Fintech firms

Fintech firms enter sub-prime credit card lending

Fintech firms are entering a sector mostly feared by the credit card-issuing banking institutions.

The financial technology firms are doing this by lending to customers with poor credit histories, a risk banking sectors can’t take.

The latest report says that LendUp Global and Fair Square Financial, which focus more heavily on riskier borrowers, mailed out roughly 35 million credit-card offers during the first half of the year.

A market-research firm Competiscan says only seven million were issued the same period last year. That’s incredibly increase.

Another specialist in personal loans to risky borrowers, CreditShop, acquired last year by investment firm Värde Partners, reportedly rolled out a credit card earlier this year.

Also, Elevate Credit,which specialises in high-cost installment loans, launched one in July, 2018, Financial London says.

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. Rewards programs, one of the biggest costs for large card issuers chasing creditworthy customers, are rare.

But risks abound: Facing rising loan losses, especially among the riskiest borrowers, banks are reining in their growth in this sector. Sub-prime credit-card balances at seven large US banks rose 3% in the first half of the year from a year prior, down from a 13% increase in the year-earlier period, according to Autonomous Research.

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Capital One Financial’s sub-prime balances accounted for 32% of its domestic credit-card balances in the first half of 2018 compared with 36% in the same period a year earlier

The new lenders are getting help from some industry stalwarts.

The Orogen Group, an investment firm headed by former Citigroup chief Vikram Pandit, said in May it was committing $100m in equity to Fair Square, which distributes cards to borrowers with less-than-pristine credit scores. LendUp recently announced that Capital One co-founder Nigel Morris and former Capital One chief credit officer Frank Rotman were joining its board of directors.

The population of subprime borrowers “is nigh on half of America, and there’s enormous opportunity for others to be able to offer a great product with great sophistication to compete in this space,” Morris said in an interview.

Fintech startups still account for a relatively small slice of the sub-prime card market. At the end of 2017, Fair Square had 124,000 open accounts, more than half of which went to customers which prime credit scores at the time they were opened, and just shy of $95m in balances for its Ollo card holders, according to people familiar with the matter.

Capital One has around $32bn in sub-prime credit card balances on its books.

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The new entrants say their use of machine learning and artificial intelligence for underwriting helps them manage the risk. They also mostly extend small credit lines, often ranging between $500 and $2,000, limiting the scale of potential losses.

Around 60 million US adults have credit scores lower than 650, according to Fair Isaac, roughly the threshold where banks focused on prime borrowers stop lending. Some 53 million US adults do not have credit scores at all because they have little or no borrowing history.

Fintech lenders have been targeting 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 whether to approve them.

Fintech startups looking to enter the credit-card business have a few challenges that banks do not. They typically must partner with banks to issue the cards on their behalf to comply with rules set by card networks Visa and Mastercard, and they need a source of funding to lend against. LendUp, for example, uses Transportation Alliance Bank to issue its Arrow Card and has a $100m line of credit from Victory Park Capital Advisors, a Chicago-based investment firm


This story first appeared on Finacial News, London

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