Pretty Soon, It's Real Money

The Federal Reserve released Consumer Credit numbers yesterday indicating that Americans now hold $943.5 Billion in revolving credit facilities. The old adage goes, " a billion here, a billion there; pretty soon it's real money." My contention would be that when outstanding debt hits $1 TRILLION, we're talking about real money.

Consumer Pinch

There is ample evidence, as we've discussed before, that the retail market is tightening. It follows modest weakness in the jobs market, but most closely is related to the fact that the American public added more than $140 billion in debt over the last three years. Combine that with the fact that housing prices are no longer a tireless engine of wealth creation, but is starting to fall. In fact, home foreclosures are on the rise, and American consumers are beginning to walk away from their fledgling mortgages.

The way that the mortgage boom was fed, with at best tacit complicity among mortgage originators, collateralized debt obligation salespeople, real estate brokers and homebuilders that led to very low down payments if any at all being made on hundreds of thousands of new homes. Homeowners are beginning to just forfeit the very low levels of equity they were forced to put into the mortgages out of the gate. Those walkaways will cause a hit against the collective credit rating of the American consumer.

Tightening Credit

The massive debt levels that Americans have assumed is increasing the anxiety level among credit card issuers. In December, 7.6% of that $943 Billion was at least 60 days delinquent, or already in default, up from 6.4% year over year. There is evidence that credit card companies are both increasing their lending standards, and increasing the rates of cardholders, even those in good standing. Further, many of them have already taken charges to build up reserves against bad credit losses.

Even more frustrating for both the credit cards and retailers is the evidence that the consumer is cleaning up its act. While it is unlikely to have the means to collectively wean itself off debt in the near term, many are cutting discretionary spending. Wal Mart, which grew year over year sales only 0.5% vs. the 2% it expected to is frustrated by low gift card redemptions as most expenditures are moving more toward essentials and away from things like electronics.

Mpayy's Value Proposition

Mpayy is not going to drive more customers into stores, or even to the websites of online retailers. Mpayy's offer to internet retailers with an online presence is two-fold: i) Mpayy will be 40-50% cheaper than the other payment options; and ii) Mpayy takes all the fraud risk. It is an interesting market to be entering in, because the highest profile alternative payments company that has been having big wins in the retail space is Bill Me Later, which is in itself a revolving credit facility. For the reasons discussed above, it will be interesting to see what happens to them.