There is a significant shift happening in the loan sector. Companies that provide credit without using their own balance sheets and have digital access to both consumers and private data sources are likely to have a considerable competitive advantage over traditional lenders. Leading the way toward a digitized lending experience are businesses like LendingClub and Square, which make loans more easily available, transparent, and generally less expensive than other forms of funding. While the credit card business has only recently begun, the market for unsecured personal loans has already undergone this change.
Consumers are matched with investors who buy and ultimately fund loans through marketplace lenders like LendingClub, Sofi, Prosper, and LightStream. These lenders give the market for unsecured personal loans more liquidity and more affordable rates. Transunion estimates that fintech companies made up 38% of the $138 billion market for unsecured personal loans in 2018, up from 5% in 2013. The entire market for unsecured personal loans than quadrupled from $50 billion to 138 billion while the banks’ stake decreased from 71 percent in 2013 to 49 percent in 2018.
The use of credit cards appears to be about to undergo a similar change. Initially, the purpose of credit cards was to enable their owners to make purchases without using cash or checks. Sadly, they frequently led cardholders into debt unintentionally or readily. On balances of $863 billion  in 2018, cardholders paid an estimated $118 billion in interest, with 91 percent of the revenue going to the 10 publicly traded corporations depicted in the graph below.
Due to historically high interest rates and record-high interest payments over the past ten years, these businesses are taxing their customers more than ever before. The average credit card rate has climbed by around 700 basis points in comparison to long-term Treasury rates since 2008, increasing the difference between credit card interest rates and Treasury rates from about 800 basis points to 1,500, as seen in the chart below. At the same time, interest rates have reached record-low levels in absolute terms.
The high and rising signup bonuses required to attract customers have apparently been offset by banks charging higher interest rates. When Chase Sapphire Reserve launched in August 2016, JP Morgan gave new cardholders $1,500 sign-up bonuses if they made $3,000 in purchases in the first three months. In the first two months, Sapphire Reserve acquired 470–706,000 customers, making it the most successful credit card introduction in history. This resulted in a liability of between $35 million and $53 million.
Fintech businesses do not require incentives or perks to draw new users, whereas banks are charging record-high interest rate spreads to offset rising client acquisition costs. For instance, Apple debuted its credit card earlier this year without any incentives and attracted roughly three times as many cardholders in the first two months. According to this Google Trends data, the publicity it produced also led to three times as much interest as the Sapphire card did.
The Apple card, in our opinion, was just the start of the avalanche of credit cards and credit card substitutes that fintech companies will provide over the coming several years. Due to their low customer acquisition costs and data benefits, fintech companies can offer more competitive rates than their banking counterparts. In order to gain the users’ trust and loyalty, they also offer transparency.
LendingClub and Square are two fintech companies that have applied for banking licenses, which should lower their cost of capital as they cut out middlemen and provide services directly to customers. Fintech companies could seize half of the consumer debt currently provided by banks, reducing their credit card interest fees from $118 billion in 2018 to $64 billion in 2028, thanks to their structural advantages over banks. To make matters worse, bank credit card interest rates might stabilize and drop considerably further from their current 1500 basis point premium over Treasury bonds.
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