Fintech Crowd Enters Subprime Credit Card Lending
Fintech startups are stepping into a void increasingly left by credit card-issuing banks: lending to customers with bad credit histories.
LendUp Global Inc. and Fair Square Financial LLC, which focus more on riskier borrowers, sent about 35 million credit card offers in the first half of the year, according to market research firm Competiscan, up from 7 million over the same period. period last year.
CreditShop LLC, a specialist in personal loans to subprime borrowers that was bought out last year by investment firm Värde Partners, launched a credit card earlier this year.
Increase credit Inc.,
which specializes in high-cost installment loans, launched one in July.
Subprime loans can be lucrative. Most of these cards carry interest rates north of 20%, significantly higher than the average credit card interest rate of 14.1%, according to the Federal Reserve. Reward programs, one of the biggest costs for large card issuers looking for creditworthy customers, are rare.
But risks abound: Faced with increasing loan losses, especially among riskier borrowers, banks are slowing their growth in this sector. According to Autonomous Research, subprime credit card balances at seven major U.S. banks rose 3% in the first half of the previous year, up from 13% the year before.
subprime balances represented 32% of its domestic credit card balances in the first half of 2018 compared to 36% in the same period a year earlier
New lenders are getting help from some pillars of the industry. The Orogen Group, an investment company headed by the former
Chief Vikram Pandit said in May he was committing $ 100 million in equity to Fair Square, which distributes cards to borrowers with less than perfect credit scores. LendUp recently announced that Capital One co-founder Nigel Morris and former Capital One credit director Frank Rotman are joining its board of directors.
The sub-prime borrower population “makes up almost half of America, and there is a huge opportunity for others to be able to offer a great product with great sophistication to compete in this space,” said Mr. Morris in an interview.
Fintech startups still represent a relatively small share of the risk card market. At the end of 2017, Fair Square had 124,000 accounts open, more than half of which were for customers with excellent credit scores when they opened, and just under $ 95 million in balances for its customers. Ollo card holders, according to people familiar with it. with matter.
Capital One has about $ 32 billion in subprime credit card balances on its books.
New entrants say their use of machine learning and artificial intelligence for underwriting helps them manage risk. They also mostly extend small lines of credit, often between $ 500 and $ 2,000, limiting the extent of potential losses.
About 60 million American adults have credit scores below 650, according to
Just Isaac Corp.
, roughly the point at which banks focused on blue chip borrowers stop lending. Some 53 million American adults have no credit rating because they have little or no borrowing history.
Fintech lenders have targeted both groups, often using data not included in applicants’ credit reports, such as how often they change addresses and whether they pay their utility bills on time, to determine if they have to approve them.
Fintech startups looking to enter the credit card business have a few challenges that banks don’t. They usually have to partner with banks to issue the cards on their behalf in order to comply with the rules set by the card networks.
and they need a source of finance to lend against. LendUp, for example, uses the Transportation Alliance Bank to issue its Arrow card and has a $ 100 million line of credit from Victory Park Capital Advisors LLC, a Chicago-based investment firm.
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