WORKWEEK

Last week, I wrote about some alarming macroeconomic trends that could impact fintech companies— a dramatic increase in consumer credit card balances. My thesis is that, similar to how a portion of debit card spend made its way to fintech companies over the last few years, a portion of the $46 billion increase in credit card balances in Q2 must have originated from fintech credit card startups that are catering to a new generation of borrowers. These users are acclimated and comfortable with digital finance products and there are more startups than ever focused on building credit cards for Gen Z’s. (If you’re interested in reading more about some of them and their value props, check out this great deep dive from my Workweek colleague Alex Johnson of Fintech Takes.) 

In his essay, Alex mentions that another catalyst for this growth in consumer fintech credit products has been the rise of credit card infrastructure companies—Deserve, Cardless, Imprint, and a few others. Because of the growth on the consumer side of things, its definitely safe to say that infrastructure companies are growing just as rapidly, providing the API’s and more to help enable startups to get to market much faster. 

I caught up with Kalpesh Kapadia, CEO of Deserve, on Friday to chat about the impact the economy has had on his business. For those unfamiliar with Deserve, they’re one of the top credit card infrastructure startups in the market—working with companies like BlockFi, M1, Sallie Mae, Customers Bank, Perpay, Truebill, Glorifi, NYDIG and ZeroHash to power their credit card programs. They work with both Mastercard and Visa to enable modern, digital-first, credit cards for consumers. 

“Behaviorally, the trends we’re seeing are consistent with others in the industry—credit card revolving balances are growing, and spend is moving towards everyday purchases and necessities like gas and groceries. Spend volume is also increasing dramatically. Over the last two years, consumers have been paying down credit card balances owing to government stimulus checks—now, that’s not happening. People are borrowing a lot more on their credit cards, and they’re opening new accounts because they need more credit than before,” Kapadia told Fintech Today. 

Inflation does this in an economy—the price of everything has gone up tremendously and it’s becoming harder for the average American to afford their lifestyle. Usually, this forces people to increase their personal debt, which could cause negative externalities. Kapadia noted that the macroeconomy will also lead to more defaults as well. 

How did we get here? The pandemic and post-pandemic credit card spending has been vastly different, and a lot of folks took advantage of their lower balances to put more extraneous purchases on their credit cards. “During the pandemic, delinquencies and balances went down,” Kapadia said. My guess is that with the government sending stimulus payments, a lot of folks used that extra cash to pay down their debt. “A few trends happened around credit card spend: more people started buying furniture, TV, food, digital goods, home improvement, and putting that on their credit card. Post-pandemic, it flipped: there’s more traveling and spend has shifted to restaurants, hotels, car rentals, etc. In addition, during the pandemic, we saw people pay down credit card debt and do more Buy Now Pay Later too.” 

And, as I mentioned before, inflation is playing a big role in how consumers are spending. “Now, people are putting more spend on credit cards across a number of categories. And inflation is playing a big factor—people’s paychecks aren’t going far, and with so many people living paycheck to paycheck, people are putting more of their living expenses on their card. Consumers are opening more cards and banks are noticing: they’re getting aggressive around rewards/promotional offers and offering a strong value proposition.” 

Overall, Deserve has been seeing more and more inquiries from clients and potential customers—validating the thesis that credit card infrastructure startups have a lot of potential growth over the next few quarters. 

Up next: what’s happening on the data side of things? We’ll talk to a few players in the credit and lending data space.