There is no shortage of innovation in credit cards. Mastercard and Visa are no longer bank associations; they are payment innovation and technology companies. Cards are everyday products that continue to displace cash. Financial institutions focus more on credit card lending than they do on installment loans. Magnetic stripes are out, and digital authentication is in. Most of all, as a result of credit, debit, and card products, 5% of the United States is unbanked, 13% is underbanked, and 81% is fully banked, according to the Federal Reserve.
What has not changed much is the structure of the credit card lending vehicle. In the past 60 years, the design of the bank card has remained essentially the same. The U.S. credit card model requires a minimum due payment that averages 1/36 of the cardholder balance, plus any amount above the credit line. The CARD Act of 2009 added some structure to improve clarity and ensure the account does not negatively amortize, but the terms remain about the same.
The guiding light for establishing the minimum due comes from the Office of the Comptroller of the Currency’s (OCC) Safety and Soundness Handbook. While the OCC does not concisely dictate the payment amount, it mentions that it is “usually calculated as 1 percent of the principal, along with finance charges, and fees,” to ensure that the payment reduces the total balance, and the account does not increase because the minimum due is less than the amount to cover the monthly handling cost.
BNPL introduced a different format than credit cards. In the pre-transaction arena, using PayPal’s Pay-In-Four as an example, 25% of the charge is paid at the close of the transaction, and similar amounts will settle over the next six weeks. In addition, there is no interest charge, and instead of building a sizeable revolving balance that requires a 3% payment, the lending vehicle is a small installment loan.
There is no question that this model hit a chord with consumers.
An exciting development is underway in Australia, and U.S. credit card issuers should take note. In the Australia model, the minimum due monthly payment is closer to 2% of the closing balance rather than the 1/36th commonly seen in the U.S., as this disclosure from Westpac illustrates. However, under a newly structured credit card, the terms change entirely. It is worth a look and could be a breakthrough in the structure of credit cards, at least for a segment of consumers. The model aligns with a finding from Mercator’s North American PaymentsInsights, which pointed out the appeal of low/no interest financing and easy credit.
Westpac now offers the Mastercard-branded Flex Card
In Westpac’s Mastercard-branded Flex Card, underwriters approve a limit up to AUD 1,000 (USD 746). The card carries no interest, but if there is an outstanding balance, the borrower pays $10. There are no late fees, but the card may only be used if the account is current. Terms and conditions are here.
Facing off against Westpac is NAB’s StraightUp Card, issued under the Visa brand. If you carry a balance, there is a $10 charge but a promise of “No use, no pay,” meaning no fee if you do not use the card. Similar to Westpac, there is no interest charged, nor are their late payment fees. However, NAB takes a more aggressive lending approach, underwriting to three credit limits: AUD 1,000, AUD 2,000, and AUD 3,000 or USD 746, USD 1,492, and USD 2,238, respectively.
Even Australian credit unions are getting into the zero-interest card game; Community First Credit Union in New South Wales now offers a similar product at even lower rates.
The card is not for all consumers, but it is an excellent option for thin credit files, students, immigrants, and hourly-wage workers. This new credit card format can create lending opportunities for banks and borrowing opportunities for consumers. But is Zero interest the new secret sauce of credit? Will low-value credit limits allow issuers to embrace a new market? Will it crack the code on elusive Millennials, who still shun credit? And, what about Gen-Z?
Let’s look at the Zero Interest Card in the context of the U.S. consumer and net worth
Step out of the consumer credit box and look at the market differently- consumer net worth. We could spend hours on the importance of FICO Scores and the Ability to Repay rules, but stick with me on this for a moment.
Detailed below is a chart adapted from the John Hancock Retirement Reference Book. The chart stratifies U.S. households into six groups, as shown below. In addition, we overlay some comments on credit cards.
Figure 1: Low Budget Card Lending Can Benefit a Large Block of U.S. Households
Sources: Federal Reserve Bank, John Hancock Insurance, LIMRA Secure Retirement Institute, Mercator Advisory Group
I would argue that just about any household classified as Mass Affluent or better, with a FICO score > than 720, could get almost any credit card they want. Those to the left of the Mass Affluent category, with <$250k in household assets, will not be as qualified if they apply for a card issued by a top issuer.
But, look at the household numbers on Low Net Worth. We have 87.3 million households with assets south of $100k. Of those, 53.9 million are not retired and younger than 55, 13.9 million are not retired, and over 55, and 19.5 million are retired. Sure they do not have the spend habits of the Mass Affluent market, but this down-market group has scale. Therefore, a low-budget card might be attractive to millions of households.
BNPL was an eye-opener for many bankers and payment companies. There are some positives and negatives in the model, but one thing for sure is that BNPL does not solve the issue of household spending and budgeting. The new Australian model embraces entry-level consumers, qualifies them for small credit amounts, and offers banks the opportunity to create a relationship with customers who might grow into deposits and broader lending products.
It is certainly worthy of consideration by every bank card lender.