See also "Potemkin AI".
From the Wall Street Journal, Aug. 13:
Financial-technology startups are stepping into a void increasingly left by credit-card-issuing banks: lending to customers with poor credit histories
LendUp Global Inc. and Fair Square Financial LLC, which focus more heavily on riskier borrowers, mailed out roughly 35 million credit-card offers during the first half of the year, according to market-research firm Competiscan, up from 7 million during the same period last year....MORE
CreditShop LLC, a specialist in personal loans to risky borrowers that was acquired last year by investment firm Värde Partners, rolled out a credit card earlier this year. Elevate Credit Inc., ELVT -0.11% which specializes in high-cost installment loans, launched one in July.
Subprime lending can be lucrative. Most of these cards carry interest rates north of 20%, significantly higher than the average credit card interest rate of 14.1%, according to the Federal Reserve. Rewards programs, one of the biggest costs for large card issuers chasing creditworthy customers, are rare.
But risks abound: Facing rising loan losses, especially among the riskiest borrowers, banks are reining in their growth in this sector. Subprime credit-card balances at seven large U.S. banks rose 3% in the first half of the year from a year prior, down from a 13% increase in the year-earlier period, according to Autonomous Research. Capital One Financial Corp.’s subprime balances accounted for 32% of its domestic credit-card balances in the first half of 2018 compared with 36% in the same period a year earlier
The new lenders are getting help from some industry stalwarts. The Orogen Group, an investment firm headed by former Citigroup Inc. chief Vikram Pandit, said in May it was committing $100 million in equity to Fair Square, which distributes cards to borrowers with less-than-pristine credit scores. LendUp recently announced that Capital One co-founder Nigel Morris and former Capital One chief credit officer Frank Rotman were joining its board of directors.
The population of subprime borrowers “is nigh on half of america, and there’s enormous opportunity for others to be able to offer a great product with great sophistication to compete in this space,” Mr. Morris said in an interview.
Fintech startups still account for a relatively small slice of the subprime-card market. At the end of 2017, Fair Square had 124,000 open accounts, more than half of which went to customers which prime credit scores at the time they were opened, and just shy of $95 million in balances for its Ollo card holders, according to people familiar with the matter.
Capital One has around $32 billion in subprime credit-card balances on its books....
