The credit card industry is changing. Once a symbol of prosperity, it now faces a major crisis. First, non-performing assets (NPAs) are rising. Second, new card issuances are stalling.
Therefore, this twin challenge is hitting bank profits hard. Consequently, it is forcing a new look at old business models. Banks are looking for new solutions. Surprisingly, they are finding a new partner. Fintechs, once seen as rivals, are now vital allies.
Indeed, fintechs are fast and agile. They use data in smart ways. Banks are tapping into this power. Furthermore, this partnership is not just about surviving. It is about reinventing the credit card business. It will create a new path for growth. Ultimately, this article explains the problem. It shows how banks and fintechs are working together to find a solution.
The Spectre of Rising NPAs
Non-performing assets are a silent threat to any bank. An NPA is a loan that is not being paid. For credit cards, this means no minimum payment for 90 days. For years, credit cards were a great business, bringing in high margins. However, the picture is different now.
In fact, NPA numbers are climbing. This is a global trend. In India, for instance, credit card defaults have jumped. Data from the Reserve Bank of India (RBI) shows a clear rise in these defaults, even as other bank NPAs fall. The same is true in other countries.
As a result, why is this happening? Inflation is a big reason. People are losing their jobs, and the cost of living is rising. Consequently, this stretches household budgets thin. Many people took on too much debt. Moreover, “buy now, pay later” (BNPL) schemes made credit easy to get. Thus, too many people are now stuck in a debt cycle.
For banks, this has major consequences. For one thing, it hurts their bottom line directly. Banks must set aside money for bad loans, a process called provisioning. In turn, this cuts into their profits. Additionally, it shows more risk in their loans, which can lead to increased capital requirements from regulators. The RBI has increased the risk weight on unsecured loans. Therefore, this makes it more expensive for banks to lend, starting a cycle of caution.
In conclusion, traditional lending models are old. They rely on credit scores and job history. Unfortunately, these models are no longer enough. They miss the full picture of a person’s finances. As a result, this leads to a higher-risk portfolio that is more likely to fail in a bad economy.
The Issuance Impasse
Banks are becoming more careful. This is a direct result of rising NPAs. The second major problem is a slowdown in new card issuances. Banks are tightening their lending rules, making it harder for new customers to get a card.
Aggressive marketing campaigns are gone, and easy approvals are a thing of the past. Banks are taking a more cautious approach. This caution makes sense, but it also creates new problems.
For example, slowed issuances hurt a bank’s growth. The credit card business is a volume game. Banks need many customers to grow their market share. However, a smaller number of new customers means growth stops, and banks lose momentum.
Furthermore, this caution also hurts a large part of the population. Young professionals often have no credit history. Gig economy workers are a good example. They need credit products, yet traditional banks often turn them down. These are, in fact, the very people driving the digital economy.
The problems are clear. Rising NPAs are eating away at profits, while stalled issuances are killing growth. The industry needs a new way forward. It needs a new solution. This is precisely where fintechs come in. They are not the enemy; instead, they are the new hope.
Fintechs: The Architects of a New Credit Model
Banks and fintechs are now working together. This is the most promising solution. After all, fintechs have what banks need most: speed, flexibility, and a focus on the customer. They also have modern technology. Most importantly, they use data in powerful ways.
Here is how they are helping banks.
1. A New Way to Judge Risk
This is the biggest impact of fintechs. Traditional underwriting is a blunt tool. It uses limited, old data, making it conservative. It can also exclude good customers. In contrast, fintechs build smarter models. They use a mix of AI and Machine Learning.
- New Data Sources: For example, fintechs look at more than just credit scores. They analyze bank transactions, utility bill payments, and even mobile phone data. This provides a full view of a person’s financial life, thus giving a better picture of their ability to repay debt. A person with a short credit history can still be a good risk.
- Predicting Problems Early: AI models can find patterns. They can predict default risk better. They can see problems before they happen. This helps banks act fast. Specifically, they can offer a flexible payment plan or adjust a credit limit. This helps stop an account from becoming an NPA.
2. Smarter Issuances and Personalization
Fintechs are helping banks grow again. They help them find the right customers and offer the right products.
- Personalized Products: A single credit card for everyone is outdated. Therefore, fintechs allow banks to offer tailored products. These can be secured cards for new users or co-branded cards for specific groups. For instance, a card for frequent travelers. This helps banks attract new customers.
- Easy Digital Onboarding: The customer experience is a key difference. Fintechs have mastered digital onboarding. A customer can apply for a card in minutes and get it approved almost instantly. This process is smooth and easy, which removes a major barrier. Ultimately, it helps banks get new customers quickly and cheaply.
3. Better Collections and NPA Management
In addition, fintechs improve the back end of the business. They are changing how banks collect money. The old way is often manual and strict. On the other hand, fintechs are making it more human and efficient.
- Automated Collections: For instance, AI-powered chatbots can talk to customers in a helpful way. They can send payment reminders and offer flexible plans. They help users understand their debt, which helps banks recover money and protects the customer relationship.
- Predicting Collections: Advanced analytics can predict which accounts are most at risk. They can also predict which customers will respond best to certain communication. This helps banks focus their efforts, thereby lowering the overall cost of collections.or more detailed discussion on how conversational intelligence is transforming NPA recovery & collections in the BFSI sector, check out this article from Financial Express.
Enhancing NPA recovery and collections with conversational intelligence in BFSI sector – Financial Express
The Collaboration Models
The partnership between banks and fintechs takes many forms.
- Banking as a Service (BaaS): Fintechs provide a technology layer. They offer platforms for card issuance and loan management. The fintech provides the tech, while the bank provides the license and money. As a result, companies like M2P Fintech help banks launch card programs fast.
- Co-Branded Cards: Banks partner with popular brands to create a new card. The fintech often provides the technology, whereas the bank is the issuer. This lets banks reach the brand’s large customer base.
- Specialized Providers: Some fintechs focus on one thing. It could be underwriting or collections. Banks can use these specialized solutions and integrate them into their own systems.
The Path Forward: A Hybrid Future
The credit card industry will be a mix of old and new. Banks will still be essential. After all, they have huge amounts of money, a long history of trust, and understand regulations. Meanwhile, fintechs will provide innovation, data intelligence, and great customer experiences.
The current problems are not permanent. Rather, they are a call for change. By working with fintechs, banks are not just finding a quick fix; they are building a better, more stable business. They are reaching more people and are ready for whatever the future holds. In conclusion, the credit card is not going away; it is just being reborn. It is being reinvented, one partnership at a time. The most successful banks will be those who embrace this change.
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