The balancing act in digital bank lending

Generally speaking, lenders want their customers to borrow. In fact, they need them to. They are, after all, in the business of lending, and if nobody is borrowing, they’ll soon go out of business.

It’s for this reason that more or less every adult in the UK is forced to bin three or four letters a month from their bank offering them a loan or overdraft. In this day and age, users of online banking are just as likely to find themselves having to hide a not-so-surreptitious offer of a pre-approved loan of £20,000, wedged in among the payments on their online statement.

These speculative, at best semi-bespoke loan offers have earned the big banks some bad press over the years. But direct mail campaigns and offers of pre-approval are commonplace within the world of fintech too. Direct mail has, somewhat ironically, been among the most fruitful origination channels for online lenders.

Is there anything wrong with lenders – whether they be banks or P2P platforms – wanting to lend? Depends on the circumstances; but at least they’re honest about it.

In the new world of digital banking, the want (/the need?) to lend is a source of great embarrassment. Credit is treated as a kind of dirty, best hushed up necessity. Nowhere is this more evident than in the launch of Tandem’s first major product: a credit card.

In a press release announcing the launch, “the Good Bank” (as Tandem refers to itself) did not call the product a credit card. It was referred to as a “travel cashback card”.

That card – available in four vibrant colours – carries an APR of 18.9 per cent. This is how it works:

The card is interest-free for up to 56 days (including a 25 day grace period). Interest will be charged on purchases if a customer fails to repay their full statement balance on their payment due date, which falls 25 days after their statement date. If a customer falls behind payments in this way, they will continue being charged interest on all purchases, including new purchases, until they’ve been repaid in full. While behind on payments, the grace period does not apply. Cash withdrawals will be charged interest on from the day of the withdrawal – but these do not affect the grace period on purchases.

Tandem acknowledges that the new card is not the cheapest on the market. But the newly-licenced bank says that it will not encourage customers to spend beyond their means (thus incurring fees). It sees the ability to borrow as a useful tool – but not one that should be depended on.

Tandem may well believe this, but it presents a problem. Everybody knows that (most) digital banks are losing money – and lots of it. They are exceptionally good at attracting customers, and for the most part have no way of monetising them (yet).

Turning its customers into borrowers is one way that Tandem can begin to solve this problem. But because of its explicitly laid-out ethos (an ethos that indeed applies across the digital banking world), the opportunity feels somewhat constrained.

And it’s not just Tandem.Monzo,Starling,Revolut,N26 – they’ve all launched or are thinking about launching a suite of loan options. Revolut partnered with peer-to-peer lender Lending Works to power its consumer credit offering. N26 has teamed up with auxmoney and Younited Credit. They’re all gearing up to lend money but they’re stuck in this weird position where they can’t speak plainly about wanting to lend.

Most digital banks have designs on pushing loans to customers at some point, but only in a very tailored, data-driven way. In a world where Open Banking allows fintech firms access to the transactional data held by the big banks, disruptors have a chance to proactively flag refinancing opportunities for their customers, thereby saving them money. Here is an example of how digital banks can actively market loans to their customers without being accused of the scattershot approach that is typical of incumbent banks.

The point is that, in digital banking, lending is a balancing act. Digital banks need to roll out loan options if they’re ever going to generate the sort of revenues that will be needed to scale their businesses, but at the same time they can’t be seen to be driving unsuitable customers into debt at 18.9 per cent per annum. Such a thing would contradict the fundamental purpose of these companies: to build a better, fairer banking system.

If balancing customer need with the needs of the business is the challenge, then timely, intelligent, data-driven marketing of loan options is the solution.