Into the Black Hole

The U.S. consumer debt total rose for yet another month in January of this year, the Federal Reserve told us in its latest consumer credit data release on Friday. This was also the 29^th consecutive monthly increase. Following a downwardly revised $15.9 billion increase in December, the January total rose by $13.7 billion — less than expected.

As has become the norm in the post-Lehman years, January’s aggregate consumer debt growth was exclusively the result of yet another big rise of its non-revolving component and, especially, of the auto and student loan totals. The growth of the former total has been fueled by the ongoing economic recovery. The latter, however, has relentlessly kept increasing through crisis, recession and recovery alike.

The unrelenting rise of the federal student loan total had slowed down substantially at the beginning of 2013, which was welcome news, considering the huge expansion it had undergone over the past decade, and especially in the past five years, as you can see in the relevant chart further down. In turn, that growth, paired with a stubbornly high unemployment rate, has caused the student loan charge-off and delinquency rates to spike, a process which is not only ongoing, but is likely to intensify as the year progresses, even as the economy continues to recover.

In a reversal of December’s developments, when the credit card debt total spiked by the largest amount in seven months, January total fell, albeit modestly. Furthermore, December’s spike was downwardly revised by a substantial amount. By the way, that has been one of the most characteristic stories of the post-Lehman period: every single time we’ve had an unusually large monthly increase in the revolving total, it has been immediately reversed in the following month or two. And this is why, even with the only partially reversed December spike, that total is negligibly higher than the peak reached at the end of 2008.

Last month I wondered whether it was possible that the post-crisis era of subdued credit card debt accumulation was finally over and that the December increase in revolving credit indicated that Americans had rediscovered their penchant for a more liberal credit card use. After all, I noted, the economic recovery had been gaining ground and the unemployment rate just keeps falling. Not to mention that Americans now have much healthier credit card accounts than they’ve had in decades. And the trend of record-low and falling credit card delinquency and charge-off rates and record-high and rising monthly repayment rate (MPR) has continued in the first two months of this year, rendering the absolute debt level mostly irrelevant.

Well, despite all that, last month I admitted to having no idea whether we had turned a corner on credit card spending and now January’s data indicate that the December splurge may have been just another blip. But let’s take a closer look at the latest Fed data...

MasterCard has just released its second annual analysis of the mobile payments-related conversations it tracks on various social media platforms. This time, however, the pool of analyzed data is vastly larger than it was in the first iteration of the survey. The payments company tells us that it, in cooperation with Prime Research, a PR consultancy, had tracked “more than 13 million social media comments across Twitter, Facebook, online blogs and forums around the world”, compared to only 85,000 conversations in the first study.

The researchers’ objective is to determine what consumers across the world — both adopters and non-adopters — feel about mobile payments. And they find that sentiment toward mobile payments has improved considerably and consumer usage has grown, as has merchant acceptance. Merchants have scored an 88-percent positive rating among consumers, MasterCard tells us, and many of them are touting m-payment acceptance as a competitive advantage. Their conclusion: as consumers are increasingly turning to mobile payments, merchants who fail to accept such payments may find themselves at a disadvantage.

The researchers have illustrated their findings in a nice infographic, which I thought I’d share with you...

That is the question tackled by The Economist in a recent article and Accenture — a consultancy — in a new paper. And it is a very fashionable topic, one that is only likely to attract ever more interest in the coming years. Both The Economist and Accenture note — and this is the generally-accepted view — that a revolution is under way that is transforming the way banking is done. Accenture predicts that “by 2020 an estimated 15 percent of traditional banks’ revenues could shift to online-only players, including branchless banks and new technology entrants”. That is huge and yet it may well turn out that the researchers’ prediction falls short of the real figure.

But the more interesting question, to me at least, is who stands to benefit the most from the ongoing banking revolution. Well, here too the views of The Economist and Accenture converge. On the one hand we have a host of nimble start-ups, like Simple, which are flooding the digital banking space, signing up huge numbers of very active users under the banks’ very noses. At the same time, the traditional players already have millions of users who, as The Economist reminds us, tend to stay put. Moreover, the barriers to replicating digital banking technology are low, which means that the cool new apps developed by Simple and other start-ups can be (and often are) quickly copied by banks.

Naturally then, both reports conclude that a winning strategy would involve some kind of a merger of the strengths of the two sides of the conflict. The most likely scenario — and the one outlined in The Economist’s piece — would involve the acquisition by an established player (BBVA, Spain’s second-largest bank, in the article’s example) of a promising upstart (Simple, in the same example).

But isn’t it possible that a well-capitalized start-up may be able to take on the banks on its own and succeed? Well, it is certainly not impossible: PayPal did it a decade and a half ago in the payment processing space and Square is now following in its footsteps (although Jack Dorsey’s start-up may now be in trouble). Yet, these two names (one and a half, really) have all but depleted our list of success stories on the scale we are discussing here. Moreover, there isn’t a purely banking start-up that I know of, which is anywhere close to being as well-capitalized and ambitious as the two just mentioned. So, with that in mind, let’s take a look at how a winning combination would look like...

That is the inescapable takeaway from the latest State of the Industry Report, just released by the Mobile Money for the Unbanked (MMU) program, run by the GSM Association (GSMA), an organization for the promotion of the GSM mobile telephone system, and supported by the likes of The Bill & Melinda Gates Foundation and MasterCard. The mobile money industry continues to grow very fast and is expanding across more regions, with 52 markets now boasting two or more mobile money services.

And yet the majority of services remain in Sub-Saharan Africa. The researchers tell us that, in 2013, airtime top-up and person-to-person (P2P) transfers, which are the domain of Kenya’s M-Pesa — the biggest mobile money success to date — have remained the most adopted services.

And there is nothing particularly inexplicable about Africa’s continuing dominance of the mobile money’s market. As we’ve noted many times before, consumers in the U.S. and other developed markets never really warmed up to M-Pesa-like money transfers, simply because we have too many other payment options, which are either more convenient, cheaper or otherwise preferable. That, however, is not the case in most of Africa, where people in rural villages are cut off from even the most rudimentary of banking services. This is why M-Pesa has been so successful in Kenya and in other developing countries. In essence, M-Pesa has brought basic banking to people who’ve never had it.

Small surprise then that MMU’s report is now telling us that mobile money services are spreading through the developing world like wild fire. Let’s take a look at it...

Regular readers will not be surprised to learn that I love data and statistics. So much so that every time I look at an issue, the first thing I do is to try and put numbers on the various pieces under consideration. I feel very uncomfortable when such numbers cannot be found or are of dubious reliability. Fortunately, we live in an age when data are usually freely available and easily accessible, so I am seldom frustrated.

And that brings me to the subject at hand: Square has reportedly postponed its Initial Public Offering (IPO) indefinitely. The reason, according to FOX Business, which broke the news, is that “the company has run into problems with its “revenue run rate,” a key projection of future performance”. The rate in question is merely an estimation of a company’s annual revenues, made by extrapolating current trends. So, if a company brought in $100 million in revenues in its latest quarter, its run rate would be $400 million.

This is big news! And, if the report is correct, it certainly sounds as though Square is in real trouble — and it is not that the processor is not making money. It is unprofitable, yes, but that is neither news nor is it, on its own, a reason for Square’s investors to run for the hills: they know and accept that the start-up’s immediate objective is not to make money, but to grab as big a share of the market it created, as possible. If this goal is successfully accomplished, and the opponents are consequently defeated, profits will follow.

No, the cause of the trouble is much scarier: Square seems to have lost the confidence of its own employees. FOX tells us that the processor has “recently released one million secondary shares, meaning that many Square employees have opted to sell their stake in the company”. And if Square’s own employees see no brighter prospects for the start-up’s future, why should the rest of us be any more excited about it?

Incidentally, this news came at a time at which I was still making my way through American Express’ Advanced Payments Report, which tells us that start-ups are ranked last by consumers among the “players most likely to drive growth in mobile payments”. What’s going on? Well, let me offer a couple of observations...