Reconciling Consumer Crosswinds

Frequently, in his space, we discuss both the online and offline retail spaces as Mpayy's secure online shopping system relies first and foremost on the consumers' willingness to go shopping. However, beyond transactional data released by the Commerce Department and Comscore, there are other tea leaves that we can read to get a view into the consumer's plight.

Today we look at real estate and credit card transactions.

Underwater Real Estate

Zillow.com is an innovative online real estate research and data website that provides holistic views into cities and neighborhoods for consumers. Home-shoppers use the site to look at purchase data of homes near the addresses the potential buyer is considering. To do so, Zillow has to track publicly available purchase data nationwide.

Zillow released its Real Estate Market Report yesterday. According to Dr. Stan Humphries, Zillow's vice president of data and analytics, ""The second quarter is the sixth consecutive quarter of home value declines and we see little promise of turnaround in the short-term as the rates of decline have yet to slow and, in fact, actually accelerated in many markets. The high rates of negative equity are having a direct effect on home sales figures as we've seen considerable growth in foreclosure transactions and homes selling for a loss." His prognosis is not rosy, predicting that "most markets are likely to remain in negative territory for the next few quarters given the magnitude of current year-over-year declines."



Zillow's press release mentions, "For example, 32.7 percent of homes sold in the second quarter were sold for a loss and 18.6 percent were foreclosure sales compared to the year-ago quarter when the rates were 12.2 percent and 7 percent respectively."

In other words, the investment with the best track record of creating wealth, and most home-owners' largest investment is now a massive liability with exit scenarios that force a loss. Most home-owners save up for a substantial period of time before purchasing a home, and it will take time after those losses are booked before those folks are back in an equally financially healthy position they were before the purchase. This will have material consequences for discretionary spending for the foreseeable future.

Growth in Expenditures Benefits Payment Processors

Amidst the consumer damage resulting from the bursting of the real estate balloon, billions have been written off the balance sheets of banks related to illiquid auction rate securities, foreclosures, losses on home sales and defaults on credit card balances, there is significant strength among the payment processors. The American consumer continues to spend.

The chart below displays the payment processors versus the pure play credit card issuers.



However, the pure play payment processors are exhibiting unbelievable growth. MasterCard has skyrocketed over the last year, and Visa has demonstrated incredible strength since its IPO earlier this year. Visa demonstrated 8% year over year volume growth in its credit card volumes in the US and 28.5% in the rest of the world. Visa also reported more significant strength of 13.6% in its debit card volumes in the United States.

Mpayy's secure online payment processing system is a debit instrument that allows shoppers to pay online with their checking accounts. Mpayy saves the retailer money, guarantees payments and eliminates fraud liability. Shoppers receive enhanced security and cash back guarantees on top of expanding their ability to send money to their friends and family for free anywhere in the US.

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.

I'm getting charged for whaaaaa!?!?!

MSNBC's Red Tape Chronicles has an entry today that is burning up the blogosphere to the tune of 77 pages of comments when printed as a text document. The discussion is related to fees incurred through Debit Card purchases made with PIN numbers. In other words, these fees result from your keystroking your PIN at checkout in a bricks and mortar store rather than using it as "credit", which simply means you authorize the transaction by signing a piece of paper.

The distinction is related to the interchange fees I wrote about yesterday. Bob Sullivan quotes Gartner's Avivah Litan analyst that:

"a bank will take in perhaps 20 cents from a merchant for a $100 PIN-debit purchase, but $1.48 for a signature debit purchase in the same amount. In general, banks can make up to 50 cents on PIN transactions, with the fee capped. But banks can rake in up to 2 percent of signature-based transactions, a potentially huge haul."

In other words the interchange fees related to the pseudo-credit transaction allow the credit card issuing bank to charge fees to the merchant, who will raise the prices of the goods you're buying. As a result, the bank is making up for lost payments from the merchant by charging you anywhere from $0.25 to $1.00. Either you'll pay the fees in lieu of the merchant, or else you'll shift back to using credit.

Given the frequency with which Debit card users actually use their cards, this is definitely something to be on the lookout for. Mpayy will solve these problems with NO FEES EVER for consumers, and offering CASH BACK and a HIGH-YIELD REWARDS program that can be used as cash anywhere Mpayy is accepted. The ability to will only come when you PAY THIS WAY, and merchants will only let you do if you INSIST ON MPAYY.

About those Frequent Flier Miles...

One of the primary benefits Mpayy's payment system will offer to merchants is savings vis-a-vis credit card processing - both in the base rate, and the consistency of rates. This will stand in stark contrast with the variable interchange fees that are charged by the major credit card networks on an industry-by-industry basis, according to Zhu Wang in the Payments System Research Department at the Kansas City Fed. (See paper here)

According to a Diamond Technology Consultants, 44% of interchange costs go to pay for Rewards programs, while none of it is passed onto the merchants. Further, merchants are likely to pay 3% for association branding costs, while the interchange costs comprise only 14% of the fee.

Those rewards programs, also do not go on to necessarily benefit the consumer. A recent comment from Conde Nast Portfolio.com (@ MSNBC) report notes:

The basic American AAdvantage MasterCard issued by Citibank carries an annual fee of $50, the interest rate on purchases is more than 17 percent, and the cash advance rate is north of 22 percent.

In other words, the consumer and the merchant split the bill on purchasing airline miles through credit card fees. Merchants are paying through the aforementioned interchange fees, of which there are an estimated more than 100 different rates. Similarly, consumers are paying annual fees and virtually usurious interest rates to make purchases that may not even be worth the bytes they are stored in. The story continues:

"For example: Continental Airlines last month announced a wide-ranging increase in the price of its best awards. The number of miles required to get a free first-class domestic ticket rose about 11 percent; the cost in miles for some international business-class seats rose by 25 percent."

Mpayy to the Rescue

Mpayy will offer users a 100% free service to make purchases. In fact, it will be even better than that providing a network through which consumers can make purchases for $0.99 on the $1.00, and we are working on a universal rewards program that will be available to be used as cash anywhere Mpayy is accepted. Members can transfer moneys among themselves as much as they like... there is simply no reason to pay 15% interest on that online t-shirt purchase.

For merchants, Mpayy will offer rates that start well below credit card rates and go only lower depending on the volume offered. There will be no hardware required. Mpayy will never withhold merchant funds should merchants find themselves in violation of some unpublished Kafka-esque rules. All of this, plus, Mpayy will assume 100% of transaction fraud risk removing the burden of maintaining secure credit card information allowing companies to focus exclusively in their wheelhouse.