The lending sector is experiencing a significant transformation. Companies with digital access to customers and private data sources that provide credit without straining their balance sheets will have considerable competitive advantages over traditional lenders.
Companies like LendingClub and Square are pioneering the transition to a digital lending experience, making loans more accessible, transparent, and, in most circumstances, less expensive than traditional sources of finance. While the unsecured personal loan market has previously seen this change, the credit card sector has recently begun.
LendingClub, Sofi, Prosper, and LightStream are examples of marketplace lenders that connect customers with investors who buy and eventually finance loans. These lenders boost liquidity and offer more competitive interest rates in the unsecured personal loan market. The credit card industry appears to be on the verge of asimilar change.
Credit cards were initially intended to allow holders to pay for products without the need for cash or cheques. Unfortunately, they frequently led cardholders inadvertently and/or quickly into debt.
These corporations are charging their borrowers like never before: interest rates have risen at an unprecedented pace over the last decade, and interest payments have reached all-time highs.
The average credit card rate has climbed around 700 basis points relative to long-term Treasury rates since 2008, increasing the premium between credit card interest rates and Treasury rates from roughly 800 to 1,500 basis points, as seen in the chart below.
At the same time, interest rates have fallen to historic lows in absolute terms.While banks charge record-high interest rate margins to offset rising customer acquisition expenses, fintech firms do not require bonuses or inducements to recruit new customers.
For example, earlier this year, Apple launched its credit card without any incentives and attracted nearly triple the number of cardholders in its first two months. Banks appear to have compensated for the high and growing signup incentives required to woo customers by charging higher interest rates.
The Apple card was simply the tip of the iceberg regarding credit cards and credit card alternatives that fintech businesses will provide in the coming years. Fintech firms benefit from reduced client acquisition costs and data benefits, allowing them to offer lower rates than their banking counterparts.
They also give openness, which helps them win their users’ confidence and loyalty.
Several fintech firms, including LendingClub and Square, have filed for banking licenses which should lower their cost of capital as they cut out intermediaries and sell goods directly to customers.
Fintech businesses may seize half of the consumer debt now issued by banks, reducing credit card interest costs from $118 billion in 2018 to $64 billion in 2028; credit card interest rates might normalize from a 1500 basis point margin over Treasuries, potentially lowering interest costs even more.
