When eBay paid $945 million for BillMeLater in October, we blinked. The business assigns credit at the point of sale to ecommerce customers who can’t use credit cards because they don’t have them, have maxed out credit limits, or choose not to. It charges fees much like a credit card – currently 19% interest.
The credit markets were already a wreck in October, with accelerating defaults on credit card accounts. And worse, the securitization markets were starting to shut down, meaning credit companies couldn’t get the debt off their books.
Still, a BillMeLater investor said not to worry. Their model is different than the credit card companies, he said, because they only issue credit on a per-transaction basis.
Fast forward a month and a half, though, and things are much worse. Credit default rates are expected to hit 10% next year as personal bankruptcies soar, and the securitization markets are flat out closed.
And I don’t really buy the argument that BillMeLater has a better model than the credit card companies. Card companies can (and do) lower credit limits in bad times, so they don’t have much more exposure on credit limits compared to BillMeLater. Also, most of BillMeLater’s customers don’t qualify for credit cards in the first place, or are tapped out. That makes this debt super sketchy. And BillMeLater’s credit models were created in a world of 5% default rates (the average over the last ten years), which are nowhere near as bad as what’s coming. On top of all of this, BillMeLater is pushing incentives that give people zero payments until April 1. What a teaser to buy stuff people can’t afford for the holidays.
This is adverse selection at work. People who don’t need to wait until April 1 to pay won’t use it. Those that do will, and those people are likely to be big credit risks.
At the very least eBay seems to have overpaid for BillMeLater. At worst they may have huge losses on the product next year. In 2008 they’ll do $1 billion in payment volume. You can do the math on a 10%+ default rate.