Source: Wall Street News

Why does the highest interest rate in more than 20 years seem to have put much resistance on Americans' consumption? Perhaps the answer is that some undisclosed “ghost debt” supports Americans' expenses, but also sows the seeds of disaster.

According to recent media reports, the increasingly popular “buy now, pay later” (BNPL for short) model has created a large number of hidden debts, making it more and more difficult for the Federal Reserve and Wall Street to grasp the actual economic situation, affecting economists' judgment on economic prospects and interest rate trajectories.

What is BNPL?

BNPL is a shopping model that allows consumers to pay later and pay in installments. American companies that provide this service include Affirm, Klarna, and Afterpay under Block.

Although it sounds very similar to China's Ant Huabai and Jingdong Baijiao, the difference is that consumer finance services on Chinese e-commerce platforms also need to be incorporated into the credit reporting system like bank credit information, while the US BNPL platform does not need to report to credit reporting agencies, so it is highly opaque.

Since the platform does not publish data, there is no way to calculate the exact size of the BNPL debt. According to Adobe Analytics estimates, online shoppers in the US spent about $19.2 billion using BNPL loans in the first quarter, an increase of 12.3% compared to the same period last year.

BNPL services became popular during the pandemic through methods such as interest-free installment payments, and particularly attracted young digital consumers. Critics believe, however, that these services are particularly tempting for people with financial difficulties. Edde Haan, professor of accounting at Stanford University, told the media that the BNPL “makes it easier for people to fall into debt, and the lack of transparency makes this situation even more serious.”

According to data collected by the polling agency Harris Poll, 43% of BNPL users are in arrears on payments, and 28% are in arrears on other debts due to using these platforms. Middle-class families are also heavily dependent on these services. The poll found that 42% of households with an annual income exceeding $100,000 had their BNPL services overdue.

Of the respondents using BNPL, more than half said that BNPL made them buy more than they could pay, while nearly a quarter thought their BNPL spending was “out of control”. The survey also found that 23% of users said they couldn't afford most of their shopping expenses without installments, while more than one-third of users only resorted to BNPL services after a credit card overdraft.

Some BNPL services automatically deduct funds from user accounts, which may result in overdraft fees. Furthermore, users of the BNPL platform who pay on time will not improve their credit score, but if payment is delayed, they may be sued, which will have a negative impact on credit.

The US Consumer Financial Protection Agency also warned that the BNPL service poses many potential risks, including late fees, hidden interest rate expenses, and loan support.

Hidden debt obscures US economic prospects and affects interest rate trajectory judgments

For a long time, the BNPL service platform has refused to cooperate with the three major US credit reporting agencies to disclose data on these ghost loans, claiming that the latter cannot properly handle these microfinance data, and that disclosing information may damage consumers' credit scores.

What is particularly critical is that the opaque nature of the BNPL may have misled the Federal Reserve and Wall Street analysts in judging the US economic situation. Under stubbornly high inflation, most traditional economic indicators point to insufficient consumption momentum in the US; in reality, the opposite is true. So much so that economists and traders have had to repeatedly reverse their predictions of a slowdown in economic growth and the Federal Reserve's interest rate cuts.

Strong consumer spending and low unemployment have convinced many economists that American consumers are resilient, but the truth is that they may just be spending with ghost loans that aren't included in the statistics.

Financial blog ZeroEdge pointed out that for the Federal Reserve and Wall Street, it is already difficult enough to use existing data to understand the post-pandemic economy. The existence of ghost debt further conceals the full picture of the financial health of American households, making it more difficult for economists to judge economic prospects and interest rate trajectories.

In addition to ghost debts such as BNPL, explicit debt also reveals the potential risks faced by US consumer credit. A report released by the Philadelphia Federal Reserve last month showed that in the fourth quarter of last year, the US credit card delinquency rate hit a record high. As of the end of December last year, nearly 3.5% of credit card balances were overdue for at least 30 days. This is not the highest level since 2012, up about 30 basis points from the previous quarter. The ratio of 60- and 90-day overdue dates also increased. Nominal credit card balances hit a new high, and credit card usage also rose as consumers further expanded their credit lines. The inflation-adjusted credit card balance is still below the level of the fourth quarter of 2019.

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