What's Happening with Consumer Finance

Speaker 1:
Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Jaret Seiberg:
Welcome to Two Cents, the financials podcast at TD Cowen. I am Jaret Seiberg, Managing Director and Financial Services Policy Analyst at TD Cowen Washington Research Group. Today, we're going to dig into the world of consumer finance with Moshe Orenbuch, T.D. Cowen's analyst who follows that space. But first, as always, is my partner in podcast, Scott Smith, who is TD Cowen's specialty salesperson for financials. All right, Scott, what's going on in the market?
Scott Smith:
The last month or so was an incredible amount of cross currents across the financial services space. We had obviously the bulk of financial earnings over the early part, early to mid-part of July, and they kept rolling right through the current timeframe. In the middle of all of that and the positive sense around earnings and extremely positive capital markets activity, there was some really unusual action, which seemed to mostly be driven, as it turns out, by this issue with a situational awareness fund that was creating so much weakness in momentum stocks. That momentum weakness was being met with a lot of financial services buying, especially in names that people were generally a little bit more negatively disposed on. So people got caught very much offsides around what was happening there and really only saw a little bit of clarity and light when situational awareness was resolved in the last week or so.
Jaret Seiberg:
We had all these banks report. What do you think some of the big market takeaways were from not just the big guys that got all the headlines, but maybe some of the mid-sized players?
Scott Smith:
Sure. The big ones were easy. It was capital markets' activity was exceptionally strong. For the regional players, if you look at the quarters, the pluses were very obvious, loan growth, still good credit quality. The concern points were a little bit more around deposit costs and deposit competition as interest rates stayed elevated. But overwhelmingly, if you look at earnings revisions post-earnings releases, it felt like the regional banks were, broadly speaking, seeing positive earnings revisions for the remainder of '26 and even into '27 as well.
Jaret Seiberg:
So let's spin everything forward here. We are in August. Generally, August features only one thing that the financial markets care about, which is Jackson Hole. Is that where all the attention is going to be for the next couple of weeks or is there anything else you're looking at?
Scott Smith:
Well, vacations for a lot of folks, because of all the pain experienced in July and early August. But yeah, for sure, Jackson Hole is going to be a very clear focus. The divergence between what the market is pricing it in terms of rate hikes, what some of the large cap bank managements have been talking about in terms of rate hikes, and where we're hearing investor conversations is pretty starkly different.
I feel very much like most of my investor conversations are with folks who think no rate hikes and that the next move from the Fed will in fact be a cut and not a hike, but that is absolutely not what the market is pricing in. And like I said, also not what large cap bank managements are telling us. So for sure people are going to be laser-focused on what comes out of Jackson Hole with respect to that view.
Jaret Seiberg:
All right. As always, thank you, Scott. Should be an interesting month ahead for financials.
All right. Without further ado, let's turn to Moshe. As I said at the top of the show, Moshe follows the consumer finance space for us at TD Cowen, and I wanted to get him on the podcast to talk about the state of consumer finance. Moshe, what have you learned lately as the companies have been reporting earnings and as we have kind of moved into the summer vacation season?
Moshe Orenbuch:
Great. Yeah, thanks Jared, and thanks for having me on. I think if you separate it from an offensive and a defensive standpoint, offensive being what consumers are doing in terms of spending, I think that's where investors have genuinely been surprised that consumers have continued to spend more or less at stable kinds of rates. It was a little faster in June than in July, because of some things specifically with respect to the calendar and some of the big retailers like Amazon having their Prime Day in June. But for the most part, those spending levels have been very, very consistent.
That's also translated into modestly accelerating growth in credit card balances, emphasis on modestly, but nonetheless accelerating, and very strong growth in originations of installment loans as consumers have continued to try and find ways to fix the cost of debt on portions of their obligations. The lower end has been particularly strong there as well.
And then, I would say from a defensive standpoint in terms of credit losses, delinquencies and losses have continued to behave well. We lowered, which is better, obviously lower is better, lowered all our forecasts going into the quarter, and most of the companies kind of beat our lowered forecasts. JP Morgan did lower their guidance for the year for credit card losses. So that has been, I would say, another area of positive, a little more on the defensive side.
Jaret Seiberg:
And Moshe, why do you think credit is holding up? We hear complaints all the time about the affordability crisis. It's become a political mantra, affordability, affordability, and yet consumers seem okay. Why do you think?
Moshe Orenbuch:
Look, I think the bottom line is there definitely are individuals that are struggling and there are individuals that are defaulting. And I would say those levels are modestly higher than they were pre-pandemic, but they've shown improvement off what we had seen when we were exposed to an extended period of time where inflation was in excess of wage growth. Employment is strong. And in general, it's not been true every single month, but for most months, wage growth has been ahead of inflation.
So if you contrast that to '22 and '23, when inflation was high, interest rates were rising, and so the costs that affected the moderate to lower income consumer were rising even faster than inflation, that was a particularly difficult time, and we're coming down from that level.
Jaret Seiberg:
Against that backdrop, how should we think about gasoline prices, which do seem to still be elevated beyond where we were before the start of the Iran War? Are you seeing any of that in the data?
Moshe Orenbuch:
So interestingly enough, it used to be a much more, I would say, direct correlation between what gasoline prices would do and what that would do to other areas. I think that obviously higher income consumers end up spending a little bit more when gasoline prices are high. Lower income consumers have been doing some degree of substitution.
They've also done things like break up transactions into smaller dollar amounts, filling up their cars multiple times. And so there've been ways that consumers have managed it, I would say. If it were more severe and protracted, I think we'd end up with a more negative impact than we've seen. It hasn't had as much of an impact as most, including myself, would've thought.
Jaret Seiberg:
And so Moshe, one of the biggest changes I think in this space over the last 10, 15 years has been the growth of buy now, pay later. It's largely replaced 90 days or 180 days, same as cash. How do you see the impact of that space and do consumers use it?
Moshe Orenbuch:
So in reverse order, consumers definitely use it. Not every single consumer uses it though. I would say the traditional pay in four, which is you pay a quarter of the purchase price upfront and three payments every two weeks after that tends to be in the neighborhood of $100.00 to $200.00 items. And those consumers tend to be people that are, I would say, either somewhat credit constrained or just want to avoid building their revolving balances.
But think about that, that term is relatively short. And so, while there may be a fair amount of volume, it doesn't have that much of an impact on debt. There are other buy now, pay later providers, and a firm is the largest in this area. And there it is used for shorter dated installment loans, sometimes 0%. And there, that's been a little bit of a bigger impact on things like the credit card business, but still modest in size. I would say that, again, while it's a large and growing trend, it hasn't had as big of a structural impact, again, because the debt is much shorter duration than traditional installment loans and certainly credit cards. So we keep a close eye on it and follow a number of the companies that participate in that area.
And I would say the regulators are also looking at it in terms of things like making sure that lending rules are followed, as well as trying to bring that into the mainstream from a credit reporting perspective so that other lenders will be aware of the total debt burden of consumers. That's something that will probably take some time though.
Jaret Seiberg:
Moshe, as you look ahead the next 6 to 12 months, what's on your radar for this space?
Moshe Orenbuch:
We've always looked at employment. What we learned painfully in '22 and 2023, we also have to look at the relationship between wage growth and inflation. I say somewhat jokingly that I've been doing this almost 40 years. If I had been doing it 10 years longer, I think we would've had a healthier respect for inflation as a credit metric. So that's the change over this cycle is that we do have to look at it. You mentioned gas prices, that's going to be a big piece of it. And so, the recent increase is something that we do keep a close eye on.
The good news is that that's happened in an environment where employment has been very strong. And so, we do look at both with a more recent focus, if you will, on the relationship between inflation and wage growth.
Jaret Seiberg:
One last big question, and then I can't help but ask a couple of policy questions to you. What about young people and credit? You read the popular press and it seems like young people, those fresh out of college are having trouble finding jobs. Are you seeing any trends with younger people in credit that it's worth talking about?
Moshe Orenbuch:
First of all, unemployment among younger consumers is higher than the average. And so, it is an area that you do have to watch. And there's a pretty broad spectrum. I mean, American Express who is marketing to higher income young consumers has said that now over 60% of their new accounts are millennials and Gen Zs. And their credit isn't as good as the older Amex customers, but it's substantially better than similar aged consumers that are not their customers.
But it does increase the risk. And so, I think there are going to be younger consumers who have shied away from the traditional revolving credit model, and that's been one of the trends that has fed the buy now, pay later, that phenomenon. And so, one of the areas that we do cover is student lenders and Sallie Mae, all of its customers have private student debt. And so they're not all recent college graduates, but there's a higher level of those.
And so, it is an area that we do focus on. That was something that weakened last year and has normalized this year such that the spread between the unemployment rate for the recent college grad and the average has reverted back to its historic level and not at a higher rate than it had seen in the second half of 2025.
There are concerns about impact of AI on certain job categories and what that means particularly for younger consumers. I would say that has not shown up in the data yet, but it's certainly something that we keep an eye out for.
Jaret Seiberg:
Great. All right. I got to ask you two quick policy questions before we wrap this segment. President Trump and Elizabeth Warren agree on very little, but one thing they are on the same page on is with a 10% cap on credit card interest rates. I view this as unworkable, but you're the industry guru here. What happens with a 10% interest rate cap and how should we think about this?
Moshe Orenbuch:
With a 10% interest rate cap, neither of us or anyone else would recognize the credit card business. And so, yeah, I would agree with the unworkable aspect. I think all you need to say is the highest end credit cards out there, whether it's the Delta Reserve credit card at American Express, the Chase Sapphire Reserve have interest rates of 20%. So I think that tells you that this is not a lower end consumer issue of restricting credit. It would restrict credit across the entire economy. And so, I think it is completely unworkable.
I did find it fascinating that the industry really didn't offer any solutions back in the early part of the year when the president tweeted about it initially. The stocks were impacted, but the industry sort of let it die on the vine, which is interesting as opposed to suggesting various types of maybe less extreme solutions. That was my takeaway.
Jaret Seiberg:
And the question that I hear all the time is, "Well, why do interest rates on credit cards have to be so high?" Can you just spend 30 seconds on the economics behind that?
Moshe Orenbuch:
Well, look, you're writing an option to a consumer by giving them a credit line. And if you were a business, you would pay for that credit line. So I think that's the real reason. And you think about it when you loan someone on an installment basis, that loan amortizes. The credit card is always a risk that's out there. And so, that's kind of the main reason. It is an actual liability, and it's a significant convenience to the consumer to have that credit line available to them. So I think that's the main reason. Are there cross subsidies? Yes, there are, but going to take a lot more than 30 seconds to go through those.
Jaret Seiberg:
Fair enough. Let's just wrap on an issue that also won't go away, which is the Credit Card Competition Act. For those who are not into the weeds on payments, this is a bill by Senator Marshall and Senator Durbin to essentially require Visa and MasterCards to operate on unaffiliated networks. It's part of a long-running battle between the merchants and the banks over the cost of using credit cards. I think the odds of it becoming law are very low, but is it even possible to run credit cards on other networks?
Moshe Orenbuch:
It's very theoretically possible. The question is, is it practical? Would you be kind of opening up to fraudsters and would you be effectively raising the cost to merchants of that? I think the answer to that is probably yes. There are four networks, two besides Visa and MasterCard, that currently process credit transactions. American Express generally charges more. And the Discover network, which is now owned by Capital One, is not really broad enough to, I think, provide the same types of fraud protection that merchants have become accustomed to. So I think it's also unworkable. It isn't clear to me that it would in fact lower the cost to the merchant because for technical reasons that are kind of created in there, it just doesn't appear that you're going to get materially lower costs.
Jaret Seiberg:
All right. Moshe, that is absolutely fantastic. You're a great guest as always, thank you for joining us this month on the podcast.
Moshe Orenbuch:
Thanks, Jaret.
Jaret Seiberg:
And that brings us to our final segment, which looks at the major financial policy issues from the last few weeks and previews what we're expecting in the next few months.
All right, so what happened in the last several weeks? Biggest news is definitely on Capitol Hill where the housing package finally cleared Congress. It became law without the president's signature. We continue to view this as positive for manufactured and modular housing. There's also some helpful zoning reforms in there. So overall, a plus for housing, though more of a down payment as we expect broader legislation in the new Congress in 2027.
That same bill also expanded reciprocal deposits, which is a way for consumers to get deposit insurance coverage in excess of the FDIC max. This is a benefit to small and mid-sized banks, and we expect the banks will be touting that in the coming months.
The Clarity Act, which is the big crypto market structure bill, is in trouble, although we expect another push in September when Congress returns. We also have Bill Pulte back full-time at FHFA as the director. That suggests we could be hearing more from that agency in the coming weeks and months.
The CFPB has told us that they are about to release an open banking rule that will govern how consumers move data from banks to FinTechs. And then lastly, President Trump has backed that Credit Card Competition Act that Moshe and I were discussing, though I remain dubious that much is going to happen on that front, but certainly we expect headlines this fall.
In terms of what to expect going forward, the House is on recess until August 31st. The Senate is out until September 15th. We are waiting on the SEC for a proposal on foreign private issuer eligibility. This is a way to pressure Chinese companies to de-list.
The other big SEC proposal that we're waiting for is exemptive relief for tokenization efforts. I think with the Senate having left town, the door is now open for the SEC to permit greater tokenization efforts.
At the banking agencies, we should be close to getting a proposal to adjust supervisory thresholds, which are the different asset size points at which different Prudential regulations take effect. This should be broadly positive for mid-size banks. We're also going to get a proposal to ease bank liquidity requirements. I continue to think that this is perhaps one of the biggest policy issues for the banking industry that is not getting enough attention. And I think it could be broadly positive for pretty much all banks, but especially the biggest banks.
Our next FOMC decision is on September 16th, and then September 30th is the deadline to avoid a government shutdown. And then of course, the midterm elections are on November 3rd. Pretty much all the headlines out of Washington between now and November 3rd have to be viewed through the prism of the upcoming election.
All right, with that, we will wrap up the August edition of TD Cowen's Two Cents Podcast. Thank you to Moshe and Scott for being our guests this month. I am Jaret Seiberg with TD Cowen, and I look forward to having everyone tune in next month for our financial policy podcast.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.