The Ghost of Spending Past – Why the Uptick in Holiday Spending Could Mean Major Impacts For Digital Lenders in the New Year

As we move further into the New Year, the dust is settling around the recent holiday shopping season and its related spending numbers. Heading in, many leading experts were predicting a banner year for digital commerce, with National Retail Federation (NRF) analysts suggesting holiday sales would likely grow to hit pre-pandemic levels1. Based on recently released NRF Census data, it seems those forecasts proved correct. While this is good news for many retailers, it could possibly be a sign of impending trouble for digital lenders and their borrowers in 2024.
Even with several factors on the horizon that could potentially dampen spending, including possible fluctuations in inflation and interest rates, this recent data has many thinking this trend of increased consumer spending will likely continue. Payment options like BNPL (Buy Now, Pay Later), peer-to-peer lending platforms and other small dollar loans offered through various embedded lending fintechs have risen significantly over the last few years, with data suggesting record increases over the past holiday season. This could in turn translate into increased default and delinquent payments, especially for digital lenders.
While payments options like BNPL have helped provide greater levels of access to credit for U.S consumers, the default risk on these payments continues to be an issue. There is growing concern that these defaults could ripple out to severely impact both lenders and their borrowers, creating further stress in an already tightening credit environment.
For borrowers, defaults and delinquencies can have serious consequences by damaging credit scores and making it difficult for consumers to access credit in the future. In some cases, it could even lead to potential legal action. So, what started as a minor, simple decision at the register could quickly turn into a major burden. For digital lenders, these defaults and delinquencies can have major effects across the entire enterprise. Impacts on interest rates and loan terms could mean reduced availability of certain key embedded lending products or much stricter eligibility criteria, making them prohibitively expensive and out of reach for many borrowers. In addition, default payments could also create a liquidity crunch for lenders, with funds that would have normally fueled new loans becoming unavailable, possibly stalling new business and potentially stunting the growth of the lender’s overall loan portfolio.
The reality is digital lenders face some incredibly unique challenges related to defaults, which can impact everything from today’s operations to tomorrow’s funding. The current, rapidly evolving digital landscape has provided new levels of convenience and speed, offering seamless delivery of fintech products and services, and through embedded digital lending, greater credit accessibility.
However, in the midst of this evolution, a critical gap in the consumer credit ecosystem has emerged – one traditionally filled by lending insurance. For decades, insurance has helped provide the framework essential for the financial well-being and resilience of both lenders and borrowers alike. Without it, most lenders would be forced to operate within excessively narrow, restrictive credit boxes, making it extremely difficult for many borrowers to access funding. Debt protection, credit insurance, guaranteed asset/auto protection (GAP), personal mortgage insurance (PMI), Warranties/MRC – these coverage options have become a ubiquitous, indispensable facet in lending today.
And yet, the issue with most traditional lending insurance options is they were developed for a highly intermediate flow, one with a host of parties who are all incentivized and compensated to upsell. But this added friction is not compatible with modern digital native consumers who expect simple, fast interactions.
An effective approach many lenders are leveraging to help mitigate default rates is a Digital Lending Insurance (DLI) strategy.
By implementing DLI for their embedded lending, digital lenders can better protect themselves against the domino effects that could be triggered by defaulting borrowers. A DLI strategy comes at no cost to the consumer and adds no further friction to the process. This effectively protects lenders from unexpected losses and positions them to keep extending credit to borrowers with lower rates, benefiting a broader range of customers.
Regardless of the upcoming spending trends, the market adoption of digital lending and payments options like BNPL is likely to continue to grow. With this evolution in the digital commerce space, digital lenders must be prepared to meet the challenges this new environment is bringing – leveraging the right fintech, tools and approaches to both protect themselves and to help ensure a secure, responsible and convenient lending experience for their customers.

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