November 6, 2021

Changing Climate in the Consumer Lending Marketplace: What We’re Seeing and Hearing​

Jim Stewart

Jim Stewart

CEO, Epic Research

Three Things We’re Hearing

  • BNPL-ooza
  • BNPL growth continues
  • Bank-branded cards dominate the mail

A Four-minute read

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  • Each month, the frenzy surrounding buy now, pay later (BNPL) programs reaches new heights, and no topic comes up more frequently in our industry conversations
  • Despite the recent attention, the BNPL concept has been around for decades
  • Citizens Bank’s successful “iPhone Upgrade Program”, launched with Apple in 2015, finances iPhones through Apple retail stores and online
  • American Express has offered its “Pay Over Time” feature for many years, which allows cardmembers to designate purchases for installment-like treatment after the purchase has been made
  • The current iteration of BNPL has several general characteristics:
  • Small ticket – generally $500 or less, sometimes higher
  • Short term (e.g., four months)
  • No consumer finance charges (unless the consumer “busts” and doesn’t pay within the stated term)
  • Lender revenue comes primarily from the merchant discount rate (MDR), supplemented by consumer late fees and the occasional finance charges on busted loans
  • One issue for lenders is that the profit on BNPL loans is significantly less than that of traditional installment loans
  • The primary lever to increase lender revenue is via a higher MDR
  • However, with the current competitive mania amongst lenders, increasing MDR rates may be challenging
  • A second, potentially more pressing concern is the lack of data on the long-term asset quality of these loans
  • Many BNPL loans are made without pulling a credit bureau report
  • While surveys show that more than one-third of consumers who have taken a BNPL loan have missed a payment and that many consumers have multiple BNPL loans, most BNPL loans are not reported to credit bureaus
BNPL Lender Logos
  • The U.S. is less penetrated with BNPL offerings than many other countries and is currently dominated by fintechs such as PayPal, Affirm, Afterpay, and Klarna
  • However, many traditional lenders, like Citi and other card issuers, offer similar “after purchase” installment programs
  • Retailers are getting into the game, generally with a lending partner – this year alone, 20+ BNPL deals have been announced with retailers such as Apple, Target, Amazon, and Walmart forging alliances with leading BNPL players
  • Despite the swarm of activity, BNPL is still in the early adoption phase, representing perhaps 1% of U.S. loan activity, with analysts estimating that it will reach a steady state market share between 2% - 4% over time
  • A recent TransUnion survey showed that BNPL customers still use traditional forms of credit such as credit cards
  • BNPL shows signs of a bubble, with most lenders lacking experience with anything other than the historically benign credit quality environment of the past 12 years
  • As competitive pressure and the inevitable upswing in consumer delinquencies stress the BNPL segment, consolidation is likely on the horizon

BNPL Growth Continues

  • Epic recently surveyed over 1,000 consumers regarding their experiences with BNPL loans, and the data provided some interesting comparisons with a similar survey we ran in September 2020
  • Email us for the full results of our recent BNPL survey
BNPL Survey Oct2021 - Infographic

Bank-Branded Cards Dominate the Mail

  • Consistent with recent months, credit cards and student loans remain the only products that have recovered to pre-pandemic levels of mail volume
DIRECT MAIL VOLUME - Q3 2019, 2020, 2021
  • As in prior months, proprietary branded cash back and rewards cards dominated card mail volume – September saw all of the top 20 mailed offers falling into these categories
Credit Card Top PRODUCTS – september 2021
  • Another interesting development is that four venture-backed “near prime” issuers – Mercury, Mission Lane, Avant, and Ollo – are behind the top 13 products mailed
  • Through focus and the hiring of top-notch risk management talent, niche players such as these four and others have effectively dominated this sector
  • The near prime space has been largely ignored by traditional banks as “too risky,” however it may be beneficial for them to consider a thoughtful entry via acquisition
  • Digital acquisition costs have continued to rise with “cost per click” rates for HELOC, student loans, and education refinance loans reaching pre-pandemic levels
EMII - Google Search - Cost per impression JAN 20-SEP 21
  • Following the rise in digital ad costs, some advertisers moved ad spend to other channels, including TV and direct mail

Quick Takes

  • Epic has recently examined cross sell intensity – the rate at which lenders send other product offers to their existing customers
Indexed Direct Mail Cross Sell Intensity JAN19-SEP21
  • As shown in the above chart, cross sell rates vary widely across institutions, with larger banks generally having somewhat higher volumes than smaller ones; however, this data reflects direct mail offers only, with many banks cross selling to their customers via email and other digital channels
  • Advertisers and printers are reporting widespread paper shortages, along with increased costs for paper and freight, and allocations among customers that could have a material effect on financial product mail volume
  • Ally Financial announced that it agreed to acquire Wilmington-based near prime card issuer Fair Square Financial for $750 million
  • Ally previously announced an ultimately unsuccessful acquisition of CardWorks
  • Fair Square has 650,000 “Ollo” branded card accounts, with $750 million in loans outstanding
  • BNPL firm Klarna unveiled a “super app” that consolidates shopping, payment management, and support for products, delivery, and returns, intended to help transform Klarna from a payments platform into a shopping hub

The Epic Report is published monthly, and we’ll distribute the next issue on December 4th.

Thank you for reading.

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Jim Stewart

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