The future of consumer lending

“We’ll probably be the last generation to use the term credit card and debit card…It will probably be debit access or credit access, and it will likely be loaded on to a mobile device.” – John Stumpf, CEO, Wells Fargo

FinTech has been revolutionizing the way an ordinary consumer is making payments. With apps like Apple Pay, Samsung Pay and Google pay, today, there is no necessity for a physical card.

While payment processing through technology is getting a lot of attention by bringing more convenience and safety to transactions, new business models are coming up which can entirely move consumer banking to mobile devices. One such application is Marcus by Goldman Sachs. Marcus is an online only bank which allows users to make deposits as well as take personal loans to refinance their credit card debts.

Usually credit card users are of two types. The first kind are the ones who use the card to make payments regularly and repay their debt at the end of the month. They get interest free credit to spend all month, while the credit card companies cannot make profits from this segment. The other kind of customers are the ones who use the credit card to borrow and are unable to repay it immediately. It is this segment which accounts for the bulk of the profits for the credit card company. This segment is charged high interests to make up for the losses the company incurs from the first segment too.

Here is where Fintech lenders come in, and they refinance these credit card debts at a cheaper interest rate. This is possible since there is no cross subsidization – all the customers of these lenders pay interest. This is what Marcus has done successfully over the past two years since its inception – it has given $3 billion worth of personal loans to over 1.5 million customers. Marcus brand will potentially offer auto loans, mortgages and insurance in the future, while other functions like wealth management can also be integrated into the service.

The added benefit of the FinTech services is the flexibility they provide. Today’s consumer wants choice and wants to be in control. It is possible for a user to fix his duration of loans as, say 26 months, instead of the standard offerings of 2 year or 3 year loans which banks may provide. Fintech, in addition to increasing the array of services which can be provided to a customer also empowers him to get credit in his own terms.

Reference: http://www.goldmansachs.com/our-thinking/podcasts/episodes/10-13-2016-harit-talwar.html

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