
Consumer debt can be a negative indicator, but BNPL is a loss-leading industry trying to enter the market of revolving consumer credit and is eating into credit cards because, well, they're loss leading. If more people are using it, it's difficult to know from what the article is reporting how this is related to the broader economy.
Yeah but BNPL can't be eating into credit card debt that substantially because credit card and all other forms of debt balance continues to grow. BNPL growth is not happening in a vacuum; it is part of an extremely concerning trend of consumers taking on unsustainable debt with the buy-in of institutional investors.
I've used BNPL for smartphone purchases in the past and it has always shown up on my credit report as "revolving credit." So wouldn't it just be lumped into the credit card category in a chart like this? Or does BNPL not count towards household debt at all?
What should people be rallying around?
Anything else?
How about restoring taxes for corporations and the wealthy?
What about the other 34,791 indicators we've all been hearing since January of 2022? I'm only a little joking here, so try not to take this too personally.
There is literally almost every day one article after another about how the car loan situation is so bad that the whole industry is going to crash any moment now. First, it was the worst since 2015, then it's the worst since 2009, then the worst since 2001. This has been happening since June 2021 when I financed my current car. People may have been calling for a car loan crash before then but I only started noticing it after I got a car loan. I'm not saying there won't be a crash of some sort in the auto loan industry, but most people have paid off their cars and bought new ones in the last few years since we started yelling "the cloud is falling" in the auto loan industry.
I have no idea whether a recession is coming or not and what will cause it, but this is just another person calling for recession based on one article.
For many consumers BNPL can make a lot of sense though. This is if and only if you are the kind of person who manages their cash flow very carefully and makes sure to only take on debt when it makes sense. If you have the cash, then by delaying the payment you effectively get to pocket extra interest.
That's true, actually! I've used BNPL a few times myself, there's a pretty undeniable value to it. I'm more worried about what it means that use of such services is growing so significantly in conjunction with other forms of debt.
Is there any signs of increasing debt overall for individuals? The growth in BNPL just seems to be new apps eating away at credit cards and other kinds of short term loans.
For all the hate that BNPL gets, the loan terms are actually very favourable for the user compared to basically any other loan.
older article but yes, household debt and debt nonpayment continue to grow at least in the US.
For a quick summary on what Klarna/Affirm/BNPL are, here's a short video I came across on by Two Cents: Are Buy Now Pay Later Loans a Good Idea?
It's the neue credit card. Low barrier to entry and it definitely takes advantage of the younger consumer base. About half of users are 30y and younger.
I've noticed the option on online sites for years but avoided them since I only saw them as a means to fuel consumerism. I've never used the services but I wonder if it's popular among my peers as a <30y...
Like all lending services, they're great when used appropriately.
I paid for my Lasik with Care Credit. I had just enough in my account to pay for the Lasik in full, but I knew that if a big expense had come up soon after it would have put me in a bad position. I took the $166/month for two years option. Zero interest paid and I got to keep my safety cushion. It was the right call because my car shit the bed 3 months later. One of those weird moments in life where you just feel like you knew the future.
I used Afterpay to buy my wife a nice gift for her birthday. I had the money to buy it right then and there, but again, 4 interest free payments of $60 was easier for me at the time. I knew I would pay it in time no matter what. I knew it would make the payment easier to stomach in the short term since I wouldn't be digging into my safety cushion money.
I can easily see a younger person falling into the trap though. I fell into the credit card trap when I was young and partying too hard. Luckily it wasn't an insane amount of money and I managed to pay it off without tanking my credit. It took me two years though, and I am forever changed because of it.
I've used them a couple times. I usually only use it on stuff I need(i recently had to replace an office chair for my work from home setup for example), but the timing inconvenient(other bills, I need it a specific date etc). It can easily be a trap, but it has uses. I stay away from using it frivolously.