ARM Industry Facing Challenges, Consumers Turning to Point of Sale Credit for Necessities
As we mentioned in our opening letter, ARM M&A activity is down in the first quarter of 2023 compared to both Q4 2022 (deals getting done for year-end) and Q1 2022. But that is not the only thing down this year. In contrast to 2022, American taxpayers are looking at a much smaller average tax return refund balance—11% smaller to be exact. Couple that with the previous year’s “pull through” or cleanup of older debts with stimulus funding/government tax credits, it is easy to fathom why liquidations are down across nearly all consumer-based asset classes.
When you factor in the position of a consumer today and the historic period of inflation we are living through, these currents impacting the ARM vertical make sense.
For example, groceries as a percentage of buy-now, pay-later (BNPL) order volume grew by nearly 26% in the first two months of 2023. Alarmingly, we are spotting a growing trend of consumers turning to point-of-sale credit for necessities—not just for discretionary spending like we saw during the pandemic. This trend is something our experts have been espousing as a potential “canary in the coal mine” of broader economic conditions, and we will continue to monitor it closely.
Through information we pulled from a report the CFPB put together in March of 2023, we found that consumers who do not use BNPL have consistently higher credit scores on average compared to those who did (chart included in the CFPB report). Nevertheless, with Apple entering the BNPL space with their announcement of Apple Pay Later, it will be interesting to monitor the segments utilizing point of sale credit and observe how that may evolve over time.
For those with prime credit ratings, things have held steady, but those near-prime segments—already more inclined to fall into the servicing of accounts receivable management firms—are beginning to waiver.
Switching gears slightly, a lawsuit between two household names gives us intriguing insights into the ARM vertical and its outlook.
Mega retailer Walmart recently filed a lawsuit in the Southern District of New York against Capital One with regard to their credit card partnership. Walmart claims that Capital One is in violation of some of their service requirements. Capital One objects to those claims. However, one of the more fascinating implications is that Walmart executives are rumored to have requested a renegotiation on the card contract—specifically around adjusting the loss-share agreement, which pertains to the portion of charge-offs that the retailer and the bank each shoulder, per the WSJ.
Walmart is no stranger to litigating against its credit card partners. They sued Synchrony in 2018 who was their card partner for 20 years prior. This whole saga could be nothing, or it could be a compelling data point, as the largest retailer in America servicing lower income consumers begins to fear the size of a potential delinquency wave.
But it is not just Walmart credit card holders. All Americans are starting to feel the credit crunch, as revealed in a recent survey put out by the New York Fed regarding consumer expectations. According to the survey, there has been a rise in the estimated likelihood of individuals missing a minimum debt payment in the next three months, increasing from 10.6% in February 2023 to 10.9% in March 2023. Consumers and the broader economy are hanging on, but we will be tracking this trend to see if these numbers continue to tick up over the coming months.
In ARM M&A news that’s closer to home, we at CAS are proud to have closed a recent deal: the sale of a debt purchase platform. There is heightened interest surrounding the debt purchasing vertical. As volumes begin to pick up, more of these businesses are becoming available for purchase/service.
As for our ARM vertical predictions, we anticipate a continued wave of consolidation over the next 6-12 months, as owners contemplate their succession/next steps after a disappointing first quarter of 2023. Anecdotally, we are seeing (and facilitating) more and more conversations amongst strategic buyers, as smaller market participants (i.e., services and technology providers) are contemplating how the long-term future of the ARM vertical will look.