Phantom debt is having a 'seismic impact' on consumer credit

US credit card debt hovers around $1.12 trillion for the first-quarter of 2024, according to the Federal Reserve Bank of New York, also finding 15% of Gen Z consumers to have maxed out their credit cards. Parallel to consumer trends, retailer Macy's (M) reported credit card delinquencies to have risen 8.9% in the last year while more "buy now, pay later (BNPL)" borrowers are late on their payments.

Splitit CEO Nandan Sheth sits down with Brad Smith on Wealth! to discuss the "phantom debt" in credit markets perpetuated by BNPL plans. Phantom debt is traditionally characterized as old, forgotten, already defaulted, or debt that does not exist that collectors still seek repayment for, which in this case is specific to BNPL payments that aren't closely monitored by credit agencies.

"We just did a survey and it noted that one-third of individuals that sign up for a 'buy now, pay later' plan do not know that they're originating a new loan. And as you know, those plans are not being reported to the credit bureaus, so it's hidden from the ecosystem," Sheth says. "You probably also noticed today... that the CFPB announced that they're going to regulate 'buy now, pay later' on par with credit cards, which tells you that we need more responsible lending in this space."

For more expert insight and the latest market action, click here to watch this full episode of Wealth!

This post was written by Luke Carberry Mogan.

Video transcript

Well, credit card debt in the United States has never been higher.

With the latest figures from the New York fed putting total credit card debt at $1.12 trillion.

That same study shows that 15% of Gen Zers have maxed out their credit cards.

So how did this all happen?

Analysts at the New York fed attribute some of this to young adults who on top of the inflationary costs that we've all been feeling are being burdened with very high student debt factor in shorter credit histories and the lower credit limit and you get more extra maxing out their cards or missing payments to help us understand why this trend is happening and what can be done about it.

We've got Naon Scheff, who is the split it ceo All right, we're gonna get to your business in a moment here, Nan and, and thanks so much for hopping on with us, but you hear figures like this.

What goes through your head?

Firstly, thanks for having me.

The real story.

Brad is the Phantom debt that's in the market today that's driven by buy.

Now, pay later plans and programs.

There's $50 billion worth of that debt that's unreported.

And because it's unreported, it has a ripple effect on credit card repayments and exaggerates the situation that is certainly fueled by inflation and high interest rates.

How does this have a longer term ramification as well?

On the credit worthiness for uh a large group of a generation, if you will, that is now having some of these maxed out credit cards impact their scores, I think uh I think it's gonna have a seismic impact.

Uh We just did a survey and it noted that one third of individuals that sign up for a buy now pay later plan do not know that they're originating a new loan.

And as you know, those plans are not being reported to the credit bureaus.

So it's hidden from the ecosystem.

You probably also noticed today.

Um in line with your question that the CFP B announced that they're gonna regulate buy now pay later on par with credit cards, which tells you that we need more responsible lending in this space.

Ok.

So let's go a little bit more into your business as you know, as a player within this by now, pay later or split it into payments type of space.

What's different about split it versus some of the other comparable industry competitors.

A lot of people might think about a firm or a Klarna or something like that.

Very, very fine and formidable competitors.

We're very different Brad.

Um that the primary difference between us and other buy now pay later is we're not originating a new loan and because we're not originating a new loan, we're using existing credit that consumers have on their credit cards.

So if you try to make $1000 purchase and you don't have enough of a credit limit, we, we won't approve you for the transaction.

And as such, we feel that we're a lot more responsible because we're already governed by the credit card regulations and the fact that we're not allowing consumers to what's called loan stack, I think makes our proposition a lot simpler and a lot more responsible for consumers have mansions.

And so that considered as well, what, what is the revenue model or, or even the profitability pathway look like for, for sustained profitability for split it.

Yeah.

So because we're not spending millions of dollars on marketing and our write offs are significantly lower because we're not originating new loans.

We have a very clear pathway to profitability.

Number one, all of our installment plans are 0% to the consumer.

We only charge the merchant and the merchant offers the 0% plan to the consumer.

So based on our volume, based on our trajectory, we're very confident that within an 18 month period will be profitable.

Um Number two, because our revenue model does not uh focus on consumer fees and hidden fees.

It's uh much more.

Um uh but it it's it's much easier for merchants to adopt and ensure that their consumers are getting a very fair buy.

Now, pay later program on their websites.

Naon Scheffer was the split it, Ceo Naon.

Thanks so much for taking the time here with us today.

Really appreciate it.

Thanks Brad.