Visa Chief Economist: Banks Disintermed by “Massive Increase in Alternative Lending” | Payments Source

Fintechs that offer installment loans have a major impact on credit card lending – and many card issuers are ill-equipped to compete.
The clearest audience for these products, which allow consumers to transfer some of their credit card balances to a fixed, unsecured loan at a lower rate, are subprime cardholders who pay high interest rates on their credit cards. But these fintechs are reaching a much larger segment of the population with their marketing, which has a felt impact across the entire credit rating spectrum.
In 2010, fintechs held only about 1% of unsecured installment debt in the United States, according to Visa’s analysis of anonymized personal loan data from TransUnion. But that number jumped to 36% in 2017, and it is estimated to have reached nearly 40% today, according to Wayne Best, chief economist at Visa, at SourceMedia’s Card Forum, which takes place this week in La New Orleans.
For card issuers, it seems people are paying off their balances, a trend that could normally be attributed to a healthier economy. Best disagrees.
“A lot of it comes from the disintermediation that we are seeing,” Best said in his keynote address Tuesday. In total, 5% of what would have been outstanding credit card balances was consolidated into personal loans.
This part of the credit card market is now disintermediated, Best said. “It’s a big problem.”
Some of the consumers driving this shift may be young adults with little credit history because they preferred debit cards or did not have easy access to credit cards due to marketing restrictions. Map act. But it would be a mistake to put the entire fintech target audience in this bucket.
“FinTech impacts all credit scores,” Best said in an interview after his speech. “Everyone thinks it’s just millennials or tech geeks. We went back and looked at who was doing these moves and it was happening in all at-risk bands and at all ages – including the baby boomers. “
Best has been with Visa for 29 years and has been in his current role for 24 years. Best and his team, which is located around the world, work with Visa issuers and acquirers to provide insight into the economic changes occurring in their industries.
“We are seeing a massive increase in alternative loans,” Best said. He attributes this to the ease with which these fintechs have made it possible to move sales to their own products, for example via a mobile app or by partnering with retailers.
Some financial institutions respond by partnering or investing in fintechs so they can make a profit by sending clients to them, Best said.
Even if financial institutions do not want to partner or compete with these fintechs, they should at least be aware of the impact of this trend.
“When you, as a consumer, move a balance from credit cards… to unsecured installment credit, it doesn’t weigh as heavily on your credit score,” Best said. “Let’s say I was a near privileged client before; now that has propelled me into a category of choice.
This consumer is now visible to financial institutions that only target blue chip customers, but nothing has really changed about this consumer’s creditworthiness, Best warned.
“It creates a risk for financial institutions that think I’m a blue chip customer, but only because of how this… disintermediation happens,” he said. “It’s a big deal because if you look at what happened in 2016 there was a huge increase in delinquencies that scared the market.”
Delinquencies have increased despite a healthy employment rate, Best said. One of the reasons was that financial institutions had targeted subprime clients more aggressively, “but it’s also this credit rating improvement that has occurred during that time,” he said. “We counted up to 3 million people who went from one score band to two higher score bands – actually a leap forward – and about 8 million people who went from one score band. above.”
Millennials, of course, are a target for fintechs offering installment loans. They see advertisements for the product on social media and are eager to transfer their balances to a loan that offers a lower rate. But this marketing is reaching older demographic groups as well.
“A lot of people don’t think baby boomers are very tech savvy. They have computers and they know how to use them, ”Best said. Baby boomers are more likely to view an installment loan as an option for a home improvement or travel rather than a way to pay off debt. But healthcare providers are still feeling the impact.
“That’s not to say that financial institutions aren’t also playing in this space, but it isn’t growing as quickly,” Best said.