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A survey of senior loan officers across the American banking system regularly undertaken by the Federal Reserve shows this month that lending standards are tightening across all categories. The drivers are no surprise: tolerance for risk in the industry is falling fast, the collateral being brought to the table by applicants is not what it was and loan portfolios are coming under strain.
Another factor is growing concern over the funding costs of US banks generally, many of which are sitting on low-yielding assets, a situation becoming increasingly painful as the Fed resolutely pursues a monetary policy that has seen the key interest rate now reach the highest point seen for over a decade and a half.
However, though larger issuers are requiring higher credit scores from applicants, "demand for credit card loans remained basically unchanged on net," noted the Fed in its summary of the survey results.
Careful risk assessment is also becoming more evident among Buy now, pay later providers: analysts have noted that Affirm, for example, is converting fewer applicants to borrowers as it right sizes a ship still rolling from the effects of more expensive funding and a recent influx of new players. Affirm's losses more than trebled in the quarter just ended, a performance that nonetheless beat analyst expectations but demonstrates that the path to sustainable profitability looks to be narrowing, with much depending on whether the Fed feels the need to push interest rates up even further this year.
More diversified than Affirm, one of the biggest players now in the pay-later sector worldwide is in fact PayPal. In the latest earnings call, chief executive Dan Schulman revealed that more than 32 million of its users, through almost three million participating merchants, had used the lending option. This week the company reported, versus the same period last year, a two-thirds rise in BNPL payment volumes to reach six billion dollars in the first quarter.
In addition, along with the gravy of higher interest rates from PayPal/Venmo user deposits on its balance sheet, processing arm Braintree produced a 30 percent growth in revenue last quarter.
When BNPL was getting off the ground in markets such as Australia, proponents often pointed to the absence of interest charges on the borrowed principal; now that eye-catching feature is front and centre in the new TD Clear credit card, said by issuer TD Bank to be the first of the kind in the US market. Rather than the customary interest on outstandings, holders will pay a subscription fee : for ten dollars monthly they can avail of a thousand-dollar spend limit, with a second product choice doubling both amounts. The usual fees associated with credit cards, currently coming under intense regulatory and political scrutiny, are entirely absent, which means, for example, fee-free cash advances. Holders will not be charged annual fees or anything extra for payments made at overseas merchants.
"Our research indicated that many customers want a simple solution to credit. TD Clear provides simplicity with a predictable monthly payment," said Chris Fred, head of Credit Cards and Unsecured Lending at the New Jersey-headquartered bank, which is owned by Canadian lender Toronto-Dominion.
Other stories of interest this week...
Europe: Paper for parliament pours cold water on digital-euro CBDC
Singapore: WhatsApp and Stripe help businesses accept payments in chats
US, Europe: Financial Stability Board examining social media and bank runs
US: Banks generated record $80bn 1Q23 profits despite turmoil
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