Can Citi and Chase beat fintechs at their own game?

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The long-dominant credit card is under attack — not only from outside the industry but also from within.

Consumers who want to finance expensive purchases, whether it’s a new refrigerator or the latest smartphone, often pull out plastic instinctively. The revolving balances that result from their well-ingrained shopping habits represent a lucrative business for many banks.

But upstart lenders are now mounting a challenge to the card industry, aiming to change both the decisions that shoppers make in checkout lines and their willingness to roll over their debts on an indefinite basis.

These companies are focusing on millennials, whose financial behavior is still more malleable than that of older cohorts.

But banks with big credit card franchises are not sitting by idly. In recent weeks, JPMorgan Chase and Citigroup have both announced new products that take a page from the nascent competition by allowing customers to turn their cards into products that offer fixed repayment costs. They join American Express, which pioneered the concept in 2017.

The new offerings should enable Chase, Citi and Amex to hold onto business they might otherwise lose, said Michael Taiano, a senior director at Fitch Ratings. But he also pointed to a downside: the fixed-rate products will likely offer lower profit margins than the credit card business has traditionally generated.

“It’s a defensive strategy,” Taiano remarked.

One threat to the credit card industry comes from online installment lenders that encourage cardholders to refinance their existing debt. Companies such as LendingClub and Social Finance, or SoFi, offer personal loans with fixed repayment schedules and lower interest rates than credit cards.

Outstanding balances on U.S. personal loans have climbed by nearly 60% in the last four years, to a record $138 billion at the end of 2018, according to data from the credit reporting firm TransUnion, Most of the sector’s growth has been driven by fintechs, which now hold 38% of outstanding personal loan balances, up from just 5% in 2014.

The second threat comes from a newer crop of online lenders. Companies like Affirm and GreenSky, which offer installment loans to finance specific purchases, are trying to change consumers’ shopping habits. Their marketing pitches often focus on the perils of revolving debt.

Affirm CEO Max Levchin once described the credit card as a tool so powerful that consumers may use it to accidentally saw off their own leg.

In a recent interview, Levchin said: “It’s a tool with no safety on. If you’re not careful, you’re going to end up revolving forever and paying a lot of interest.”

San Francisco-based Affirm, which launched in 2013, was initially focused mostly on e-commerce, financing purchases at checkout. But today the company has its eyes on brick-and-mortar shopping as well.

Last month, San Francisco-based Affirm announced a partnership with the retail giant Walmart, underscoring its arrival as a competitor to the large credit card issuers. Under the Walmart deal, in-store shoppers who are purchasing electronics, furniture, sporting goods and more will be able to apply for Affirm loans quickly on their mobile phones.

These sort of loans likely hold more appeal for lower-income folks who have a difficult time paying off their credit card debt than they do for affluent consumers who receive rewards whenever they swipe their cards.

Arad Levertov, the CEO of Sunbit, a Los Angeles-based point-of-sale lender that specializes in subprime borrowers, argued that many consumers are frustrated by how difficult it is to understand how much interest they will owe on a credit card purchase.

“They’re not sure how much they’re paying for the product, and how much for interest,” he said.

To be sure, the new crop of fixed-rate lenders have yet to halt the card industry’s growth. Outstanding balances across the industry hit an all-time high of $1.06 trillion in December, the Federal Reserve Board reported. As of the third quarter of 2018, every U.S. adult had an average of 1.45 credit cards, according to data from the American Bankers Association and the U.S. Census Bureau.

But the steps being taken by American Express, Chase and Citi suggest that the large credit card issuers are thinking about how their franchises might be eroded over time.

Amex launched its Plan It feature in September 2017. The product allows Amex cardholders who are logged into their online accounts to select fixed-fee payment plans for specific purchases of $100 or more.

Plan It resembles a point-of-sale installment loan, though it is only available after the purchase has already been financed on a revolving credit line.

Amex’s website shows the example of a $422.30 airline ticket, and it presents the option of making six monthly payments of $73.75, 12 monthly payments of $38.73, or 18 monthly payments of $26.98. The customer would pay between $442 and $485, depending on the payment schedule selected.

“That kind of control, we found, is what people really like, as a responsible way to manage their finances,” said Elizabeth Crosta, vice president of public affairs at Amex.

Citigroup’s newly launched card offering is effectively a hybrid between a cash advance and a personal loan. The Citi Flex Loan allows cardholders to borrow money from their existing credit limit, but the debt does not revolve. Instead, borrowers pay the funds back in fixed monthly payments over a predetermined period of time.

Meanwhile, JPMorgan Chase announced plans last month to launch a pair of fixed-fee products for its card customers.

My Chase Plan will look much like Amex’s Plan It feature, though purchases of under $500 are not expected to be eligible to be converted into installment loans, according to Chase’s preliminary plans. The product’s fees will be competitive with those charged by point-of-sale lenders, said Anthony Cirri, head of lending strategy at Chase.

The design of the bank’s My Chase Loan feature is expected to resemble that of Citi’s Flex Loan.

If upstart fintechs see these new products from the credit card giants as a threat to their business models, they aren’t showing it.

During a recent conference call with analysts, GreenSky CEO David Zalik was asked about JPMorgan Chase’s response to the rise of point-of-sale lending, and he did not betray any concern. Atlanta-based GreenSky facilitates point-of-sale loans to consumers through partnerships with thousands of merchants then parcels the loans to its partner banks, which keep the loans on their books.

“We were scratching our heads because we didn't see anything about that actually being point-of-sale. It just appears to be a personal loan product wrapped inside a credit card balance,” Zalik said.

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Consumer lending Credit cards Point-of-sale Fintech Marketplace lending Max Levchin Citigroup JPMorgan Chase Affirm American Express
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