U.S. Consumer Financial Data Rights are Almost Here
November 1, 2023 | 5 min read
The global COVID-19 pandemic changed the credit card market, with total revolving credit card debt in the United States falling from a high of nearly $1.1 trillion in 2019 to $950 billion in early 2021 and the balance on credit cards dropping from an average of $6,629 at the end of 2019 to $5,897 at the end of 2020, according to Experian. See the graph from CreditCards.com below for details.
These trends have made some financial institutions nervous, as they indicate decreased card income.
What’s driving the trend? Among many things, there’s the matter of consumers receiving stimulus funds and using those funds to pay down their credit card debt. Then there’s also the rise of a buy now, pay later (BNPL) approach to shopping, which has exploded in popularity and is expected to skyrocket by 47% over the next year.
To explore this second point in depth, consider that the European fintech company Klarna raised $639M at a $45.6B valuation to enter the U.S. market and further promote their BNPL approach to banking. Klarna enables consumers to split payments over the course of several weeks, changing the way they view credit. After all, when consumers pay over six weeks with no interest, they’re no longer using their credit card as much as they once did.
Given the rapid growth of this BNPL approach, it’s time for banks to take note and invent new approaches of their own.
Open Banking and Open Finance can help with this.
One option is to use Open Banking to offer an alternative to buy now, pay later — one that helps consumers consolidate their current credit card debt into a series of set payments. With the insights available from tokenized, credential free account connections, banks can get the insights they need to create fixed tranches and allow consumers to choose the amount, rate, and payment schedule they want, offering clarity about total payout. Financial institutions that offer this level of flexibility best ensure that consumers stay with them and don’t consolidate debt with a competitor or choose a BNPL offer.
Another option is to finetune the credit card offers you’re making to individual consumers. For example, with an open finance API and modern connectivity you can pipe in a 360-degree view of customer accounts from a variety of financial services companies and then get insights into transactional patterns and card types to better understand what each customer prefers. Does someone spend a lot on air travel? Offer them a card with big rewards for flights. Does someone else spend a lot on gas? Offer them a card with big rewards for filling up their car. By dialing in the exact needs of a certain card, you’re more likely to get that revenue.
In addition, banks can also use the insights gained from open finance to better understand balances and debt load, which can augment the traditional credit approval process. In this way, banks can better understand which customer segments they can safely offer credit cards to while making sure that these customers don’t end up in financially precarious situations. For instance, NuBank, which is now worth $30 billion after a $750 million investment led by Berkshire Hathaway, allows customers to start with extremely small credit limits and build from there, analyzing transaction data along the way. Because of this, NuBank is reaching unbanked and underbanked markets.
This is just the beginning of what will be possible with open banking and open finance, as people continue to invent new ways to help people find the credit they need and become financially strong.
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