Will Instant Credit Take Over Credit Cards?

Instant credit is a way by which shoppers get access to real-time loan approvals for their purchase at a point-of-sale (physical and online) without using a credit card. The credit check is mostly done based on a host of parameters covering credit score, social media data, merchant data and others. Klarna, a Swedish technology firm, is considered to be the pioneer in instant credit.

Since its debut in 2012, instant shopping consumer credit firm Affirm has grown by leaps and bounds. The USP of Affirm is that it leverages a world of data that’s not generally used to estimate lending risk. The firm uses a variety of data sets to assess shoppers, from available credit data to merchant data, and even social media data. Initially, Affirm had only been available to online retailers who signed on individually. Later in August 2015, it teamed up with e-commerce software provider Shopify to bring in more customers. Late last year, Affirm started offering its solutions to the brick-and-mortar stores through a partnership with Clover, a point-of-sale system owned by First Data.

Firms offering instant credit are set out to rethink how millennials borrow money. A recent report says that more than 60% of the millennials do not own a credit card. This offers a very strong case for an instant shopping firm such as Affirm. These firms offer an alternative to credit card, where borrowers take out a microloan (typically a few hundred dollars) at the point-of-sale to finance a purchase. The terms of the loan, including interest rates (typically lower than those offered by credit card providers), are clearly indicated upfront. The goal is to serve consumers who might not otherwise have access to credit based on traditional credit scores like FICO.

The model of instant credit has picked up pace. Tech giant Apple also seems to be interested in the concept of instant loans. On one end, it has marketed its financing program well in partnership with Barclays which allows Apple’s business, education and personal consumers acquire products at low monthly EMIs for a period of 6, 9 or 12 months. On the other hand, the firm also applied for a patent linking cash borrowers and lenders (filed in 2011). The process would involve the borrower launching an app and telling it how much money is needed. Based on the location of the request, the app would broadcast the request to lenders in the user's vicinity. The user would then be sent a notice of the person agreeing to lend the money and would travel to that location for collection, at the agreed-on time and place.

The fact that the average loan size and tenure at Affirm are $400 and nine months speaks for itself. Technology companies such as PayPal have also shown a keen interest in offering instant credits. PayPal offers a revolving credit line giving consumers the option to buy now and pay over time. Certain purchases come with promotional no payments + no interest if paid in full in six months offers. Consumers have the option to make no payments for six months, and as long as they pay in full by the end of the six months, they will not be charged interest fees. If not paid in full by then, consumers are charged interest calculated from a few days after their purchase date. In addition, the concept is also famous outside of the US.

There are other examples of firms which offer instant loans. Klarna also offers a similar service customized for Europeans. When a customer enters his/her email address while checking out of the commerce website, Klarna almost instantly decides if it can extend some credit, drawing on the public and private data available about the user. If the user qualifies, it gives him/her 14 days (and an additional grace period) to pay their bill. According to the company, this has proven very powerful in countries like Germany, where few people use credit cards. Paidy also offers a similar service like Affirm in Japan. Going forward, it would be very worth watching how the incumbents and the FinTech startups such as Lending Club, Prosper and others react to this emerging opportunity of instant consumer finance.