“We live in a digital world” is an understatement. The next decade, as Generation Z arrives and millennials move into prime spending years, will have profound effects on all industries. Finance, in general, and credit cards in particular, are no exception. Fintechs that can decipher the coming changes are looking at a trillion dollar industry currently dominated by traditional banking players.
The latest innovation in alternative lending can have a profound impact on how credit cards are issued, used, and managed in the financial ecosystem. LendIt USA 2018 saw a panel discussion on “Creating the Next Generation Credit Card.” The focus was on how LendUp and Petal, two venture-backed Visa credit cards, have disrupted a stagnant industry with alternate data and fast decisioning. Sasha Orloff, CEO and co-founder of LendUp, and Jason Gross, CEO of Petal, discussed the secret sauce, their insights, and future trends in the industry.
The Journey to the Credit Card Market
Around 40 million Americans do not have any credit score, and around 20 million have a very limited credit file. This results in limited access to the credit market. The disproportionate effect of this is felt by the millennial generation, immigrants, and low- to moderate-income consumers.
The 2008 financial crisis left considerable people under the age of 30 with subprime credit facilities comprising of expensive products. And though they might not have a strong credit score, their strong digital financial footprint can be leveraged to understand and examine their creditworthiness.
Alleviating such deficiencies will help genuine customers gain access to the credit they deserve. They will also be able to receive better pricing with lower interest rates, lower fees, etc. This was the main reason for Gross getting involved with Petal. What differentiates Petal from other companies is the use of pioneering technology to look into the financial “footprints” of consumers and make credit decisions accordingly. Petal can now underwrite on a more inclusive basis and leverage financial data by designing better products for its consumer base.
On the other hand, Orloff evaluated the problems faced by today’s credit card companies who reject almost 85% of consumer applications that come through their websites. This is a massive opportunity loss for all stakeholders.
Also, fintech companies are not directly issuing credit cards; rather, they are partnering with banks. This can lead to a win-win relationship where LendUP can help banks monetize this opportunity by using its proprietary technology. It is a category leader and understands the subprime space. It is currently working with two banks and has recently signed a deal with its third bank. Meanwhile, they are also looking to onboard more banking partners who want to better serve their communities.
Offering the Next-Generation Credit Card
Both companies believe there is a huge opportunity as half of America is underserved or unserved with regard to credit. The exciting part about the original credit card is the piece of plastic in the wallet can be used to build a relationship with customers by understanding their requirements and daily financial habits. With the ability to offer multiple products, credit cards should be a natural cross-selling platform for traditional banks.
When talking about the 60-year-old credit scoring system, Gross discussed how it lacks full financial information and focused only on the liability side of a person’s balance sheet. Petal’s credit scoring system takes a much more holistic view of a person’s finances and focuses on assets and cash flows. Instead of concentrating on any one part, they look at a more complete picture, which helps them assess the borrower granularly on thousands of data points. Its algorithms are powered with machine learning, which assists them in detecting further patterns for enhancing the customer experience.
Orloff cited the results from a study conducted by his company showcasing how supplementary data can be more powerful than using the traditional credit scoring data to evaluate the financial health of a consumer. Talking about the population outside the banking system, he thinks one cannot completely rely on credit scoring. Rather, it is mandatory to use alternative data points to calculate the creditworthiness of the individual.
Credit cards were the first step in understanding banking customers and their paying habits. With smartphones, banks can add a layer of intelligence that will generate insights that were not available earlier. Orloff also discussed how credit cards can now be used to attract consumers and why it is important to customize cards for the individual. LendUp’s card can now optimize according to the financial goals of each single consumer. He laments that the financial industry seems to be the last industry to keep churning out generic products for its clients.
Gross explained that consumer finance and credit scoring is an area with huge opportunities have just scratched the surface till date. Millennials aspire to do business with companies that have their best interests in mind. Companies should focus on re-inventing digital experiences and optimizing for the financial success of the customer. To design this digital experience, there is a need to leverage behavioral science and best practices of product design to make credit intuitive, transparent, and simple.
Stephanie Vaughan is vice president at Block X Ventures. She is an experienced capital markets professional with a background encompassing crowdfunding, venture capital, and investment banking. She served as director of capital markets and development at StreetShares, a marketplace lender focused on providing small business loans to veteran-owned companies funded by Institutional, Regulation A and Regulation D investors. At StreetShares, she led all strategic initiatives for investor products. She also played a key role in raising the company’s $23 million Series B financing. Previously, she was a senior associate executing venture debt transactions for LunaCap Ventures and was an investment banking associate with Houlihan Lokey. A former captain in the United States Marine Corps, she served as communications and operations officer and held strategic roles assisting in re-designing the USMC Force and overseeing anti-terrorism efforts for U.S. Central Command in Afghanistan. She holds an MBA in Finance from Columbia Business School and a BA in Quantitative Economics from the United States Naval Academy.