summitV I E WWill the Recession Have summit creek capitala Lasting Impact on How So, consumers are not turning to debt toConsumers Pay for Things? fund their purchases anymore, and in fact are purchasing less. Not exactly big newsThere is no question that the American economy is for anyone who pays attention. The news summitVIEWdriven by consumer spending. A full 70% of GDP is the way that consumers are reducingis dependent on the buying of goods for personal their debt load: default. Definitely not theconsumption. So important is this segment of the healthy way to unwind bloated householdeconomy that in the aftermath of the 9/11 attacks balance sheets, and sure to damagePresident George W. Bush urged US citizens for creditworthiness long after joblessness and“continued participation and confidence in the income flow have been remedied.American economy.” The clear implication: keepshopping or the terrorists win. It seems crass What is the point of this depressingand tactless, but the buying of stuff is the largest diatribe? Consumers are still going to buycomponent of the largest economy in the world. That things, even after they have defaulted on 1is the reason GW pushed it after 9/11, and also the their loans, but the way they will pay forreason consumer deleveraging has become such a them is going to change.hot topic as the US adjusts to the New Normal in the Oct.wake of the global financial crisis. As pointed out above, credit cardsThe American consumer is suffering from a credit have become 2010hangover. The real wage earned by workers has an immenselyessentially been stagnant since the late 1970’s, popular way tomeaning the purchasing power of take home pay pay for goods andhas not changed in 30 years. Yet at the same time, services - and notconsumer spending has risen from about 63% only because itto over 71% of US GDP. Fueling this seemingly is a buy now payincompatible wage and consumption trend has been later transaction.low interest rates and increased access to credit of How muchall types: cash out mortgage refis, credit cards, store more convenient is it to swipe a card atcredit, auto loans, etc. Using debt was ubiquitous, a terminal than fumbling around witheasy and considered savvy. Oh how times have greenbacks? And who among us is notchanged. supremely annoyed at ending up with a pocket full of coins (I can’t be the onlyThe outstanding debt held by US households was on one)? The technological advances, alongan exponential growth curve from the 1970’s right with the expansion of access to credit,up until the onset of the financial crisis in 2007-08. fueled the growth of paying by card forThe continual loading of debt to fuel consumption almost any transaction. With the credit halfhas hit an inflection point, and consumers are of that equation drying up, will consumerscertainly not taking on more debt, and likely have switch to cash? Not likely, especially whenbegun a long, slow process of unwinding the debt the same point-of-sale infrastructure can bethey do hold. Woody Brock sums up the subject: utilized by debit and other cards.Basically, we are witnessing the end of 35 years of The reason the American economybinge-borrowing, of over-consumption, and of under- works (most of the time), is because itsaving. Economic agents of all stripes are cutting back is adaptable. The Invisible Hand almostand becoming more conservative — from overextended magically allocates resources to theirmuseums with their copy-cat expansions, to pension most productive use. This process offunds that overpromised benefits and under-funded creative destruction is constantly at workliabilities, to loony state and local government expansion, all across the economy, all the time. Oneand to individual citizens confronting the depressing area we have been paying attention totriad of wealth loss, runaway medical costs, and is the payments market. This space hasjoblessness. undergone a large shift recently away see disclaimer on last page from writing checks and using cash to
summit creek capital paying with plastic, both debit and credit. Now with credit harder to come by,summitVIEW and consumers less willing to take it on, markets are looking for new ways to make it easier for consumers to spend money. There are several factors that are2 accelerating the changes taking place in how people pay forOct. 2010 things: the Internet & Cloud Computing, the proliferation of smartphones (and other mobile devices such as the iPad), and the consumer credit situation. The first three are clearly related, and the fourth will definitely affect how consumers approach transactions. The question is how all marketplace in China and the dominance of the of them will combine in coming years. Summit domestic market by competitor Alibaba, PayPal has Creek Capital’s research on eBay provides good experienced rapid growth in transactions between examples of how changing consumer patterns China and the rest of the world. By seeking to will affect the global payments market: expand in the current environment of economic uncertainty and potential, exponential growth in In the wake of the global financial crisis, payment e-commerce, eBay is well positioned relative to volumes have experienced a decline, and political incumbents in the global payments industry. pressure is being exerted on payment processors by consumer advocacy groups. A New York Times Consumers are expected to keep consuming, but article at the beginning of 2010 highlighted some with more budget-consciousness in their spending of the dubious practices that Visa and MasterCard habits: seeking better prices; paying with money engage in to proliferate their networks, and they have instead of using credit. eBay has taken Elizabeth Warren’s appointment to the Consumer note. The recent acquisition of Red Laser shows Protection Agency and the Durbin Amendment that the company believes consumers will utilize the are both signs of shifting sentiment against barcode scanning technology on their smartphones large payments processing firms like Visa and to become more efficient comparison shoppers. MasterCard. As these companies begin to lobby Also, eBay’s partnership with Green Dot seeks to and navigate pending legislation and uncertainty, translate consumer’s shrinking access to credit to the growth in worldwide transactions and online spending power, by enabling customers to e-commerce continues, opening doors for eBay’s add money to their PayPal account without using a PayPal to capture market share. Though no bank. Coupled with protectionist consumer policies stranger to regulatory hurdles and unsuccessful that will reduce incumbent interchange fees the ventures in foreign markets, PayPal continues to increasing use of efficient purchase technology position itself for global growth in the payments points to growth for PayPal’s service, while reduced space. Despite the lack of success of eBay’s interchange fees improve eBay’s operating margins.
This specific quote, while clearly speaking toeBay and PayPal’s relative merits, also points tolarger themes that will affect consumption across their RushCard, or other prepaid card, via directthe world. Just as a small example, RedLaser is deposit. A few words (verbatim) from the man,an app that is downloadable to a smartphone. A Russel Simmons, on why he thinks the RushCardshopper can scan a product’s barcode with the is so important: summitVIEWphone’s camera, and the phone will display moreinformation on the product as well as prices America operates onon the same product at different stores. Pretty plastic. If you don’tdamn savvy, and a neat little example that ties have any kind oftogether our themes of utilizing a smartphone card, you’re lockedto access cloud computing power in order to out of the Americanmake a more informed decision on how much dream. You can’t gomoney to spend. In fact, eBay is so bullish on to the Internet andthis technology and PayPal’s mobile payments buy nothing, youoption, that CEO John Donahoe says that a few 3 can’t order nothingyears from now we’ll be making more purchases over the phone, youwith our cellphones than from our wallets. can’t rent a hotel Oct. 2010 room.While scanning barcodes and paying for goodswith a smartphone are incredibly appealing While prepaid(hopefully we’ll never have to carry wallets cards are generallyagain! - did I mention I hate coins?), to be targeted towardsperfectly honest these innovations will not be people who doutilized by all segments of the population. A not have thesignificant, and unfortunately growing, segment The above ad is a great example of what credit history forof the US population will continue to be stuck in Summit Creek Capital is discussing. a regular credita cash based economy, without the means to buy card, or evena smartphone, or even open a bank account. the cash for a bank account, they have been gaining more acceptance and use among middleOne area in particular, where it is impossible class consumers who would have traditionallyto use cash, is online shopping. Online retail turned to credit or debit cards. One other not-is currently the fastest growing segment of so-encouraging sign of continued growth in theretailing, and for the most part transactions prepaid market: the US Government uses prepaidhappen with cards or some other payments Visa cards to make transfer payments (such assystem, i.e. PayPal. It is not just online retail, food stamps & welfare) to those on governmentbut also online bill paying that is making assistance programs. Unfortunately for thehaving a card not just a convenience, but economy at large, the use of that type of prepaidalmost mandatory. So what is a debt-burdened card does not look like it will slow down anytime(or debt-free but credit score challenged) soon.individual to do? Well there is another area thatis experiencing rapid growth: prepaid credit and The changing behavior of the American consumerdebit cards. and the trends in global consumerism are examples of the type of macro themes that we arePrepaid cards offer the ability to pay with plastic focusing on at Summit Creek Capital. While it isto anyone. In most cases, you don’t even need important to stay informed about current events,a bank account. Some cards even function like the confused economic environment is far froma bank account. The RushCard is a prepaid resolving itself, which strengthens our resolve toVisa card brought to life by the same visionary keep our focus forward on nascent trends thatwho put together the legendary hip-hop group are likely to have an impact in the new globalRun DMC. The RushCard functions just like a economy. We will continue to share these themesregular Visa card, except the entire spending and ideas with our clients and colleagues.allowance is loaded on the card in advance - nocredit is extended and it does not siphon moneyout of a bank account. Users even have theoption to transfer their paychecks directly ontoDisclaimer: All material presented herein is believed to be reliable but we cannot attest to itsaccuracy. Neither the information nor any opinion expressed constitutes a solicitation by us for thepurchase or sale of any securities. www.summitcreekcapital.com