FinTech’s platforms help consumers pay off debt
Loading things onto a credit card and paying off the balances over time is no longer optimal – maybe no longer even possible if you pay the minimum every month.
Balancing the balloon when interest rates kick in, as high as 23% or more. The simple math gives a sense of the pressure: $100 becomes $123 you owe at the end of the year, all else being equal.
Credit card debt is approaching levels seen before the pandemic. However, we are in a markedly different economic scenario today, and data shows that paycheck-to-paycheck consumers are three times more likely than others to take on credit card debt.
Learn more: Paycheck-to-paycheck consumers 3 times as likely to take on credit card debt
The average credit score for all paycheck-to-paycheck consumers is 664, more than 90 points below the average for consumers who don’t live paycheck-to-paycheck. As a result, they are slightly more likely to find that traditional credit is a slippery slope.
They borrow more, the debt becomes more burdensome, payments are missed and credit scores go down. The vicious circle becomes even more pronounced when inflation is in the mix, as it certainly is now, because we all have to triage expenses. In triaging, the credit card expenditure can lie after paying the rent or buying groceries.
There are a number of firms leveraging digital platforms and advanced analytics to help individuals and families tackle that debt—in some cases by rolling that debt into personal loans.
LendingClub is a prominent example here. The company has said in recent results that the consumer loan business continues to increase. The company’s personal loan book grew by 19% in the last period. Total consumer market originations, as detailed in the latest supplemental material, increased 29% to $2.8 billion.
See also: LendingClub says that consumer stress leads to increased credit card balances and demand for loans
Through the platform model and a multi-pronged approach that includes digital banking and cross-pollination of products and services, FinTech-related core revenue accounted for 59% of the top line, while banking-related revenue accounted for the remaining 41%.
Management noted that default rates across the service portfolio remain below pre-pandemic levels.
In recent weeks, we’ve seen news that Tally, which offers an automated debt settlement system, has received $80 million in Series D funding. Through the company’s offer, qualified customers are offered a new line of credit at a lower interest rate.
Vendors have also enabled FinTechs and businesses to tackle credit in more measured ways. Over the summer, embedded finance platform Bond announced its Credit Builder Card, which makes it easier for FinTechs and other companies to introduce a secured credit card to their customers.
Bond’s CEO and co-founder Roy Ng told PYMNTS in an interview that close to 35% of Americans have subprime credit scores — between 580 and 669 — or credit files that are thin or nonexistent.
Related: FinTechs build critical credit capability with secured credit cards
“We’re not talking about a small patch of people here. This is quite a large population that faces this problem every day. On top of that, 40% of subprime results are represented by millennials,” he said. Bond is partnering with Bloom Credit and all payments made with Bond’s Credit Builder Card will be reported to traditional credit bureaus.
The looming credit crunch can be mitigated somewhat through the use of data to tailor debt repayment to match individual circumstances – and emerge in better financial health.
New PYMNTS study: How consumers use digital banks
A PYMNTS survey of 2,124 US consumers shows that while two-thirds of consumers have used FinTechs for some aspect of banking, only 9.3% call them their primary bank.
