Mercator Advisory Group’s December 2019 Viewpoint, Credit Card Lenders: Hone Strategies and Do Not Let Fintechs Scare You, raised a few eyebrows because we recommended that credit card issuers should not get worried about fintech and marketplace lenders. Stick to your knitting, we said. Do not be a flash in the pan; play the long game with credit management. Some may not think banking is leading-edge, but bankers sleep better when they follow the rules and prepare contingencies.
Today’s story in the Washington Post talks about On Deck Capital. Six years ago, the firm IPO’d at $1.85 billion. Yesterday, the firm announced that it agreed to be sold for $90 million. It is not just On Deck that is floundering.
- Shares of On Deck and competitors, including LendingClub Corp. and GreenSky Inc., have tumbled this year as the Covid-19 pandemic raised doubts about customers’ ability to repay loans.
- Kabbage Inc., which is backed by Japan’s SoftBank Group Corp., began suspending customers’ credit lines in the early days of the outbreak as small businesses across the U.S. shut their doors to help stem the spread of the virus.
We are in a new world, as we discussed in a recent Mercator Advisory Group Webinar on credit card profitability. Information is essential, but knowing how to use it is what makes the difference. There are nuances, and consumer lending is just as much of an art as it is a science.
The WP continues:
- During the financial crisis, banks were short on firepower for lending and wary of risks, which cleared the way for new entrants. Now the problem isn’t a shortage of cash, but information.
- It’s hard to predict who will keep their jobs or stay afloat as the pandemic evolves.
- Even established credit-card lenders such as Capital One Financial Corp. are conceding they don’t know which of their longtime customers still have a job.
Banking may seem boring when compared to the coolness of fintechs and Silicon Valley lending. But sometimes, boring is good—especially during a recession.
For me, I like the boundaries of capital adequacy, risk management, robust loan loss reserves. Even a proper OCC audit on safety and soundness makes a lender feel good, knowing that reserves are in place and controls work.
We still say, “don’t let the fintechs scare you.” Keep your eye on the ball, the recession has not peaked, and this is time to block and tackle. That is how you survive decades in retail credit.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group