A large portion of the media coverage of alternative finance focuses on the disruptive impact that it will have on banking. A recent survey discovered 70% of bankers believe Fintech will significantly alter the future of their industry.
However, it’s not just banks that could have their world turned upside down: The credit card industry may soon be forced to make drastic changes to its lending model or face the risk of being rendered obsolete.
The numbers
According to the most recent Weekly Credit Card Rate Report byCreditCards.com, the national average annual percentage rate on credit cards is currently 15.01%.
Alternatively, marketplace lenders routinely offer rates in the 7% to 9% range, or even lower.
How is this advantage possible?
Marketplace lenders’ ability to provide better interest rates are a function of three factors: More data, lower overhead and friendlier regulations.
Banks and credit card companies typically rely on FICO credit scores to make lending and rate decisions, but a FICO score can be a misleading oversimplification of a borrower’s qualifications, especially if he or she has a thin credit history. By collecting additional data and getting a clearer picture of a borrower’s financial situation, alternative lending sites such as Earnest can lend at rates as low as 4%.
“When you apply for a credit card, and they don’t ask how much savings you have in the bank, people should be like ‘Why? I have thousands of dollars in savings, I’m clearly a low-risk person,” explains Earnest CEO and co-founder Louis Beryl. Credit card companies take a conservative approach by looking at FICO scores and playing it safe with higher rates.
Just as significant, alternative finance companies face lower overhead costs compared to traditional competitors. Infrastructure is cheaper, as firms operate almost entirely online and have no need for physical branches — a model that also alleviates labor costs. There’s simply no need for as many on-site employees to connect borrowers and lenders.
Friendlier regulations — analysts say — are a third reason marketplace lenders can keep costs down. SEC oversight still exists, but compared to traditional banks, new-age alternatives don’t face the same stringent capital requirements.
Borrowers are catching on
A number of people think…
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