It was just reported by a major credit report agency that Americans had an 11% drop in credit card usage. Of the 70 million users the previous year, 8 million have dropped off the radar. At first glance Merchant Cash Advance funder might think they are in trouble with their expected payment stream quickly dwindling but these statistics require further investigation. For example, there were headlines over the past year about how much debt the U.S. consumer was "paying off" but when you dug into the numbers the reality was, the cause of this drawdown in debt at the aggregate level was almost entirely due to a huge swathe of people defaulting on debt.More than 8 million consumers stopped using credit cards over the past year. About 62 million people now have an active card, compared with 70 million a year ago. The decline stems from a combination of consumer choices and bank actions. An analysis by credit reporting agency TransUnion found that use of general purpose credit cards bearing MasterCard or Visa logos, or issued by Discover or American Express, fell more than 11 percent in the third quarter, compared with the July to September period last year. The Chicago-based company found that consumers in the subprime category, or those with low credit ratings, were believed to be without cards mostly because they were shut down by banks after payments fell behind or balances were written off. "One can quite reasonably infer that's not voluntary," said Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit. Banks have written off record amounts of credit card balances in recent years.
But a significant portion of the decrease in card usage reflects decisions by cardholders to stop using credit, Becker said. "They're simply either not purchasing as much or paying down balances." Many of these individuals may have shifted to using debit cards. In the past several years the use of debit cards has grown steadily and now surpasses credit card use in both the number of transactions and dollar volume. Interest rate increases by credit card companies and reduced credit lines have contributed to that trend.
The good news for funders like American Finance Solutions is that almost all credit and debit card transactions are used in capturing the expected payment stream from our clients. So in reality the economics of the merchant cash advance appear to be virtually unchanged. This is good news for the funding companies, agents representing the products and the merchants accessing the financing since there are no significant changes to the expected payback one should expect approvals, underwriting and access to capital to remain consistent.
