New Indicators Are Giving Us a Sense of Where We Are Headed…For Now
At the macro level, the uncertainty under the current pandemic is great, and predictions are difficult. Physicians are still discovering new ways the COVID-19 virus is behaving. And it is unclear how well we will deal with local flare ups or a broader second wave. On the economic side, we are in equally uncharted territory. While governments have provided unprecedented relief and central banks have massively injected liquidity to ensure the functioning of financial markets, we don’t know yet how resilient families and businesses can be in face of extended lockdowns and a deep economic downturn.
At the macro level, the uncertainty under the current pandemic is great, and predictions are difficult. On the economic side, we are in equally uncharted territory. We don’t know yet how resilient families and businesses can be in face of extended lockdowns and a deep economic downturn.
At the sector level for retail financial services, short- to medium-term trends can be more easily predicted. As large parts of the world are under stay-at-home orders and trying to move online, people will seek accelerated access to digital payments. They will be more conservative with their spending, and spending priorities will shift. In the face of uncertainty, people will try to save more if they can and seek out different insurance where available. For borrowers and lenders alike, loans that were extended pre-COVID under different assumptions will come under stress, and everyone will be careful with new credit against the backdrop of economic hardship.
The series of recent 2020 quarterly earnings calls, in particular in the U.S., where more of the firms with relevant data are standalone public companies and thus provide such information, is giving us a sense of where we are headed…for now. [click to tweet]
- People are moving online for payments. For PayPal, the number of net new online accounts in April was 7.4 million — twice as much as their previous best month. Friday, May 1, was the highest transaction volume day for PayPal ever. Mastercard reported that in April, “card-not-present” transactions, i.e., those where the merchant did not see the card physically, for the first time exceeded more than half of total.
- People spend less and on different things. Visa reported for the month of April a drop in card transaction volume of 19% — more so on credit cards (-31%) and less on debit cards (-6%), which are often used by younger and lower-income consumers that have less discretionary spending power. Bank of America data shows spending on groceries up by ~15% for April and online retail up ~80%, with spending on travel down nearly to zero and on restaurants down ~50%.
- Credit is under pressure. On the unsecured consumer lending side, LendingClub reported a slow down at the end of the first quarter and is expecting lending volumes to be down by 90% for the second quarter of 2020. On the small business side, Kabbage announced that it stopped all new lending not associated with SBA-guarantees and even canceled existing lines of credit.
- People want to actively manage their money. While market volatility makes investing hazardous, retail investors opened new accounts in large numbers. Charles Schwab reported a record 280,000 new accounts for March. Savings and investment apps such as Acorns, Robinhood, and Stash all reported new user spikes. Federal Reserve data indicates that U.S. household savings rates are up.
- Risk perceptions are shifting. The pandemic has impacted insurance demand. Brokers report an April increase of 30–50% in applications for life insurance, while insurers are getting jittery and increasing premiums or stopped new business altogether. At the same time, auto insurers have pledged a premium rebate, partly because they can (since miles driven dropped by some 50% during the mid-March to mid-April and consequently, there were fewer accidents) and partly because they fear their customer might otherwise bolt.
These trends seem to be replicated globally. In India, for example, credit card purchases fell similarly by 30% during the first two weeks of the lockdown, while consumer interest in insurance on the leading online portal was up 30–40%. Our own portfolio experience mirrors these trends, and companies are accelerating or adapting their plans accordingly. Challengers banks in our portfolio such as Chime in the U.S. or Neon in Brazil are experiencing a surge in sign-ups. InsurTechs such as MicroEnsure in Pakistan or Gramcover in India are already distributing critical illness, hospitalization cash coverage for COVID.
On the credit side, which in our case is largely in emerging markets, the performance of the loan book that was originated pre-COVID is still uncertain. A number of countries put loan payment moratoriums in place, so the impact of the lockdown has not yet played out. In a deteriorating economic environment, non-performing loans in the existing book are bound to go up. But even under protracted economic slowdown, new credit is needed and certain forms are less risky to underwrite, for example, point-of-sale credit for consumers as in the case of ZestMoney in India, which is subsidized and de-risked by merchants keen to stimulate demand.
In the medium term, the economic outlook could get worse before it gets better. Particularly worrisome is the mortgage market and its broader implications if people are unable to make their housing payments over several months. In the long term, the pandemic will eventually be overcome and economies will recover. As to their financial services providers, people will remember how they showed up in the time of crisis. The companies that truly put their customers first and were able to help them better cope with a very tough situation and improve their economic outlook under very difficult circumstances will emerge the stronger for it.
