Technology and the Future of Credit
Five insights or trends in the future of credit are POS lending, contactless and cashless transactions, big data, SME lending and the importance of identity. Five key players or influencing companies in the future of credit include Zero, WishFinance, Square, Amazon and Affirm.
- Already firmly on the scene for the future of credit, POS (point-of-sale) lending is predicted to gain an even bigger market share.
- As consumers move increasingly exclusively digital and online, POS lending is perfectly positioned to capture them, as it is natively a digital-first experience. Traditional banks and issuers will be threatened by POS lenders unless they can gain relevance with the modern, digital customer.
- POS lending does not rely on traditional credit checks, so it appeals to a wider audience, especially those without much lending history in their files.
- Buy-now-pay-later type spending has been driven by success in certain retail markets, such as OEM auto finance. As this allows for end-to-end control, it remains to be seen if it will gain traction in other markets.
- Right now, POS lending is financed either by interest rate fees paid by consumers or by merchant fees.
- For traditional lenders to remain competitive or to gain back some of the market share gained by POS lenders, they will need to disrupt this segment in the future.
- Visa, for example, announced it was piloting POS lending with select merchants in India, Russia and the UAE.
Contactless & Cashless
- While society has been transitioning to this for some time, experts are predicting the COVID-19 pandemic will accelerate the rate that transactions will become almost completely cashless. There is already a marked increase in credit card transactions for small amounts, under $5, showing the move away from cash.
- A survey from early March (2020) found that 38% of people consider contactless technology as an important factor in deciding on a credit card.
- In order to keep germ-free/clean, mobile apps or "wave and pay" solutions allow people to pay and pay each other without any touching. Several countries' banking regulators have actually raised the amount that could be spent via a contactless transaction, in a bid to encourage consumers to use contactless payments and reduce the spread of disease.
- Transportation networks are increasingly adopting contactless credit cards as a method of payment.
- Some experts predict that one day credit cards will not only be able to pay money (to people) but accept funds, too.
- One of the primary challenges for lenders to date has always been to be able to understand their customer and what risk they were absorbing. Gaps in information have persisted for certain customers still 'outside' of the system, such as young adults or people from cash-based rural markets.
- However, as data can now be collected and collated from billions of sources and places, banks are slowly able to close that information gap. Machine learning and deep learning can further be used to piece together data and make informed lending decisions. IBM found that 90% of all human data has been created in the last two years.
- AI will have a role in utilizing the data to come up with new, multivariate algorithms to create new scoring models.
- As data becomes more and more democratized, smaller players and disrupters can come into the credit space to offer innovative products to consumers.
- Banks are predicted to really tap into SME lending as the future of credit, especially as a digital priority. There is significant room for improvement in the customer experience, meaning banks will have to keep up with fintech firms that already offer a seamless, efficient process.
- As such, there is a real drive to fully digitize the SME lending process. Banks are understanding the need to see the end-to-end journey, rather than any piecemeal approach.
- Some lenders are recognizing that it may be prudent to partner with fintech rather than try to replicate it internally. For example, ING partners with Kabbage and BBVA with OnDeck.
- As credit will become increasingly digital, confirming identity becomes extremely important for the security and integrity of lending.
- Therefore, technology like blockchain and biometrics are poised to become vital to the future of credit.
- Both will prevent fraud, which is one of the biggest risks for lenders. Current anti-fraud measures like PINs and passwords will become outdated, as technology like fingerprint readers will be integrated into cards and behavioral biometrics employed to flag fraudulent transactions.
- Zero, which launched last year, is on the forefront of fusing fintech with sleek product design and an innovative business model.
- An app-based bank, Zero combines a credit card and debit (checking) account into one, sleek product. Consumers earn cashback on all transactions but have their "credit" automatically paid from the checking account.
- The card is modern, made of metal with a minimalist design. With no fees, people can earn cashback like credit but bank like debit.
- Its "tier" model is also unique, in that users can actually level up their rewards via referrals rather than spending alone.
- WishFinance, and future companies like it, are seeking to innovate and disrupt the world of P2P lending. Wish aims to overcome some hurdles of P2P lending like diligent credit checks and safeguards.
- WishFinance uses blockchain tech to connect to a business's POS (point of sale) to utilize real-time data for analysis. Then, when a business needs funds, Wish uses this data, along with local information like market conditions and local information, to score borrowers.
- This means that businesses are scored on real cash flow data, not assets.
- Repayments are then taken from the same POS. Wish programs it to deduct 3-5% of transactions to repay the loan, which means the more business the company does, the faster their loan is repaid.
- Square has made its name in the banking industry by providing cost-effective payment processing solutions, mostly for small businesses. Square Capital, launched later, then made it possible for these businesses to access funding at great rates.
- Square recently reapplied for their banking license, which, if granted, means they will be able to offer even more profitable solutions.
- Innovative solutions like the Square Card (which allows companies to use incoming cash against future credit) and Square Cash (P2P payments) extend Square's potential pool of customers.
- Square Cash and a possible banking license could allow the company to move from a primarily B2B company to a big player in the future of credit.
- While still very much in speculation phase, many experts are simply waiting for Amazon to announce its foray into retail banking and lending. The retail giant already offers lending to its third-party sellers and controls certain payment methods.
- The prediction is that the company is forming or will form a partnership with fellow giant JP Morgan Chase to build a truly disruptive megalithic consumer finance arm.
- No one really knows what this will look like in the future of credit. Experts speculate the company will focus on key partnerships, a strategy it has successfully employed in the past.
- The company has already made key fintech investments in emerging markets, such as India and Mexico.
- Amazon's influence and pull is so great, that any move into banking could easily become a new "norm" for consumers.
- Affirm represents the major increase in POS lending. Last year, the company struck a major deal with one of American's largest retailers, Walmart, to offer point-of-sale lending on its website and at nearly 4,000 stores.
- Consumers will be able to access fixed-payment loans on items between $150-2,000, adding Walmart to nearly 2,000 other US merchants.
- Affirm CEO Max Levchin has been a vocal critic of the credit card industry, claiming that lenders like to trap consumers in debt for long periods of time.
- In 2019, Affirm also launched a new B2B arm for business lending. Offering a similar buy-now-pay-later model, Affirm seeks to disrupt the future of credit by offering both businesses and consumers easy access to fixed-plan lending.