Our point of view from December 2019, entitled “Credit Card Lenders: Perfect Your Strategies And Don’t Let Fintech Scare You OffExplained how credit card issuers should not fear installment lenders trying to turn credit card balances into consolidation loans and acquire point-of-sale financing into term loans.
The premise was simple: Alternative lenders have yet to experience an economic change, unlike credit card issuers, who adjusted their business during the recessions of 1960 (10 months), 1970 (11 months), 1973-1975. (16 months), 1980-1982 (22 months), 1990-1991 (9 months), 2001 (8 months) and 2008-2009 (20 months).
There were a few credit card failures along the way, such as Advanta, International Household, and MBNA. Yet for the most part, the industry has moved on, with a more robust credit rating, better risk management tools and economies pushing towards digital treasury.
Installment loans predated credit cards, but in the early days they had skyrocketing payments. You would pay the monthly interest and then at the end you would pay the principal balance. It was a crazy model that created a false sense of security for borrowers and lenders.
Things changed in the late 1800s when retailers like Singer Sewing Machines and loan companies like Household Finance created a business model where a portion of the monthly balance and interest was due each month. When credit cards first appeared in the early 1970s, plastic proved to be a more accessible tool, with a new feature: revolving credit.
Fintechs have picked up on this model over the past five years and have become the main source of installment loans; they tried to bring credit card volumes back to the old, disastrous installment process. There have been some successes, but we challenge the model by arguing that revolving debt is more manageable than installment debt. Another factor is that financial institutions have an efficient, proven and resilient model.
Here we are today.
Forbes looks at the same problem and has similar results to our view from December. While we certainly had no idea of a global pandemic, we believe that a recession is long overdue. Forbes names interesting analyst firm named dv01, which is an investment management formula used to calculate the value of a basis point. Cheesy but exciting stuff.
But according to The data Provided by New York City fintech Dv01, defaults are already a serious problem for online lenders.
As of April 9, about 12% of consumer loans made by online lenders were already “in doubt.”
This means that the borrower has skipped a payment by negotiating an extension of the due date with a lender or only by not paying.
That’s a near-doubling of distressed loans in three weeks, according to data that tracks 1.7 million loans worth $ 19 billion provided by Dv01, which happens to be named after a formula that traders use this to calculate their exposure to changes in interest rates.
Well the cards aren’t pretty, but they are acid tested.
In its annual stress tests, the Federal Reserve modeled major banks’ credit card loss rates at 11.3% in an “adverse scenario” and 16.35% in a “severely adverse” scenario.
The new findings from Dv01 mean that at least among Payday Now Online lender, credit problems have already passed a bad recession and are heading to depression-like levels.
Dv01 data tracks loans made by online platforms such as LendingClub, SoFi, Best Egg, and Prosper Marketplace.
The average FICO score of the loans he tracked was 715 and the average loan balance was $ 11,400.
While large and comprehensive, the data set covers only a fraction of the record $ 14 trillion in U.S. household debt, including more than $ 4 trillion in credit card debt.
Misery may love company, but I still feel more comfortable with my line of American Express, Discover, Mastercard, and Visa cards in my wallet.
Preview by Brian riley, Director, Credit Advisory Service at Mercator Advisory Group