FinTechs are going after another financial market void, this time providing loans to customers with low credit scores.
According to a report in the Wall Street Journal, citing the market research firm Competiscan, LendUp Global and Fair Square Financial are among the FinTech startups that are going after borrowers who have less than stellar credit, sending out about 35 million credit card offers in the mail in the first six months of 2018. That is up from 7 million mailed out in the same time frame a year ago. Meanwhile, CreditShop, which investment firm Varde Partners acquired in 2017, launched a credit card earlier this year while Elevate Credit, which focuses on installment loans, came out in July. For FinTechs, making loans to subprime borrowers can be a lucrative business. The credit cards typically have interest rates of around 20 percent, higher than the average credit card interest rate which the Wall Street Journal, citing the Federal Reserve, said is 14.1 percent. Reward programs, which are expensive for a credit card company to run, are not common with these credit cards geared toward the subprime market, noted the paper.
The FinTechs are getting support from industry players including The Orogen Group, an investment firm headed up by former Citigroup CEO Vikram Pandit. In May it invested $100 million in Fair Square, which provides cards to borrowers who don’t have the best credit scores. LendUp announced this year that Capital One co-founder Nigel Morris and former Capital One Chief Credit Officer Frank Rotman became directors on the board.
While this area of the market has the potential to be lucrative, it does have the risk of customers not paying back credit card balances. The Wall Street Journal noted that banks have been slowing down in this sector because of the risks. Autonomous Research found that subprime credit card balances at seven big banks in the U.S. increased 3 percent during the first six months of this year, down from a 13 percent increase a year ago, while Capital One subprime balances represented 32 percent of its credit card balances in the first half of 2018, down from 36 percent in the first six months of 2017.