09 August 2022 |

How Consumer Credit Can Impact Fintech Apps & Infrastructure


Last week some really alarming data came out from the NY Fed that gives us an indicator on just how stressful inflation has been to the average American. 

Consumer debt is rising dramatically—most mainstream media headlines revolved around consumer credit card balances, which went up $46 billion in Q2 2022, a 13% lift from the previous quarter. This marks the highest rise in consumer credit balances in over 20 years—a data point that shouldn’t be glossed over. 

But look at the data a bit more deeply and you’ll see other important info emerge; mortgages and auto loans are also driving increases in overall consumer debt. And, just as alarming, 30 day delinquencies are rising in addition to balances; people are borrowing more and struggling to pay it back. 

None of this is good news honestly but it gets worse; there are so many wonky issues that this creates too. When people start having the ability to pay back their debt, how do people prioritize debt payments? How do consumer credit card startups and BNPL repayment manage delinquencies and repayments in a tighter economy? Larger corporations are raising prices to keep up with inflation, which is leading to some slight revenue growth. As this Bloomberg article points out, unit sales have remained level so no ones selling more, yet companies are making slightly more revenue. This isn’t “healthy” revenue either—it’s not because these companies are selling more products, revenue’s growing because companies are increasing their prices to combat inflation. 

Overall the effect is clear—with things costing more money, consumers are dramatically losing their purchasing power, and they’re looking at credit options to give them more flexibility. 

When analyzing all of this, something I’ve been wondering in the back of my mind has been: how does this impact the fintech world? 

One way is the volume of consumer lending at fintech companies—if more consumers are getting loans and credit cards, then some of that is going to consumer fintech companies, and increase growth for companies in B2B credit card infrastructure that power those companies too. 

One unique example is Sofi: the company is lending to consumers and making more money off those loans by becoming a regulated bank. Sofi was granted a bank charter by the OCC in Jan 2022, which is now creating a more economically profitable flywheel around lending. Because consumer lending is increasing, and Sofi can now hold those loans on those balance sheets, they can also collect more of the fees from interest. 

They also are seeing an increase in deposits, but consumers aren’t going to be able to save that much (the personal savings rate is 5.1%, the lowest in 13 years.) Sofi’s personal lending product and a credit card (which also allows you to collect up to 3% in rewards in crypto) are seeing more volume, but if the costs of deposits get higher, then that offsets some of the revenue gains. 

Sofi does have a really wide, multi-channel, marketing strategy, including naming rights to the LA football stadium for nearly the next two decades—which Sofi over $600 million for $20 million. It remains to be seen whether these big strategies will pay off, but early indicators do look like it’ll reduce customer acquisition through brand recognition dramatically. Plus, with Galileo’s infrastructure business thriving—revenue grew by 38% YOY quarter—Sofi’s diversified business has multiple sources of rapidly growing revenue that can benefit from these macro shifts in consumer behavior. 

Next week, we’ll talk more about how consumer behavior towards credit is impacting credit-card-as-a-service infrastructure companies.