1. summitV I E W
Will the Recession Have summit creek capital
a Lasting Impact on How
So, consumers are not turning to debt to
Consumers Pay for Things? fund their purchases anymore, and in fact
are purchasing less. Not exactly big news
There is no question that the American economy is for anyone who pays attention. The news
summitVIEW
driven by consumer spending. A full 70% of GDP is the way that consumers are reducing
is dependent on the buying of goods for personal their debt load: default. Definitely not the
consumption. So important is this segment of the healthy way to unwind bloated household
economy that in the aftermath of the 9/11 attacks balance sheets, and sure to damage
President 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: keep
shopping or the terrorists win. It seems crass What is the point of this depressing
and tactless, but the buying of stuff is the largest diatribe? Consumers are still going to buy
component of the largest economy in the world. That things, even after they have defaulted on
1
is the reason GW pushed it after 9/11, and also the their loans, but the way they will pay for
reason 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 cards
The American consumer is suffering from a credit have become
2010
hangover. The real wage earned by workers has an immensely
essentially been stagnant since the late 1970’s, popular way to
meaning the purchasing power of take home pay pay for goods and
has not changed in 30 years. Yet at the same time, services - and not
consumer spending has risen from about 63% only because it
to over 71% of US GDP. Fueling this seemingly is a buy now pay
incompatible wage and consumption trend has been later transaction.
low interest rates and increased access to credit of How much
all types: cash out mortgage refis, credit cards, store more convenient is it to swipe a card at
credit, auto loans, etc. Using debt was ubiquitous, a terminal than fumbling around with
easy and considered savvy. Oh how times have greenbacks? And who among us is not
changed. supremely annoyed at ending up with
a pocket full of coins (I can’t be the only
The outstanding debt held by US households was on one)? The technological advances, along
an 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 for
The continual loading of debt to fuel consumption almost any transaction. With the credit half
has hit an inflection point, and consumers are of that equation drying up, will consumers
certainly not taking on more debt, and likely have switch to cash? Not likely, especially when
begun a long, slow process of unwinding the debt the same point-of-sale infrastructure can be
they 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 economy
binge-borrowing, of over-consumption, and of under- works (most of the time), is because it
saving. Economic agents of all stripes are cutting back is adaptable. The Invisible Hand almost
and becoming more conservative — from overextended magically allocates resources to their
museums with their copy-cat expansions, to pension most productive use. This process of
funds that overpromised benefits and under-funded creative destruction is constantly at work
liabilities, to loony state and local government expansion, all across the economy, all the time. One
and to individual citizens confronting the depressing area we have been paying attention to
triad of wealth loss, runaway medical costs, and is the payments market. This space has
joblessness. undergone a large shift recently away
see disclaimer on last page from writing checks and using cash to

2. 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 are
2
accelerating the
changes taking place
in how people pay for
Oct. 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.

3. This specific quote, while clearly speaking to
eBay and PayPal’s relative merits, also points to
larger themes that will affect consumption across their RushCard, or other prepaid card, via direct
the 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 RushCard
shopper can scan a product’s barcode with the is so important:
summitVIEW
phone’s camera, and the phone will display more
information on the product as well as prices America operates on
on the same product at different stores. Pretty plastic. If you don’t
damn savvy, and a neat little example that ties have any kind of
together our themes of utilizing a smartphone card, you’re locked
to access cloud computing power in order to out of the American
make a more informed decision on how much dream. You can’t go
money to spend. In fact, eBay is so bullish on to the Internet and
this technology and PayPal’s mobile payments buy nothing, you
option, that CEO John Donahoe says that a few
3
can’t order nothing
years from now we’ll be making more purchases over the phone, you
with our cellphones than from our wallets. can’t rent a hotel
Oct. 2010
room.
While scanning barcodes and paying for goods
with a smartphone are incredibly appealing While prepaid
(hopefully we’ll never have to carry wallets cards are generally
again! - did I mention I hate coins?), to be targeted towards
perfectly honest these innovations will not be people who do
utilized by all segments of the population. A not have the
significant, and unfortunately growing, segment The above ad is a great example of what credit history for
of the US population will continue to be stuck in Summit Creek Capital is discussing. a regular credit
a cash based economy, without the means to buy card, or even
a smartphone, or even open a bank account. the cash for a bank account, they have been
gaining more acceptance and use among middle
One area in particular, where it is impossible class consumers who would have traditionally
to 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 the
retailing, and for the most part transactions prepaid market: the US Government uses prepaid
happen with cards or some other payments Visa cards to make transfer payments (such as
system, i.e. PayPal. It is not just online retail, food stamps & welfare) to those on government
but also online bill paying that is making assistance programs. Unfortunately for the
having a card not just a convenience, but economy at large, the use of that type of prepaid
almost 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 that
is experiencing rapid growth: prepaid credit and The changing behavior of the American consumer
debit cards. and the trends in global consumerism are
examples of the type of macro themes that we are
Prepaid cards offer the ability to pay with plastic focusing on at Summit Creek Capital. While it is
to 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 from
a bank account. The RushCard is a prepaid resolving itself, which strengthens our resolve to
Visa card brought to life by the same visionary keep our focus forward on nascent trends that
who put together the legendary hip-hop group are likely to have an impact in the new global
Run DMC. The RushCard functions just like a economy. We will continue to share these themes
regular Visa card, except the entire spending and ideas with our clients and colleagues.
allowance is loaded on the card in advance - no
credit is extended and it does not siphon money
out of a bank account. Users even have the
option to transfer their paychecks directly onto
Disclaimer: All material presented herein is believed to be reliable but we cannot attest to its
accuracy. Neither the information nor any opinion expressed constitutes a solicitation by us for the
purchase or sale of any securities.
www.summitcreekcapital.com