Before we get back to the history and workings of credit cards, I thought it would be interesting to catch up on an emerging trend, that of “alternative credit.”

Background

On September 24, 2020, Petal announced a $55M Series C led by Peter Thiel’s Valar Ventures.  Petal requires no credit history to quality for its fee-less credit card.  Instead it uses a “cash score” based on a consumer’s income and expenses.  There has been a total of $230M in funding this year, including $50M for Nova Credit, which helps newcomers use their international credit history to access financial products and services in the U.S., and $50M for Deserve for its “credit card as a service” platform. With the average American holding 2.69 credit cards in 2017, according to TransUnion, most portfolio growth had to be achieved by taking accounts away from other issuers or seeking underserved markets.  These markets include “no file/thin file” people; those who have never had a loan, or who have had no activity in the past two years.

What is Alternative Credit?

Alternative credit (or “altcredit”) companies are looking at metrics like bill payment history: since credit cards are unsecured, they are often last to be paid when borrowers come under financial pressure.  However, rent or mortgage payments, utility payments, and mobile phone payments are more necessary and offer a more accurate picture of a person’s ability to repay. In fact, some landlords supply the credit bureaus with payment histories at a renter’s request to help them establish a credit score.

Traditionally, secured cards, or credit cards that require a cash deposit of $50 or more, have been the main way for people to build a credit history.  However, altcredit provides a way to do this without a deposit, using bill payment data and lower credit lines.  This has the potential to disrupt the industry by providing an alternative to the “big three” credit bureaus and expanding the available market.

At the MoneyFest 2020 virtual conference on October 28, 2020, Nicky Goulimis, the Co-Founder & COO of Nova Credit drew attention to the plight of immigrants and foreign workers, who may have a credit score in their home countries, but cannot import that score to the U.S.  Nova Credit has partnered with American Express to use its proprietary score to offer credit cards to U.S. newcomers.  As with Petal, Nova Credit also uses non-traditional data including international credit history and bank transaction data to furnish its Credit Passport®, which is equivalent to a U.S. credit report and credit score.  Nicky said she was reluctant to use data sources like social media out of concern for accessibility and equity.  Not everyone is active on Facebook, for instance.  In any case, there is more work to be done with rental payments, because property management is quite fragmented  Another area of interest is payday lending, which often appeals to people with weak or non-existent credit.  The key to all of this activity is customer permission, allowing access to records that would otherwise remain private.

Outlook

While credit card issuers have done well so far, in part due to generous forbearance policies, the next six months are going to see some real pressures.  As of October 29, 2020, initial unemployment claims remained elevated at 751,000, albeit far down from their peak of 6.9 million on March 28.  It is clear that a substantial number of jobs are gone for good, and that it will take years to get back to where we were at the beginning of 2020.  Continuing unemployment claims shrank to 7.76 million, but with unemployment benefits due to run out for many jobless in about three months, unless Congress again extends unemployment benefits, there will be a large drop in consumer spending.  With prospects for a new stimulus package all but extinguished, and COVID-19 cases increasing with the onset of cold weather, the economic rebound is stalling.  I expect there will be a steep rise in delinquencies as lenders start to require back payments on credit card debt, and a resulting increase in the number of consumers with bad or impaired credit.  In this context, altcredit is poised to make gains, which is why venture capitalists are motivated to provide funding.

If you are in the business of offering credit, you should acquaint yourself with how companies like Petal are using bill payment history in combination with lower limits and higher rates to issue credit to more people without a higher risk of losses.

If you are a person without easy access to the credit market, Nova Credit’s website has helpful guides on how to get a credit card and establish a credit history in the U.S.