Consumers are getting ready to battle inflation for the long haul — tapping every resource that’s available.
Here’s one telltale sign:
Valley Bank EVP and President of Consumer Banking Kevin Chittenden observed that customers are scrambling to get home equity loans.
“But they’re not really using those loans,” he told Karen Webster.
He pointed to the fact that the typical utilization of those loans is 55%, and right now that percentage is at about 30%. Call it, in other words, a form of dry powder, a safety net kept in reserve.
Chittenden’s remarks came during a panel discussion on the state of consumer expectations of what lies ahead — and how they’re recalibrating spending. Panelists included Versatile Credit CEO Ed O’Donnell, Bread Financial Chief Commercial Officer Val Greer.
Caution reigns, said all three, and amid the caution, payments choice and flexibility help when grappling with inflation’s crushing pressure. As noted in this space just recently, savings are dwindling in the paycheck-to-paycheck economy.
Spending is indeed shifting, and depending on where you look, there’s some substitution effect in the mix. Valley, in another example, has seen lending for and spending on RVs hold up well as people want to travel, but they are taking relatively cheaper trips and opting to stay closer to home. Card balance delinquencies, at least in Valley’s lending book, are not rising all that much.
Grappling With Everyday Spending
Consumers look ahead and expect inflation to rage well into 2024, PYMNTS has found, but when it comes to everyday spending, there is no surprise: Zero-percent, promotional financing is making headway.
Buy now, pay later (BNPL), in particular, has extended its reach beyond an initial popularity among Gen Z and millennials shoppers. Now installment loans have grabbed the attention of older, wealthier consumers who want to act on a purchase but not have to put up their own capital at the register to do so. BNPL is no longer a relatively low volume, FinTech niche product; it’s now reached the masses.
The reasons are clear. As Greer noted, consumers began moderating their spending in the middle of last year, and by December, of course, retail spending actually fell by a percentage point. “Consumers decided to open up their wallet only when they saw big promotions and big discount offers,” she said.
Essentials are now top of mind — food and rent. And there’s another universal: O’Donnell said that all consumers have, at one time or another, faced the challenge of meeting unexpected expenses — the car repair or home repair that’s a need-to-have rather than a nice-to-have. No matter where you look, there’s less disposable income to go around.
“Consumers are becoming much more astute about what makes sense for them … and the expenses in terms of interest rate or other fees that are associated with the transaction,” he said. Promotional financing and paying over time may be more attractive to many consumers vs. paying with a credit card or even cash.
There’s a bit of shuffling in the mix, as individuals may favor one card for everyday spend, and another payment methods for larger item purchases.
The most successful merchants and retailers will be able to present the best choices, at the right time, to consumers, in order to convert them from shoppers into buyers.
More Financing Options Lead to More Sales
That shift among the retailers is significant, Greer observed. “If you look back a year or so ago, retailers could barely keep merchandise on the shelves. If you saw something you liked, go get it because it was likely to be gone when you came back,” she said. Now the impulse buy has given way to the bargain hunter, to the shopper who knows about buy now, pay later — and expects it to be there at the point of sale, across channels, no matter if they start shopping online or finish in store with a QR code.
For the merchants themselves, offering multiple financing options at the point of contact makes the difference in closing the sale, and in running operations more efficiently. Versatile’s data driven platform helps those enterprises match the right offer to the right consumers — and to the right lenders.
Chittenden said the bank aims to leverage technology and data to make sure that the lines extended to consumers are appropriate given the borrower’s payment and borrowing histories.
“You want to capture more of the discretionary spend, but while making sure that you’re thoughtful around the lines around the access,” he said. Data also helps the lenders identify trends and early distress signals so that lenders can be proactive in helping consumers navigate any financial stressors.
Looking ahead, Greer said, “when you start looking towards more of the discretionary categories, we are seeing consumers think about, ‘Is that where I want to lean in today?’”
Some categories are proving resilient. For Bread, which provides loyalty and marketing services, and private label cards, spending at brands like Sephora and Sally Beauty are strong, and consumers are using split pay and pay-in-four options to help make these discretionary purchases a bit more manageable. Simplicity matters a lot, Greer said, as consumers value credit when it comes through a nearly self-service model, and where they are not “paralyzed by the process.”
The panelists agreed that we’ll see an expansion of installment lending in order to capture sales with larger ticket items like home improvement and even elective medical procedures. The trend will be long-lasting, because as Chittenden noted:
“The consumer is strong. But the consumer’s being tested.”
