Cyber Monday: Record spending on borrowed money

American shoppers spent $12.4 billion online on Cyber Monday, a record for a single day. E-commerce platforms took the figure as proof that the consumer cannot be stopped. A good part of the spending was paid for with short-term deferred debt, much of it through the fast-growing 'Buy Now, Pay Later' (BNPL) loans.

A season of records

The Monday total capped a long weekend of big numbers. Adobe, which tracks online checkouts at large retailers, put Black Friday's online spending at $9.8 billion, also a record. The figures are not adjusted for inflation, so part of the growth is higher prices rather than more goods. Consumer prices in October were 3.2 per cent higher than a year earlier, which alone accounts for much of the gap between a record and a merely ordinary year. They are still large enough to embarrass forecasters who expected a squeezed shopper to stay at home.

The shift online also flatters the headline. Each year a larger share of holiday buying moves from shops to screens, so an online record can coexist with flat spending overall. Retailers have also stretched the discount season across most of November, pulling some purchases that once clustered on the Monday into earlier weeks. A single-day figure measures where and when people shop at least as much as how much they spend.

Gifts in instalments

BNPL volumes hit record highs as shoppers split ordinary holiday presents into interest-free instalments. The loans let stretched households bring spending forward, and because much of the borrowing never reaches the traditional credit bureaus, the growing debts are hard to see. With credit card rates above twenty-one per cent, consumers worn down by years of rising prices have turned to this shadow lending to keep up appearances.

The standard product is straightforward. A shopper pays a quarter of the price at checkout and the rest in three further payments, usually two weeks apart, so a present bought on Cyber Monday is paid off in January. The merchant, not the shopper, pays the lender's fee, typically more than a card network charges, because retailers find that the option lifts the size of the basket. Missed payments bring late fees, and a shopper can hold several such loans with different lenders without any one of them seeing the others.

The field has grown crowded. Affirm, Klarna and Block's Afterpay built the market, PayPal offers its own pay-in-four product, and Apple launched Apple Pay Later in America in March. More lenders chasing the same shoppers means more places to take on a small loan at the moment of purchase, with little friction and no conversation about affordability.

Why the debt stays hidden

Credit bureaus were built for revolving cards and instalment loans lasting years, and they record short pay-in-four loans patchily at best. A bank weighing a mortgage or car loan application may therefore see a clean file while the applicant owes instalments to three or four lenders. The Consumer Financial Protection Bureau published a report last year that flagged exactly this kind of loan stacking and inconsistent reporting. Lenders cannot price risk they cannot see, and neither can the Federal Reserve when it judges how much strain its rate rises are putting on households.

The debt that is visible is already large. The New York Fed's household debt report for the third quarter showed credit card balances of $1.08 trillion, the first time they have exceeded a trillion dollars. BNPL sits on top of that total, uncounted, and some of it is used by the same households that carry card balances. A shopper who spreads a present across four instalments while revolving a card at over 21 per cent is managing cash flow, and the strain shows up only when one leg of that arrangement slips.

Who gains and who pays

Retailers are the clearest winners, since they book the full sale now and pass the credit risk to someone else. The lenders earn the merchant fee, but they fund themselves in wholesale markets whose cost has climbed with a federal funds rate that has sat at 5.25 to 5.5 per cent since July. Card issuers lose some purchase volume at the margin. If things go wrong, the losers are the households that stacked the loans and the lenders that assumed a six-week loan could not go bad in size.

Regulators have been slow to close the gap. Britain's government said in 2021 that BNPL would be brought under the Financial Conduct Authority, and the rules have still not taken effect. In America the CFPB has published research and warnings about the product but no binding rules written for it. Until affordability checks and full credit reporting are standard, the product will keep growing fastest among households least able to absorb a shock.

Why it may hold up

The strongest objection is scale. BNPL remains small next to the credit card market, the loans are short, and a borrower who falls behind is usually blocked from taking out new ones, which limits how far losses can run. Unemployment is still below 4 per cent, and a household with a job can usually meet a fortnightly payment. The worry here is a matter of timing more than solvency, because spending pulled into November is spending that will not happen in January.

The test in the new year

The test comes in January and February, when the instalments fall due alongside the card bills for December. The government's retail sales figures for those months, card delinquency data and the quarterly household debt report from the New York Fed will show whether shoppers cut back to pay. The BNPL lenders' own results will show whether late payments are rising.

Much of Cyber Monday's record was bought on credit. Retailers have booked the sales, the instalments fall due over the coming months, and that is when household spending will probably feel the pinch. Expect January's retail sales to disappoint against the holiday headlines, with the weakness concentrated among lower-income shoppers, while BNPL lenders report rising late fees before they report rising losses.