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Over the next year to 18 months, I expect a slew of fintech companies to release credit cards and other credit-related products, like microlending or installment loans.
There are a few reasons: one is the fact that I’ve heard about 3-5 companies that are planning on releasing a credit card product or a credit product. That includes Venmo, which announced a credit card launch in late 2019.
Another reason? Infrastructure costs are getting cheaper. SynapseFi, the B2B fintech infrastructure company that enables a number of fintech startups, has been testing offering a lending API in a closed beta, according to the company’s API docs. Based on conversations I’ve had, lending API’s are either being strongly considered or on the roadmap for 2 other infrastructure startups (that aren’t Synpase).
Historically, startups have run into a few issues around issuing credit cards: the underwriting process, finding a cost-effective source of capital, and the resources necessary to launch and maintain a credit card too. Beyond that, all you need is the ability to produce cards—Synapse already helps plenty of startups produce cards through their native debit card issuance API. Combining that with a lending API is essentially the framework of a credit card. Running a credit card program takes a tremendous amount of work too—you need to have processes in place for customer support, chargebacks, servicing in case customers fall behind on payments, and a number of operational issues.
But there are some concerns around developing a credit card program. If you’re a startup looking into one, here’s what I’d be mindful about:
Debt & Financial Literacy: One of the concerns around credit card products is the negative brand effect potential it has. Deliquencies are a clear example: Goldman Sachs was so worried about delinquencies dragging down Marcus’s brand that they started the program without a collections team. All it takes is 1 headline that says “X Fintech Startups Has Customers Drowning in Debt” to turn the tide. Not worth the risk for a lot of early stage startups that are just starting to develop trust with their audience.
A way to combat this is adding financial literacy into the entire credit card product experience: from when you first interact with the user and long after.
Cost of Capital: So...who’s paying for these credit lines? I’m not sure venture investors would be thrilled if a neobank expanded into credit by lending off of their balance sheet. And a credit facility would be difficult to obtain for new fintech startups. This is going to be an area to explore—at first, companies are going to try to gain traction on a payment product and add a credit line on top, but making capital accessible for fintech startups seems worthwhile too.
Alternative Credit Modeling: Underwriting is already a confusing, opaque, process. Using tech—which is in itself very complicated—to change underwriting can lead to backlash for companies around transparency and fairness. Take a look at Goldman Sachs and the Apple Card, for instance. DHH tweeted about potential gender bias against his wife, and it led to a still-ongoing investigation by the New York Department of Financial Services. As I wrote before, from my conversations, it doesn’t seem like the investigation will amount to anything, but it’s still an unnecessary branding problem for Apple, and an operational headache for Goldman Sachs.
The reason I added “credit-like” products to my prediction is because there’s a lot of potential around developing novel ways to lend money. Lending API’s simplify the time it takes to determine someone’s creditworthiness. When the cost of implementing a new feature becomes more affordable, its gets more widely adopted. A clear example are debit cards: startups made card issuance easier, and debit cards spread like wildfire.
Installment Loans: I’m pretty bullish on installment loans, and think that area’s pretty untapped. I’ve seen a few products around installments for X, like airlines tickets, and like that space a lot. I don’t think it’s worked so far. One reason is because the value prop isn’t that strong: I’m still spending the same at the end of the day. A key might be figuring out how to if its possible to get flights cheaper rather than just delaying costs. It might be worth exploring an installment loan with smarter underwriting.
One-time loans: I wonder if there will be a lot of innovation around business lending with one-time lending API’s. Invoices and receivables is something that is pretty broken—it’s slow and riddled with issues, so sometimes payment is delayed for weeks. A one-time loan would solve a lot of problems for businesses.
I’m actually pretty bullish on lending API’s and the potential they have beyond fintech. I expect them to be really attractive for e-commerce companies: credit allows you to increase someone’s buying potential, and a slight increase in my buying power can have an outsized impact on my purchase decision. I want to buy Mirror, but its a bit out of my price range. It’d be irresponsible for me to buy it with debit, but I could be convinced with a credit card. Credit is a financial product that changes consumer behavior, so its more appealing to other verticals like e-commerce.
Last reason: credit actually drives revenue too. Credit cards make money through interchange revenue, interest payments, and when credit card companies sell data. I think some of those revenue streams (like the data selling one) will dry up as consumer sentiment around privacy continues to shift. But a) the data is still powerful and can be leveraged by the company itself b) startups will eventually find other revenue streams, like monthly fees. All signs point to a massive shift in the credit card market over the next year and a half.
Fun fact: my first job was in mortgages—I was an intern at a hedge fund that focused on trading mortgage-backed securities. So I’ve always been interested in mortgages and real estate.
I think as sexy as mortgages are, entrepreneurs are going to look towards attacking the rest of the home buying process.
Reason 1: mortgages are hard:
The mortgage space is already pretty crowded, for both B2C and B2B—look at OpenDoor, Zillow, Blend, Better, etc. All of these companies have spent significant resources on tech around mortgage underwriting and efficiency, customer service, hiring and expanding, and in some cases even holding the asset on their balance sheet. Mortgages are a risky business and highly entrenched, so it takes significant resources to get started.
Reason 2: Makes more sense to implement the bundling strategy:
There are a lot of broken parts of the home buying experience. For example, searching for homes and real estate is still locked by geography and physical presence. Saving and planning for buying a house and real estate is still complicated and expensive. Given the complexities around doing a full on mortgage startup, entrepreneurs are realizing its easier to solve those pain points, and others, and upsell customers into a new or refinanced mortgage. Its similar to consumer fintech startups and their implementation of The Bundling Strategy—solve a problem, and upsell your user on an adjacent product.
Beyond mortgages, there’s other topics at the intersection of real estate and fintech that I find interesting:
Pre-Purchase and Post Purchase: The entire home buying funnel has a lot of potential: its an asset you own for awhile. There’s a ton of continued issues that crop up around maintenance, upgrading, etc. All these are touchpoints for financing but utilizing data a bit better—there’s already a stealth fintech company in financing home maintenance space that raised a noteworthy Series A.
Making Ownership More Affordable Putting people on a path towards home ownership is a worthwhile problem to solve. Divvy Homes is a great example. Divvy puts you in a home, but you just pay 2% down and a monthly rent. After a few years (on average, 3), you can get a mortgage. I also like Divvy because I think fractional ownerships is a fascinating concept. There are absolutely other ways to make home ownership more affordable, especially from the investing side.
Renting: Renting is a massive problem for young Americans. Macro economic trends—like heavy student loan debt—have made it hard for a segment of Americans to qualify for an apartment lease in expensive cities like NYC and SF. Incentives are misaligned between landlords and tenants in these cities—landlords have no reason offer a simpler rent payment solution, or discover process, or moving. The demo is also just as likely to look at digital solutions for their renting problem. Because it’s becoming easier to add fintech products to non-fintech solutions, the time’s ripe for tackling problems around rent and using that to sell fintech services.
I’m really excited about the rent space—both renters and landlords have a plethora of problems, between supply and vacancies, affordability, and communication. It also might make sense for companies to look at the rent ecosystem as potential lead gen for a housing business down the line—being the financial partner for owning a home requires a lot of trust, and it’s better for brands to build on that as early as possible. Also, getting ahead of other companies in the space gives you more unique data that you can utilize later on.
Home Insurance: Lastly, rethinking home insurance is really interesting too. There are a) easier and cheaper touchpoints where you can sell home insurance that aren’t being worked on b) the whole concept of insurance on your home can probably be bundled into a mortgage. A mortgage that tied in home insurance and maintained would make a product financial product stand out and provide unique business value too.
The rhetoric around millennials for the past 10 years is that they never buy houses. I’ve always disagreed with that hypothesis: it’s not that they’re never buying houses, its just that major life events are getting pushed back. There are macro economic reasons—student loans, low wage growth—and societal; the pressure of getting married, starting a family, and buying and owning a house isn’t as prevalent anymore.
As millennial home ownership grows over the next few years— and especially as wealth continues to transfer to millennials from previous generations—property ownership, transfer, and buying will be an area to look into for entrepreneurs too.