Lender Tilt Moves into Subprime Sector by Introducing Novel Approach to Credit Assessment
Tilt, a new entrant in the subprime credit card market, is gearing up to offer credit cards to consumers who don't meet the underwriting standards of traditional issuers. However, the subprime market presents significant challenges and risks, particularly during economic downturns.
The subprime market is highly vulnerable to economic downturns such as rising unemployment or declining business revenue, which affect these consumers first. As a result, lenders like Tilt face elevated risks and thin margins, limiting their expansion potential. Mainstream issuers have adopted a pricing strategy to cover potential loan losses, which may constrain Tilt's market penetration.
To navigate these challenges, Tilt has developed a proprietary scoring mechanism. Instead of relying solely on traditional credit scores, they use alternative data points and a different credit scoring approach designed to capture the true creditworthiness of subprime borrowers. This method attempts to better weigh factors like cash flow and financial behavior that traditional scores miss, potentially allowing Tilt to extend credit more safely to those underserved by conventional models.
However, experts caution that companies entering this segment must think holistically. They should offer products that build savings and net worth, and diversify lending into related areas like secured auto loans or buy-now-pay-later (BNPL) to manage risk and meet comprehensive customer needs.
Recently, Tilt, formerly known as Empower, acquired the Petal portfolio in 2024. Petal's cashflow-based underwriting technology will remain intact in the Tilt cards. The issuer of the cards, WebBank, will continue to be the same as with the Petal cards. The issuer can choose to use a proprietary algorithm when determining creditworthiness, which may consider factors such as income, savings, and spending in addition to FICO scores.
Brian Riley, Director of Credit at Javelin Strategy & Research, stated that it will be interesting to see what Tilt brings to the market. Riley expects Tilt to face similar challenges as Petal, which also faced challenges with its cashflow model.
In summary, Tilt operates in a risky subprime market where economic shifts can quickly translate into losses. Their proprietary scoring aims to identify creditworthy customers by leveraging alternative data and cash flow metrics to offer fairer credit. However, success depends on careful risk management and broad product strategies addressing the financial health of these consumers.
In the subprime market, where economic downturns pose significant risks for lenders like Tilt, the company's adoption of a novel scoring mechanism, which considers alternative data points and cash flow metrics, is an approach aimed at identifying creditworthy customers. To ensure long-term success, it is crucial for Tilt to navigate its market entry holistically, diversifying its product offerings beyond credit cards to include savings-building products, secured auto loans, and buy-now-pay-later solutions, while managing risks effectively.
