Why FinTech Businesses Should Invest in the Consumer Credit Sector?

Highlights:

• Introduction
• The popularity of instalment credit
• Advanced technologies in consumer credit
• Effect of growing penetration of smartphones and the Internet on the sector
• Partnerships and product launches

Consumer credit, commonly known as consumer debt, refers to personal debt taken for the acquisition of goods and services. While the term covers any form of personal loan, it is typically applied to describe unsecured debt of smaller amounts. Consumer credit enables individuals to access an advance on their personal finances to buy products and services. For instance, in case of a vehicle emergency, consumer credit turns out to be a valuable resource to obtain funds.

A credit card is a convenient form of payment that is widely accepted, providing access to revolving credit. Banks, financial institutions, shops, and many other firms offer consumer credit. Moreover, there are also rewards such as cash back or travel points available on several credit cards. The global consumer credit industry is expected to cite a growing CAGR of 7.8% by 2032.

Installment credit: A popular method with low interest rates

Customers distribute the expense of a particular purchase over time through instalment credit. Payments are usually made weekly or monthly in uniform instalments that bear low-interest rates. In certain instances, such as Buy Now Pay Later (BNPL) plans, repayment schedules are interest-free when the loan is rapidly settled. Installment credit is often secured, with the purchased item (such as a house or car) serving as collateral in the event of a default.

How are advanced technologies transforming consumer credit processes?

• Fraud reduction with biometrics and quick payouts:

Instant payouts in consumer credit offer a streamlined process that verifies the borrower's identity and allows real-time fund transfers directly to their bank account. This immediate transactional approach significantly minimizes the risk of fraud by narrowing the window of opportunity for potential fraudsters to exploit fake identities or provide fraudulent information.

Consumer credit has incorporated technologies such as fingerprint scanners or facial recognition software in lending process, similar to those embedded in smartphones. This technology authenticates a borrower's identity during the application process. By including biometric data in personal details, consumer loan providers verify the identity of the individual applying for the loan

• Integration of AI and ML:

Artificial Intelligence (AI) and Machine Learning (ML) have a substantial impact on consumer credit, enhancing data analysis, credit risk assessment, and decision-making processes for lenders. ML, a subset of AI, employs algorithms that refine performance through experience with minimal human intervention. Lenders use AI models to make well-informed credit decisions, resulting in improved outcomes for consumers.

The use of AI/ML in consumer credit enables fast data analysis and credit risk assessment of extensive datasets. Financial institutions benefit from the broad applications of AI and ML technologies, leading to heightened efficiency and effectiveness in lending practices.

Increasing adoption of smartphones and penetration of internet: A promising opportunity to expand consumer credit

The rapid expansion of internet connectivity and smartphone usage in the global digital payments sector has significantly influenced consumer and business activities. Digital payments empower individuals to make retail transactions 24/7 using internet-connected devices, without any restriction of physical location at the point of sale.

Immediate accessibility enables consumers to make convenient & quick purchases and pay for services without the need for cash or traditional bank or credit cards. Furthermore, auxiliary payment service providers electronically connect to customers' devices, which allows rapid, secure, and efficient funds transfers in the consumer credit industry. This trend is expected to offer lucrative growth opportunities for the consumer credit sector in the coming years.

How do strategic alliances strengthen the position of top players?

The global consumer credit industry is dynamic, and frontrunners have engaged in strategic alliances to sustain the competitive industry. These alliances involve mergers, collaborations, partnerships, acquisitions, and new product launches. Some of the recent alliances are:

RBC and Visa Canada partnered in November 2022 to develop financing options  

In November 2022, Royal Bank of Canada (RBC) and Visa declared a new partnership which offers the convenient choice to convert qualifying purchases into smaller, equal payments to eligible RBC personal credit cardholders over a specified period. This option is available when shopping at participating merchants across Canada, involving both online and in-store transactions.

This announcement addressed the surge in consumer demand for more convenient and affordable financing solutions, including instalment payments and Buy Now Pay Later (BNPL) options, both in Canada and globally. Visa's research indicates that up to half of all global consumers have expressed interest in instalment financing provided by their existing credit card issuers.

Finastra introduced an embedded consumer credit solution on June 30, 2022

Finastra introduced its embedded consumer lending solution, providing consumers with access to traditional regulated lending options directly at the point of sale (POS). This platform aims to facilitate financial institutions, distributors, and merchants in offering easy access to lending options for their customers.

Finastra Embedded Consumer Lending aims to streamline the purchasing process for end consumers, offering more seamless options and providing an alternative to the Buy Now Pay Later approach. This solution is relevant for high-value purchases where traditional Buy Now Pay Later options are not applicable.

Nova Credit introduced an Alternative Credit Data Platform designed for lenders

Nova Credit launched its Nova Credit Platform on March 4, 2024, designed to revolutionize how lenders handle and analyze consumer credit data. The platform offers seamless integration, effective management, and insightful analysis of consumer credit data from alternative sources while adhering to consumer reporting agency standards.

The Nova Credit Platform offers a range of capabilities, including multi-source data onboarding, embedded analytics, and diverse deployment options. These options include no-code solutions and direct application programming interface (API) integrations.

To conclude, the global consumer credit industry has evolved due to rise in digital transformation, several benefits offered by lenders, and an upsurge in demand for loans from small businesses & individuals. However, the high penetration of smartphones and the internet is expected to open new avenues for the industry in the future.

For a detailed analysis of the global consumer credit industry with investment opportunities, contact our experts today!

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