How fintech solutions can reduce credit card debt

Those with credit card debt need innovative solutions that are easy to implement. Fintechs, digital banks and robo-advisors could have the answer.

While credit cards are essential for building credit history, accessing favourable loan terms, and sometimes even for gaining employment and leasing homes, credit card debt can be hugely damaging for some.

In fact, one of the top financial concerns for Americans is too much debt and not enough money to pay debt, an issue that is second only to healthcare costs. Throughout the COVID pandemic, this concern has become even more prevalent as credit card debt reaches all-time highs: in 2021, credit cards were used to make 28% of all payments.

Using recurring contributions and behavioural science ideas of nudging, roundups are an as-yet unsaturated method for companies, particularly digital banks and robs-advisors, to help their users repay credit card debt, and gain control over their financial health.

Credit card debt is increasing for those most vulnerable 

By the end of 2021, there was a record-setting number of 196 million credit card users in America. However, the number of credit cards issued are actually higher since the average person holds about three different credit cards accounts.

During the early days of the COVID pandemic, many used credit cards for more purchases in order to cover periods of under- and unemployment. While some maintained pre-pandemic levels of debt and some even managed to decrease their debt, about 30% of those surveyed reported increased credit card debt levels.

Who is included in this 30%? Well, the highest-risk demographic is parents with children under the age of 18. They remained at high risk despite expanded child tax credits, highlighting the difficult financial constraints this population faces.

Millennials also reported struggling with loss of income and lack of savings. Finally, lower-income earners are also at high risk with increased credit debt - the Consumer Financial Protection Bureau reported that their credit card debt increased by more than 40% over the past year, well above pre-pandemic levels. 

The reasons for taking on additional credit card debt are similar, including struggles with inflation-led rise in prices, job loss or pay cuts, and increased spending on medical care.

For these at-risk populations, the path to financial freedom begins with regaining control over credit card debt as high-interest rates and other fees incurred by payment delinquencies can have a debilitating impact on future finances. Decreasing payments made by credit cards, paying more than the minimum amount every month, and consolidating debt payments are clear first steps that anyone struggling with credit card debt should take. 

However, these steps can be difficult to carry out, especially with all the stress of everyday life.

How can innovative fintech companies make credit card debt less painful?

Digital banks and robo-advisors can have an important role to play. Since the early 2000s, more accessible and low-cost banks and advisors like Chime, KOHO, Wealthsimple and Betterment, and more have all been on the rise. With a digital-only front, these companies are able to offer free or low-fee banking and investment alternatives. 

They have also been known to adopt new innovations more quickly than traditional banks and investment advisors, and with UX-friendly interfaces, these new fintechs have garnered a younger, but enthusiastic audience. 

Among such innovations that some fintechs have rolled out include roundups

What are roundups and how can they be used for debt repayment?

Roundups is the idea that every purchase is “rounded up” to the nearest whole-dollar amount, and the difference is then placed into a separate account. The user goes about their normal life, making everyday transactions, while simultaneously setting aside a “rainy day" fund. 

For example, if you bought a morning coffee for $2.60, that amount would be rounded up to $3.00, and the difference of $0.40 would be automatically transferred to a separate roundups account.

For you, that $0.40 likely would not be very noticeable. However, over time, these small everyday transaction roundup amounts add up. And best of all, roundups requires zero behavioural change. While the destination of roundup amounts is up to the discretion of the user, one such destination can be credit card debt repayment, particularly as a supplement to the monthly minimum payments. Even an additional $30 to $50 on top of monthly minimum payments can help to accelerate debt repayments.

At the moment, some digital banks offer roundups. However, these roundups are often powered by data aggregators that still use screen-scraping.

Roundups and the problem with screen-scraping

Lacking clear open banking policies in North America, financial institutions and fintechs rely on screen-scraping, an action whereby a computer program copies data from a website. Usually, to access transaction information, a user has to provide their online bank account log-in username and password. Data aggregators then log in as if they are the user, and "screen scrape" or copy the transaction data from their online bank account's webpage.

Screen scraping has serious security issues because it compromises user privacy and risks data exposure. In fact, this is how Facebook and LinkedIn experienced their data leaks, affecting 533 million and 700 million users, respectively.

Besides the obvious security risks, banks also regularly update their online banking systems, leading to operational inefficiencies and user outages. 

Is there a better way?

Yes! Instead of going through data aggregators and screen scraping, fintechs offering roundups can use embedded finance, such as Olive Group (full transparency - that's us), who have more secure access to data, and can offer additional features such as matching, donating and investing.

A better way forward: seamless and secure roundups

The sad reality about credit cards is that they’re sometimes used by those who do not have the funds to make purchases directly at that time, even for essential products such as groceries. These users then struggle to repay the debt and end up delinquent on payments, racking up expensive interest rates and other fees. 

By introducing seamless and secure roundups to make credit card debt repayments natural while also requiring zero behavioural change, digital banks and robo-advisors can help their users embark on more solid footing towards more stable and empowering financial futures. 

Olive and roundup technology 

Olive's embedded finance platform allows fintech companies and financial institutions to offer safe, secure and automatic roundup programs to their users. By integrating directly with partners like Visa and Mastercard, we don't use screen-scraping methods, making us one of the most secure technology providers in this space. 

At their core, fintech is designed to help more people take control of their money and reach financial goals. Olive understands and supports this. 

To learn more about how Olive works, schedule time with us today. 

Similar posts

Stay up-to-date with the latest in embedded finance and open finance

Our blog covers topics on embedded finance, open banking, open finance, open data, APIs, rounding, matching, customer loyalty and more.