Tobias Baer shares an article on credit risk and the perils of the buy-now-pay-later trend.
A just-published TransUnion study shows that buy-now-pay-later (BNPL) takes the UK (just as other markets) by storm, with 35% of the population having used it in the past 12 months (driven in particular by Gen Z and Millennials with up to 60% usage). There are both obvious and not-so-obvious implications for traditional lenders.
BNPL promotes further fragmentation of consumer debt – and therefore will make it even harder for less disciplined consumers to keep a grip on their financial obligations. 50 years ago consumers could easily understand their financial capacity by checking the amount of cash in their wallet – that was all available to spend. The credit card has greatly increased both financial flexibility and the haze through which consumers see their financial capacity – but many cards give consumers at least some orientation by indicating the credit line and the available “open to buy” portion. By contracting loans one merchant transaction at a time, a consumer needs to be a real accounting wizard to know at every point of time how much money she owes or still can afford to spend.
For traditional lenders, this means that the large portion of borrowers with relatively low “conscientiousness” (i.e., limited financial planning and self-control) is becoming even riskier as the risk of excessive borrowing has become even greater. This is not only because BNPL fragments the financial affairs of consumers but also because BNPL is offered through retailers who want to use credit to maximize sales – in a sense, retailers suffer from insufficient conscientiousness themselves when they prioritize short-term sales maximization over long-term trouble for their customers (as customers going through personal bankruptcy barely make an attractive consumer). In addition, many retailers (rationally) subsidize borrowing cost by sacrificing a part of their margin, essentially to bear credit losses. As traditional lenders only can use interest and fees to cover their losses, they are at a structural disadvantage.
Key points include:
- Consumer psychology
- Limited financial planning and self-control
- Credit bureau regulations
Read the full article, How will BNPL Affect Credit Risk?, on LinkedIn.
Luiz Zorzella shares an article designed to help improve strategy by understanding your net Interest margin (NIM).
If you are a bank executive and want to manage the bank’s business strategically, you must understand the key drivers of your bank’s profitability and the trade-offs they imply.
For example, to some extent, banks can trade the cost of deposits for efficiency ratio by making it more convenient for clients to make deposits.
At the same time, the equilibrium of these trade-offs depends on a number of external factors which change all the time. In our example, while the status of the labor market impacts banks’ efficiency ratio, the compression of interest rates impacts the attractiveness of low-cost deposits.
Take interest rates for example. In 2019 10YTs paid on average 2.14%. They then fell to 0.89% in 2020 (a 125 bps reduction) and up to 1.42% in 2021 (a 53 bps increase).
The NIM of JP Morgan, Bank of America, and Citibank have been decreasing, having lost between one and one and a half percentage points in the same period. To put this in perspective, my rule of thumb is that banks need around one percentage point of NIM just to pay their cost of equity to hold banking assets, which is not accounted for in the NIM formula.
Read the full article, HOW TO ACE IT STRATEGICALLY BY UNDERSTANDING YOUR NIM, on Amquant.com.
Paul Millerd shares his understanding of hamsternomics: printing money, the future of work, and what we want or need in life.
Right now, as citizens of the United States we may become that hamster. Near term, we don’t really have a choice. Long term, we might have a choice.
A lot of people have asked us what printing money means. Like, what actually happens and why should we care? That simple question turned into a long investigation.
The result is this piece, which aims to give you a better understanding of the whole economy using hamsters. Hamsters are fun. They’re playful. We understand their need to run faster and faster on wheels.
But, my friends, the joke is on us. WE are the hamsters right now.
We’ll explain WHY we, U.S. Citizens participating in the global economy, are just like that hamster and explore WHETHER we want to remain on the hamster wheel.
It’s an ambitious agenda, requiring us to do a first principles explanation of a bunch of economic concepts, including:
What money really is
How it powers the economy and as a result, our hamster wheels
Why fast is never fast enough on the hamster wheel (hint: it’s greed!)
What happens when hamsters lose interest in the hamster wheel?
What does the future look like? Wheel or no wheel?
Key points include:
- Unleashing trillions of dollars into the economy
- The Hamster Prize
- The Hamster government
Read the full article, Hamsternomics: Printing Money, The Economy & Work Beliefs, on Boundless.com.
Supriya Prakash Sen shares a pertinent reminder on big picture problems that we all face, and offers a solution that could be a small step in financing but a leap towards a sustainable future.
In the midst of a pandemic, the past year has been chilling at best, and a nightmare at the worst of times. However, we are lucky to be alive. Now, as vaccines get rolled out, it remains for the survivors to pick up the pieces, mourn our dead, brush off the crumbs of our past and move ahead into trying to cobble a more sustainable future.
This week, with all of us still being holed up at home, I thought it would be a good idea to make a visit to the Singapore Zoo, the River Safari and the Night Safari – where we haven’t been in years. My love of animals and wild life is tempered with the sadness from knowing I may be the last generation to actually see any of this in the wild. The shrinking habitats, the splintering of these habitats (one lonely tiger can hardly go and find his mate across the void to the next one), and the absolute filthy pollution by humans and garbage makes it almost inevitable that the last few majestic animals can only be found in a zoo.
The same is true of every other habitat- whether it is our marshlands, swamps, oceans, freshwater rivers, or frozen icelands. Every species, from reptilian to mammal to bird, is being nudged off the face of this earth by our insatiable appetite for more, more, more!
On the other hand, our #instagram generation is so good at making new concepts like Cat Cafes etc…and the business of “Humanizing pets” is actually a theme, getting VC $ and many shiny new startups to exploit this new trend. This just goes to show, that humans are not all selfish; most do appreciate the innocence of animals in our lives. We just don’t pause to do anything about it.
Key points include:
- restoring the ecological balance, one settlement at a time
- the overlay of culture, habits, skills, behaviors to ensure this is not in vain
- the economics, the financing, and the incentives so it stays that way
Read the full article, Urgent Need to Restore Lost Wildlands, on LinkedIn.
Ian Tidswell provides insight into the strange pricing practices fueled by loyalty programs, credit card programs, fees, and customer perception of value.
Utpal Dholakia always has interesting posts on pricing. This one got me thinking about the strange way that buying a coffee can result in wealth transfer to an airline.
Airlines make a lot of money off of their loyalty programs (often all of their profit). 71% of those miles are purchased, many by banks for their credit card programs. This is strange.
Credit card payment processing is not a very economically efficient market: there’s close to a duopoly with MasterCard and Visa (80% market share). That, along with the scale efficiencies, consumer switching costs, and merchant risk aversion (more on this below) mean they can charge high fees to merchants, capturing huge value. (Capturing rather than creating IMHO, since this is rent-seeking behavior. It’s a high-margin, commodity business. MasterCard net profit margin is 50%!)
MasterCard and Visa member banks then compete with each other in a profitable but near-commodity market. One way they compete is on price: sharing some of the fees they earn via the processing companies with consumers. They could do this with a simple cash-back scheme or other reward programs, but it turns out that airline loyalty points work well since many people value them higher than their actual worth. It’s basically a parallel currency with a highly variable exchange rate to valuable services. An exchange rate the airline controls.
Key points include:
- The true value of reward programs
- The true cost of reward points
- The rentier economy
Read the full post, The strange case of a Cup of Coffee, Credit Cards and Costa Rica vacations, and access links on the subject on eenconsulting.com.
As the disruption continues, many businesses struggle to retain their employees. This post from David Burnie’s company provides strategies that can help keep employees on board, engaged, and motivated.
Happy, successful employees are critical for a successful company. While companies must consider how to retain employees at the best of times, employee retention is an especially pressing topic during the COVID-19 pandemic. As Ontario continues social distancing indefinitely, maintaining an engaged staff will offer a sense of stability to companies amid flux.
How can companies retain top talent to ensure maximum productivity, motivation and success?
Employee retention strategies can be implemented by employers to ensure that employees feel valued and engaged, even with current remote working practices. This can support lower turnover rates, higher productivity and improved organizational performance.
Suggestions included in this article:
- Recognition programs
- Professional development opportunities
- Health, safety and wellness programs
Read the full article, Employee Retention Strategies During COVID-19, on the Burnie Group website.
Amanda Setili shares eight steps you can take to mitigate stress and uncertainty during the current crisis.
I’ve been astounded by the degree and speed of innovation and change these last few weeks.
Things that in normal times would have taken months or years to do have been accomplished in days, largely because people are banding together to help each other. In the midst of suffering, stress, and a good bit of fear, there is more kindness than ever.
And as a society, we’re learning faster than at any other time in my lifetime.
People have shifted to remote work, retailers have ramped up store pickup services, governments have created relief programs, factories have shifted to making personal protective equipment, the Army is building temporary hospitals, and scientists and regulators are speeding new treatments to market. It’s impressive.
The steps outlined include:
- Supporting the needs of society
- Employee retention
- Customer support
- Cashflow forecast
Read the full article, Innovation amid Stress and Uncertainty, on the Setili website.