Fintech Startups Move Toward Subprime Credit Card Lending

A growing trend so far this year is the rise of financial technology startups that are beginning to offer credit card products to customers with poor credit histories, according to an article in the Wall Street Journal.

This is evidenced by an increase in credit card offers by companies like LendUp Global Inc. and Fair Square Financial LLC, both of which cater to riskier borrowers. Those companies increased the number of offers mailed to potential customers by a multiple of five over last year, from 7 million offers to approximately 35 million.

According to FICO, roughly 60 million Americans have credit scores lower than 650, which the WSJ reports is the threshold for prime lending. An additional 53 million adults have no credit scores at all on account of having little or no borrowing history.

In an interview for the WSJ article, Nigel Morris – Capital One’s co-founder who has recently joined the board of directors for Fair Square – said that 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.”

Where banks appear to be moving away from the subprime credit card space, these new startups are using machine learning and artificial intelligence to assist with underwriting. Because the credit lines they offer to subprime customers are smaller than those given to their prime counterparts, typically between $500 and $2,000, their risks are also more limited.