Earnings Season Sheds Light on State of Subprime Consumers

Earnings season has just begun, and financial firms have been weighing in on the state of consumer spending and whether consumers are meeting their debt burdens in the midst of stubborn inflation and a rocky macroeconomic environment.

Thus far, the indications are that consumers, including subprime consumers, are meeting the challenges, though there have been some shifts in behavior.

PYMNTS Intelligence has reported that, as recently as this spring, one-quarter of subprime consumers — typically defined as people with FICO scores below the 620 range — use credit for essential expenses. In part, that’s due to the desire to boost credit scores, and it’s also a way of making sure that, say, groceries are on the table.

PYMNTS data shows that subprime borrowers are 3.6 times more likely to show interest in obtaining a new credit card than those with the highest credit scores, indicating fertile ground for banks and platforms. The fact that, as PYMNTS has found, about two-thirds of consumers live paycheck to paycheck, credit is a lifeline for all manner of households and income levels.

Documents from the likes of Capital One, which reported earnings on Tuesday (July 22) show that by and large the consumer is contending with stressors. Upon the completion of the acquisition of Discover, there are estimates that the combined entity has about a third of the subprime market.

Capital One, in a letter to the Fed ahead of the merger’s closing, has said that it has extended cards to as many as 42 million subprime consumers, cumulatively. Capital One thus can serve as a proxy for the market, where SEC filings demonstrate that delinquencies were up slightly month over month in June to 3.9%, and better than had been seen a year ago at about 4.1%. Net charge-offs were 5.3% in the most recent quarter, down from nearly 6% a year ago. Discover’s net charge-offs were 4.5% in June.

In our own coverage of Capital One’s earnings this week, and in terms of card-related activity, the combined company’s year-over-year purchase volume growth for the quarter was 22% higher than a year ago, which includes Discover’s addition; excluding that business, Capital One’s year-over-year purchase volumes were 6% higher.

Pockets of Pressure

CEO Richard Fairbank noted on the call with analysts that generally speaking, the U.S. consumer is in “great shape,” where there are “some pockets of consumers [that] are feeling pressure from the cumulative effects of inflation and higher interest rates. And we’re still seeing some delayed charge-off effects from the pandemic, although the improving trend in our delinquencies suggest these effects are moderating.”

Synchrony’s results also provide a read across: Though focused on private label and co-branded cards, a dive into the company’s filings reveal that about a quarter of the company’s cardholders have scores below the 650 level.

Charge-off rates have improved to 5.7% in the June period from 6.4% last year. Brian Doubles, CEO, said on the call with analysts that “our continued credit discipline and previous credit actions drove better than expected delinquency and net charge-off performance” as purchase volumes were up about 5%. The consumer, he said is “still in pretty good shape. We’re not seeing signs of weakness.”

The platforms such as OppFi and Upstart have yet to weigh in with their own results, but earnings season is a marathon, not a sprint, and the comments and clarity on the main engine of the U.S. consumer will continue to be a mainstay of the next few weeks.