In last week’s JP Morgan fourth-quarter earnings call, legendary Wall Street CEO and Chairman Jamie Dimon pulled no punches when responding to a question regarding the growing competition within the arena of consumer finance posed by fintech giants such as PayPal, Square, and Stripe. Capping off a thoughtful response to a specific query from Wells Fargo analyst Mike Mayo, alluding to JP Morgan’s ability to “win” against these mammoth cannibal newcomers, Dimon ejaculated – with what will most likely be a quote in the many biographies written about him someday – “Absolutely, we should be scared shitless about that”.
I found the colorful retort timely as it coincided with another big, fintech related consumer finance story this week, that being the multi-billion dollar IPO of PayPal co-founder Max Levchin’s new endeavor, buy-now-pay-later (BNPL) giant Affirm.
From my view, the mutual relevance of the two events is that Affirm, along with the rest of a rapidly growing field of up-and-coming BNPL players, is at least partially responsible for the massive decrease in consumer credit card balances we’re currently seeing: consumer credit card balances are down roughly $2B since the pre-pandemic highs last spring – down to levels not seen since 2017 (per US Federal Reserve).
BNPL is a different form of consumer credit extended by way of spreading out the purchase price of products and services over installment payments, where debt service on the extension of credit (the “loan”) is carried by the merchant instead of the consumer. Admittedly, the lack of clarity on public policy, and unfathomable delays in economic stimulus by an infantile, feckless federal government is also largely responsible for the lack of consumer spending, higher savings rate, and decrease in credit card balances (consumers have shifted to debit instead), but I suspect BNPL is a non-inconsequential factor too- literally cannibalising the legacy, major banks’ consumer finance credit card business units.
The silver lining of this week’s events is that the IPO of Affirm will be extremely valuable to analysts as Affirm’s 10Qs will provide, for the first time on a major US exchange, unprecedented visibility into the rich data collected by a large BNPL concern, allowing for market participants and competitors alike to get a much better understanding of BNPL’s segment capture, and insights into the ever-changing spending preferences of consumers.
But for now, let’s not kid ourselves. The legacy majors might be right to be scared s#%tless of the recent explosion of fintechs in the marketplace, especially BNPLs. After all, who’s comfortable around cannibals?
– Adam T. Hark, Managing Director, Wellesley Hills Financial, LLC