The rise of the credit challengers

Mark Ralphs

29 July 2019

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Young people’s changing relationship with credit and with credit card companies

In the UK, consumer debt is on the rise and yet younger generations are less interested in established credit giants like Visa and American Express. Challengers are filling this void by establishing sustainable finance. They live by the values of authenticity, responsibility and transparency; values which resonate with emerging generations. 

We’re living in contactless heaven – a quick tap here and you’ve made your purchase without ever really having to come to terms with the price. Combine contactless payments with ten years of wage stagnation and it won’t surprise you to learn that credit card debt in the UK has been steadily climbing since July 2013. 

Good news for credit card companies, right? Bad debt aside, high rates of interest and credit card bills that keep piling up mean bigger margins for the Visas of this world. However, there’s a storm coming; emerging generations are turning their backs on credit card giants and the credit giants are failing to adapt and catch up. 

Young debt 

Millennials may be the most indebted generation in history yet, as recently as 2016, a Bankrate study revealed that 67% of people under 30 do not have a credit card. 

How are they financing their lifestyles or, perhaps more importantly, how do they make it to the next payday? This answer is short term borrowing; young people are increasingly turning to high-cost, payday loan companies, with 55% of all loans being taken out by those aged 18 to 34. 

These may be expensive, but it’s clear how they work. A survey from Money Supermarket revealed a significant knowledge gap among millennials on the subject of credit cards; many are not aware that you have to pay interest.

Enter the challengers

Caught between high-interest short-term loans and overdrafts, or opaque old school credit cards, younger consumers are searching for alternatives. Rising to the challenge are emerging credit card companies that emphasise transparency and accessibility. 

You won’t find these challengers on the high-street and the lack of bricks-and-mortar means lower overheads and lower fees. In turn, the lack of legacy tech leaves challengers free to develop simple, personal apps that emphasise ‘delightful’ customer experiences that meet digital natives’ high expectations.

For example, the Petal card, gives customers insights into their personal payment history and habits and goes one step further in helping them make sensible financial decisions by converting outstanding balances into lower interest loans.

Sometimes it takes an insider to recognise where incumbents are falling down – as Neil Radley, CEO of Jaja and former CEO of Barclaycard Western Europe, explains: “The industry now needs a major upgrade – it’s time to put the customer first, provide greater transparency and help consumers take control of their finances.”

These challengers prioritise ethical lending, digital experience, and transparency; and these values need to be lived from the inside out if they are to a) work and b) ring true with customers in the age of social media powered ratings and reviews. 

Buy now, pay later

Stockholm based credit startup Klarna allow people who shop online to “try before you buy”. Shoppers accepted for Klarna’s pay later service have 14 or 30 days (dependent on the retailer) to pay for their online order. Removing one of the biggest obstacles to online shopping, waiting for returns to be credited. Klarna also offers a ‘slice it’ service where shoppers can pay for their purchases in affordable long-term instalments, interest-free.

So how does Klarna make money if not from interest and surcharges? The answer is merchant transaction fees. And Klarna estimates it can increase the average online store’s orders by 30% and average spend by 34%. 

Who ate my lunch?

Visa and Mastercard are the dominant players in the global credit market. Visa has 61.5% of the global payments market, while Mastercard is some way behind with 25%.

They are, at least in part, aware of the challenger threat and are responding. Upstart Jaja has formed a partnership with Visa, which also recently launched a ‘FinTech fast-track programme’ to help early stage start-ups gain access to their global payments network. Revolut and Wirecard have already signed up.

From 1 September 2018 new regulations require lenders to speak to their customers about changing their repayment plan, warn them their card could be cancelled and, in some cases, waive interest, fees and charges in the event a customer has been in ‘persistent debt’ for more than 18 months. These regulations are designed to force established players to take a more responsible approach to lending, will it be enough?

An industry based on a business model that, at least passively, encourages the accumulation of debt, is unlikely to tap into the same values that make challengers so attractive to younger consumers. Could the giants of credit face a Kodak moment? Not yet but there are clear signs of a burning platform.