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Hi friends, Ohad Samet here.

I’m the co-founder and CEO of TrueAccord, a leader in offering consumer-focused debt repayment products. Prior to this, I served as the Chief Risk Officer of Klarna after the company acquired my previous company, Analyzd. Before Fintech was Fintech, I was the head of risk analytics for FraudSciences, a company that developed ML products for fraud prevention in eCommerce, which was acquired by PayPal in 2008.

I’m joined by Nisha Khalsa on TrueAccord’s Product team, focused on building out the TrueAccord API for Recover, our bread-and-butter product for post-charge-off collections. Prior to this, Nisha joined us from Accenture, where she served as a consultant for high growth technology companies.

Over the past couple of months, our TrueAccord team has been seeing first-hand a greater ability (or willingness) to pay off balances and a greater volume and balances of debts. Why now? What’s changed? While seasonality may be at play here, there are certain macroeconomic indicators that lead us to believe this is just the beginning for an interesting 2021 & 2022 with higher credit card balances, loan volume and possible negative impacts to subprime consumers.

2021 was a rollercoaster of conflicting macroeconomic indicators. As COVID infections surged and receded, supply chain constraints and demand pushed prices (often) up and then (sometimes) down, and several Federal and State-level programs were rolled out and then terminated, it’s hard to understand what’s actually happening in consumer credit. Here’s our take.

Credit Cards Post Covid

While US consumers slowly climb out of a COVID-impacted world, macroeconomic indicators suggest a return to pre-pandemic trends in credit card usage. With enhanced spending and reduction in federal programs, credit balances are expected to rise, yet with an inverse impact on low income demographics.

September marked the changing of the seasons, leaves beginning to turn and unfortunately for many Americans, the end of enhanced unemployment benefits, fading impacts of government stimulus and the finalization of the rent eviction moratorium. These factors provide the foundation to return consumers to pre-pandemic credit levels, spending behaviors and ultimately loan accrual and delinquency behavior. During the pandemic, consumers reduced consumption across most categories, prioritized saving and paid down balances. As the federal financial support eases, we can expect to see increased borrowing in the coming quarters and down the line, a surge in delinquency rates.

Holiday trends suggest Americans are pulling out their credit cards again, as spending is rebounding across most verticals. Consumers expect to spend more this holiday season compared to the past three years. Holiday spending in 2021 has started earlier and is trending above expectations; supply chain concerns have Americans shopping earlier - and there’s pent up demand as the pandemic deprived many of a normal holiday in 2020. Forecasts from Deloitte predict holiday spending to increase 15% from the previous year, surging vs. last year’s ~5% increase, and translating to higher loan balances, with Experian showing bankcard and retail balances approaching pre-pandemic levels.

What Data Trends Are Telling Us

Per the October Experian report, September marked the fourth month in a row of increasing delinquency rates, with the over 30-days delinquent cohort increasing 7.95% month over month. We’re seeing consumers trend towards pre-pandemic credit card usage, a potentially dangerous combination amidst a reduction in federal financial support and enhanced holiday consumption, especially for paycheck-to-paycheck consumers.

With shrinking the end of federal support and elevated spending, we will see a more pronounced impact on individuals in the low income cohort who are more reliant on credit, as subprime and near prime customers are making up a growing mix of outstanding balances, per Experian’s October report. Meanwhile, the share of the paycheck-to-paycheck demographic continues to grow from a low of 52% in April 2021 to 57% (vs. a high of 65% in December 2020). At the same time, credit card spend has increased for two consecutive quarters and debit spend has slowed, demonstrating a greater reliance on credit. Holiday trends suggest that over 30% of financially unstable respondents expect to go into debt due to holiday spend.

There's also the waning government COVID programs and holiday spending ramping up, meaning 2021 credit levels are trending towards 2019 volumes and balances, but not quite there. Assumptions around the return to ‘norm’ have not yet been fully realized, with spending still down in travel and leisure, and usual loan activity reduced by federal support. Credit balances were proportionally higher two years ago.

While early indicators demonstrate movement towards pre-pandemic credit usage, as well as the reductionend of federal support and enhanced holiday spending encouraging immediate financial behavior, full stabilization might trickle throughout 2022. A key COVID program, the child tax credit, will continue into the upcoming tax season, further contributing to an imminent correction in 2022.

What This Means For You

Hey there, Ohad again. Nisha’s excellent review tells you what’s happening and what may happen in consumer credit, but what does all that mean for fintech? First, it means that for at least 6-9 months now, everything related to consumer credit is going to have a field day. Whether you’re a public company like Upstart or seed stage startup in rental, rent to own, or straight up lending, high quality demand is going to be at an all time high as banks and traditional lenders take time to adjust. Underwriting is and will continue to be a breeze, repayment rates will be high, and you’ll experience great multiple expansion.

Second, what goes up, will come down. As banks that target near-prime and subprime consumers revv up their acquisition engine, you risk getting caught in the water receding before the tsunami, replicating the one that hit Lending Club in 2016. Lending businesses are weird -- loan book growth hides a lot of mistakes unless you obsess over underwriting criteria, acquisition mix, cohort loss analysis, and obviously servicing and debt collection (check out TrueAccord for some help there!) You can build an excellent business in times of surging demand, as the BNPL giants have shown us, but you have to prepare for, and hedge against the downside. Don’t be caught by the obvious turn of the cycle.

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Ohad Samet is the co-founder and CEO of TrueAccord, a leader in offering consumer-focused debt repayment products. Prior to this, he was the Chief Risk Officer of Klarna after the company acquired his previous company, Analyzd. He also served as the head of risk analytics for FraudSciences, a company that developed ML products for fraud prevention in eCommerce, which was acquired by PayPal in 2008.