I love having guests on the show who look at something that everyone takes for granted and said, why do we do it that way? That’s what today’s guest, Jason Gross, has done with credit cards. Jason is the CEO of Petal. He and his co-founders have designed a card that has a different business model and aims at a different market.
Credit cards have always sparked mixed feelings among consumer advocates and policymakers. On the upside, they provide incredible convenience and safety, over cash. On the down side, critics worry that that convenience factor is a double edged sword -- making spending too convenient and fueling over-consumption and under-saving.
People also worry that cards are hard to understand. For decades, policymakers have tried repeatedly to solve that by regulating card disclosures and practices with requirements to disclose the annual percentage rate and fees; make key information prominent in the so-called Schumer Box (named after New York Senator Charles Schumer); require a grace period; bar retroactive raising of interest rates; limit marketing to college students; disclose the long-term costs of paying only the minimum balance and much more. Concern about credit cards prompted Senator Elizabeth Warren, back when she was a Harvard Law professor, to begin fighting what she called “tricks and traps” in financial products, and also business models that rely on penalty fees or interest for their profitability. That concern led to the CARD Act of 2009, and then to the creation of the CFPB itself.
The Petal card is trying to solve these challenges. It’s offering simpler, more transparent terms. It addresses the overspending problem by designing the card to encourage customers to pay the full balance each month, rather than revolve. And it’s tackling a third problem, which is reaching the tens of millions of people who don’t have a credit card. For most people, these cards are the first rung on the ladder to building a credit record so that they can later get a car loan or mortgage. Millennials have tended to avoid them, partly due to coming of age in the financial crisis and becoming leery about incurring debt. Jason notes that some young people are “sponsored” into the system by parents who provided them with cards, but for those who aren’t, it’s hard to build credit.
That’s a catch 22 -- you can’t get a card because you don’t have a credit record, and you can’t build a credit record because you don’t have a card. Petal is solving that with one of the most important kinds of innovations underway in finance, namely, use of alternative data to evaluate risk. They are looking at the person’s own payment and income history, as reflected in their bank account, to determine ability to pay.
Accessing that information has become controversial, as banks worry about allowing a third party to see this data even with the consumer’s permission, in case something goes wrong. However, the ability of consumers to allow such access is the life’s blood of most of the innovation underway in consumer finance. The CFPB is evaluating the issues arising around this, including questions like who really “owns” consumers’ bank account data, whether third parties’ data uses should be regulated, and whether we need to clarify where liability should fall in the event data is misused or breached. A lot of people are working on this issue. Solving it is one of the most important steps we can take toward making finance more inclusive.
Listeners have often heard me say that I’ve spent most of my career working with efforts to promote consumer financial health and inclusion by regulating the financial industry, and that I think the results have been mixed at best! A few years ago, I realized that technology could do most of what we’ve been trying to do through policy (if we get the policy right). Petal is trying to do that -- use new data and technology to offer a product that they think will be highly profitable -- despite leaving some kinds of revenue on the table -- because consumers will choose it. Watching them will be fascinating.
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I’ll hope to see you at the events where I’ll be speaking this fall:
I’ll also be speaking in December to the Dutch Central Bank on financial innovation in December. I do many presentations for regulators and welcome those invitations. Regulators, in my view, have the hardest and most important role to play in financial innovation.
We have wonderful shows coming up. I’ll be talking with Andres Wolberg-Stok of Citi Fin Tech. And I’m going to do one on one of the most fascinating experiences I’ve had in years — I participated this month in the U.S. Army’s Threatcasting exercise — sort of a war-gaming process where we “threatcast” technology risks ten years into the future, and then “backcast” thinking about what we could do, today, to prevent the problem. It was off the chart fascinating.
We also have a show coming up with Miles Reidy, Partner at the venture firm QED. Miles and I had a fun and fascinating talk about two topics — the investment outlook for regtech, and then how to find and work with a venture capital firm.
Speaking of RegTech, we’re going to have a show with Merlon Intelligence, an AML regtech firm, and also a special show with my own co-founders — at Hummingbird RegTech. I’m proud to say that Hummingbird has been selected to present at Money 2020 in the startup pitch session. Be sure to come and watch!
