All The Fintech - 10.21.18 - Subprime credit card market correction?

The recent market movements got me thinking about some of the headwinds that consumer financial technology might face in the next couple of quarters. Thanks to a influx of financial infrastructure products, it’s become increasingly easier for later stage fintech companies to launch adjacent financial products. The two newest product trends seem to be launching a debit card + checking account with platforms such Cambre (see Stash, Empower, SoFi, MoneyLion etc) as well as offering card-linked offers with platforms like Empyr.

There’s been an increased focus on monetization and the classic consumer finance monetization model is still building up and leveraging a balance sheet (i.e. get deposits and lend it out). Everything starts to look like a bank! That being said, it’s easy to lend out money in a low-interest rate environment + bull market; what happens when the market turns?

I happened to sit next to the team on the plane ride to Money 2020 (if you’re in Vegas, hit me up!) and we spent a few minutes chatting about what’s next for fintech, which led to Stuart pointing me to some interesting data points released by the Fed around credit card charge off.

Post financial crisis, most of the largest banks in the US have been chasing prime consumers with generous incentives while leaving sub-prime customers to smaller banks + fintechs. One main value proposition by many fintech companies are their unique data sets and proprietary underwriting models, but the big question still remains - how will these models perform in a market correction event? We’ve also started to see smaller banks enter the market via fintech partnerships, even acting as the core underwriting bank in some cases (such as Elevate’s Elastic product being underwritten by Republic Bank).

At some point, a certain amount of additional risk has to be taken to underwrite a subprime customer at a competitive rate -> which leads to the real test of who really knows their customer best? There are already some indicators that this might not be sustainable. According to the Fed, amongst commercial banks outside of the top 100, the credit card charge off rate has spiked to 7.78% - equivalent to the charge off rate during the financial crisis for these institutions. I’m optimistic that a market correction will force new product innovation across fintech and unlock new consumers, but for now we all just wait and see…