Our December 2019 Viewpoint, titled “Credit Card Lenders: Hone Strategies and Do Not Let Fintechs Scare You,” discussed how credit card issuers should not fear installment lenders who attempt to shift 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 shift, unlike credit card issuers, who adapted their business in 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 flops along the way, such as Advanta, Household International, and MBNA. Still, for the most part, the industry evolved, with more robust credit scoring, better risk tools, and economies pushing towards digital cash.
Installment loans preceded credit cards, but in the early days they had balloon payments. You would pay the monthly interest, then at the end 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 such as Singer Sewing Machines and loan companies such as Household Finance created a business model where a portion of the balance and the monthly interest was due each month. When credit cards emerged in the early seventies, the plastic proved to be a more accessible tool, with a new feature: revolving credit.
Fintechs reprised this model over the past five years and became the dominant source of installment loans; they attempted to shift credit card volumes back to the stodgy old installment process. There were some successes, but we challenge the model by asserting that revolving debt is more manageable than installment debt. Another factor is that financial institutions have a working, proven, resilient model.
Here we are today.
Forbes looks at the same issue and has similar findings to our December Viewpoint. While we certainly had no idea of a global pandemic, our view has been that a recession is long overdue. Forbes points to an interesting analyst firm named dv01, which is an investment management formula used to calculate the value of a basis point. Nerdy, yet exciting stuff.
But according to data provided by New York City fintech Dv01, loan delinquencies are already a severe matter for online lenders.
As of April 9, some 12% of consumer loans made by online lenders are already “impaired.”
That means the borrower has skipped a payment either by negotiating a due-date extension with a lender or only by not paying.
It’s a near-doubling of troubled 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 to calculate their exposure to interest rate changes.
Well, cards aren’t pretty, but they are acid tested.
In its annual stress tests, the Federal Reserve models credit card loss rates for large banks to be 11.3% in an “adverse scenario” and 16.35% in a “severely adverse” scenario.
Dv01’s new findings mean that at least among online lenders, credit issues have already spiraled beyond a bad recession and are heading towards Depression-like levels.
Dv01’s data tracks loans made by online platforms like LendingClub, SoFi, Best Egg, and Prosper Marketplace.
The average FICO score of the loans it tracked was 715, and the average loan balance was $11,400.
While extensive and comprehensive, the data set covers just a fraction of America’s record $14 trillion in household debt, including $4 trillion-plus in credit card debt.
Misery may love company, but still, I feel more comfortable with my array of American Express, Discover, Mastercard, and Visa in my wallet.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
