Nothing feels more ‘grown-up’ than pulling out a credit card with a sleek design that has your own name engraved on it.
The figure below provided by the World Bank shows the credit card ownership data by country. The y-axis shows the percentage of respondents who report having a credit card. In Canada, Japan, US, UK and South Korea, credit card payments are ubiquitous. China has the highest average annual growth rate at 65.6% among the countries included in the chart.
According to the survey conducted by the Ascent, the majority of Americans get their first credit card between the ages of 18-20. Dividing by education, 47.5% of Americans get their first credit card during college years followed by 24% post college.
Young students - attending “Zoom” University (everything online), whose internship got cancelled or went online, fresh out of college (via online graduation) jumping into the current bleak job market - might feel like their route to financial adulthood has been disrupted by Covid-19. Fancy dining options and travel rewards that often come with credit cards may now seem irrelevant, un-achievable and distant to them. However, one thing they might have learned from this experience is that if you want to borrow, it is important to build up a healthy credit score!
“Well-won thrift” or “Interest”?
It is important to remember that if you don't clear your balance, interest accumulates. The fairness of this ‘interest’ charged on credit has long been a bone of contention. It even features in Shakespeare’s ‘Merchant of Venice’ with Antonio’s ‘interest’ being viewed by Shylock as just his ‘well-won thrift’. Regulators have struggled to control over-charging of interest or ‘usury’ as it is otherwise known. So what exactly is ‘over-charging’? This is of course, a subjective judgement and a moving target, considering that the ‘base’ rate charged by the central bank also changes. Well in the USA, the ‘General Usury Limit’ is set by state and varies a lot - APR 7% in Michigan and APR 45%(!) in Colorado. In practice however, this does not really matter because following a 1978 ruling which allows banks to charge ‘the highest rate available in their home state’, effectively letting them ‘export’ their highest rates. Turning to Europe, in the UK there are no real ‘usury’ laws, hence as the pandemic hits earning, cash and leads to more credit-spending, the annual rates are going up to a new record high APR of 25.5%.
If these rates seem a little high, remember that ‘credit cards’ are only available to those with a relatively good credit score. The alternative is something called a ‘pay-day’ loan - which are illegal in some US states (prevented by rate caps) but others can charge from APR 159% in Oregon to APR 662% in Texas. In the UK, ‘Wonga’ became infamous for charging rates in excess of APR 5000%, prompting the UK regulators to limit the interest on pay-day loans to a much more reasonable 1,333% (!) rate available today.
Better late than never
This week, we will look at startups which offer credit cards to newbies and those who need to rebuild their credit score. If you can do this, future loans will be easier to obtain when you really need them. Credit Cards actually date back to late 50’s with the ‘BankAmericard’ launch in Fresno but with (as an example) VISA making US$12Bn in net income(net profit) last year, there is plenty of room for innovating with lower fees or higher rewards. The infographic below illustrates the recent growth of credit card startups and the sizes of the circles indicate the amount of investment they have raised.
Well-funded credit-card startups are highly concentrated in San Francisco, and the maximum unsecured credit available to borrowers varies by provider. Credit card startups specifically targeting millennials started around 2019 are currently open for new signups.
CaaS (Credit Card as a Service)
Deserve, a California-based Credit CaaS company offers APIs upon which credit cards and rewards programs can launch in 90 days (this process can normally take up to 24 months to launch). The company has raised $237.1M to date and has secured a $100M debt financing in February 2020. Open APIs are indeed the new ‘black’ in finance? If you haven’t had a chance to read our last week’s letter on Open Banking, data and APIs, click here.