This is Karthik, one of the founders of SimplyCredit. I wanted to share SimplyCredit here because HN folks have pretty strong views about the banking system and I’d love to get your feedback. Also, this community loves 'hacks' and we feel this may be one of the biggest hacks in the financial services.
We created SimplyCredit because we were tired of credit card companies’ approach of 'paying billions in fine is easier than doing the right thing'.
To fight credit card companies, you need to understand why their product has been very sticky -- for example, attractive rewards programs incentivizes spend and gimmicky terms keep people in debt for a very long time. Most consumers are not good with managing their finances so handing cash over to them (in the form of personal loans) to manage their credit card debt does not work -- most of their paid-off cards start accruing balances shortly thereafter. We wanted to build SimplyCredit so the credit card companies will not even see a single dollar in interest charges.
Happy to answer any questions you guys have. I used to work at FICO for nearly a decade so I would like to think I know a thing or two about the credit card industry.
One of the things that allows credit card companies to keep the high rates is the difficulty in "bankrupting" your way out of their debt. How do you plan on avoiding this? Are you limiting yourselves to only lower risk people or are you serving the lower income higher risk (but constant balance) people too?
Hey commentzorro, thanks for your comment. I am not sure I follow how you are connecting difficulty in bankrupting to higher rates. If anything, opposite will be true (if your assertion is correct) as they will eventually get most of their money back. Consumer bankruptcy laws are fairly well defined in the US (not that it is nice for the consumer but there is a process) so it is not quite driven by the banks although they probably wrote the legislation around it.
If you ask me higher rates are justified because consumer's get tricked into it. Take department store cards for example, they charge 25% - 30% because no one thinks they need to carry this balance forward when they are buying a refrigerator -- they just want the 15% off at point of sale and 0% for 6 months is a bonus. Fast forward 6 months, they have not paid it off and the credit card company calculates interest by going back in time as those interests were 'deferred'. Now with all the compounding they end up getting stuck in debt for much longer they needed to be.
For people we give credit to, we focus on consumers with good credit. For others, we will still service them and help them by optimizing their payments and those payments will directly come from their checking account.
Edit: I want to clarify one thing. When I say good credit -- it does not mean you need to have a FICO Score or long history. We look at everyone holistically so it comes to down whether you are a responsible borrower measured across many dimensions.
There no way to ask in a polite way and I don't think you're doing anything wrong. It's excellent to help people get out of debt quicker ... but are you planning on picking off the low hanging fruit (best credit and demographic) and leave the hardest hit with the likely to increase rates if you're really successful. (And I see no reason why you wouldn't be.)
Sort of like selling cheap health insurance to the young and healthy so the rates for the old and sick rise.
That's an excellent question. We want to serve everyone but how we serve them will be different. For example, people with very poor credit -- like the ones that go to Payday lending are not going to benefit from having a revolving line that pays off their credit cards; most don't even have credit cards. However, all of them can benefit from a platform that does the right thing for them -- for example, recommend the right payment amount based on people's cash flow unlike a credit card company which tries to push for minimum payment. Or suggesting changes in spending behavior that can dramatically reduce their overall cost.
Especially, the poor disproportionately suffers from compounding of interest. Imagine going to a payday lender (or heck a subprime credit card) and missing a payment. First of, those APRs are insane and on top of it, they compound and just makes it impossible for them to get out of it. We really believe compounding of interest should be abolished on the lending side. In the software world, when users struggle to use a product, the product fails, you don't ding the users. But in finance it is the other way around -- the consumer pays the price for mistakes the lender does. If more main stream consumers demand simple interest and no fees across the entire industry, we will slowly get rid of these evil practices and eventually benefit everyone. We are also talking to regulators on how we can make many of these principles (dead simple terms) as the model for future lending products.
The Economist recently had a very interesting article about how the poor end up paying more fees even though they are the ones who cannot afford it -- for depositing money they pay fees, for withdrawing money they pay fees..they really cannot win either way. While, it is harder for us to help the poor on basic banking (deposit type products) at this time but we certainly have plans to do so.
Lending can be profitable, we just don't think it has to be predatory for it to be sustainable.
Brief version: Its sounds like the benefits of "simple interest" are being inflated and being used as a marketing tool. The monetary difference between simple and compound interest are minuscule if the interest is paid off every month - which this service insists on. If you pay off 100% of your compound interest every month, you can only save a few cents per month by signing up with this simple interest. If you can't pay off 100% of your interest every month (the only scenario where simple is substantially better than compound), this service is not available to you.
This looks like marketing a very marginally better product (if at all), with excessive pomp. This is no revolution... its much more like well disguised misleading stuff from financial institutions that we are so much used to.
Since you insist on the complete interest being paid at the end of each month, the grand idea of "simple interest" has very little meaning. Hear me out here...
The whole idea of compound interest is to charge interest on the unpaid interest. You are "solving" the compound interest problem by not compounding interest for a month and forcing people to not have unpaid interest at the end of the month. However, the benefits amount to very little. If people are capable of paying off their interest at the end of each month, there is little difference between simple and compound interest.
The difference between simple and compound interest (as stated in your essay) arises only in the long run, and your service does not allow long runs of unpaid interest... which means there can only be very little difference. Its misleading to compare long runs (> 30 days) if you don't allow them. The large savings from simple interest only apply to people who cannot pay the interest for 4 years. But you will kick them out after 2 months of non-payment.
Also, if a person is capable of paying the interest every month, they don't gain anything by signing up with your service... maybe a few cents on 5000$ every month, but that's it. Nothing more.
The positives I really see...
1. Convenience of not worrying about paying different credit cards.
2. Possibly lower interest rate... but I have seen no solid numbers on that on the website.
3. By forcing people to pay off the interest every month, you might make them more financially responsible.
4. I would like to see banking evolve, and this might be a ray of some hope... but I need to see more.
Also, it will be useful to give us some ballpark figures on the APR... I would like to see a table of some figures before I take the pains of giving out further details.
[TL;DR] Simple Interest may looks like has a small delta but for a lender it adds up to some serious money. Also, $2 a month (compounded for a shorter period) adds to $24 / year. We are not about simple interest alone. The revolution (not our words) if any is really taking down the credit card companies without re-inventing a new credit card product.
Hi Jugad,
Thanks for the constructive comment. I want to first clarify one thing -- we are not 'claiming' we are revolutionizing the industry by switching to simple interest (it is a pretty big deal though for the industry as you will see in my comment below but that's not a claim we are making) . As you pointed out the biggest value prop of our service is convenience (you get to keep your credit cards -- no change in your day-to-day use) and lower rates (our rates will be 3% to 15% lower than credit card companies for comparable risk rating) and really diverting the revenue from the credit card companies so they will be forced to change their ways. I can write pages about all the ways a credit company screws a consumer but that will take us away from your very balanced comment.
All the current approaches rely on giving people cash in the form of personal loans supposedly to pay down credit card debt. I can tell you from working in this industry for so long that this does not really put a dent on the credit card companies. At least, for now those consumers eventually start using their cards again and get trapped in debt because the credit card companies don't want them to pay more than the minimum payment. This is what's unique about what we are doing:
Normal: Consumer Spends $1000 -> Pays less than full balance -> Incurs interest -> Bank gets paid handsomely
Ours: Consumers spends $1000 -> SimplyCredit Pays the bank $1000 -> Consumers incurs interest at a lower rate -> Bank gets nothing -> We get paid what we believe is a fair amount
The above picture eliminates the vital revenue source from the banks. Now why this is better for the consumer:
* We have no fees (no late fees, no penalties). The credit card terms are practically irrelevant.
* We don't re-price you upwards (credit card companies do this all the time and that's how they start low and increase your rates as you start building balances -- CARD only solves a portion of this problem)
* We really encourage people to pay much more tan the minimum payment. Banks fought so hard for minimum payment warning in CARD that it is only marginally useful now. We don't want to be like them and that's not our goal.
Back to your original point about simple interest:
* You are correct, we can probably do better in characterizing the benefit as no one is going to compounded their balances over 4-years without paying down principal. We will try to come up with additional examples -- we wanted to keep it simple to illustrate the issue of compounding but point taken.
* The benefit will be meaningful when it look at it over the life of the debt. People paying $2 extra per month means they pay $24 / mth. Over 5+ years period they have paid a good chunk in extra interest just because of compound interest.
* That said, do you disagree with our characterization that this is 'unfair' and 'complicated'? If you ever had to pay interest on your card, please take a look at that statement and see if you can figure out how interest was calculated. Don't just read about the average daily balance and daily rate statements, try to calculate it on a piece of paper.
* I also don't quite agree that this change is 'minuscule'. There are a few things to keep in mind:
* First, department store cards defer interest 6 to 12 months and it is getting compounded away for a really long time. They also charge 25-30% interest. You can repeat the math for that period and interest rate and you can tell me whether that difference is meaningful. You will most likely see a 10-20% difference between compound interest an...
Thanks for the detailed reply. I look forward to your website updates and the future simplification of the credit industry.
I also find it a little surprising that the 30 day numbers are missing from your simple interest page... that's the single most important time frame, given that its common to everything that we are talking about.
I did some numbers on the 5k outstanding debt. After 30 days, simple and compound interest difference, on 5k debt looks like this...
compound interest total : 5074.50
simple interest total : 5073.97
difference : 0.53
So, a regular joe would save 53 cents a month on debt of 5k, if they pay off more than the interest every month.
Also, you seem to be putting a lot of emphasis on the evils of minimum payment in your comments... and if the minimum payment is less than the monthly accrued interest, that is EVIL. I hate paying a single cent to the banks in interest, and have had enough money to pay all debts in full every month. So I never felt the need to study the minimum payment booby trap in detail. But if banks are doing that... I hope you succeed in derailing them.
Good luck convincing people to be financially responsible, while other banks are inviting them to be irresponsible.
I think building a story around "avoiding the minimum payment booby trap" might be useful... but its a complicated story to tell in a way that an average joe with a short attention span can understand.
Yup, your example will amount to $.53 * 12 = ~$6 / year (assuming no deferral). Typically people end up staying in debt for a few years (4-6 years) because of the way the banks structure payments. So you may conclude, what the heck, $25 more over 4 years, why do I need to care? But you need to look at the system as a whole to address this problem. Finance is a very low return game (as % of assets) so people try to make $1-2 by charging this or that and in grand total adds up to billions. That's why nobody in the industry will switch to Simple Interest. I don't think our value prop is just saving $6/year (assuming interest rate is the same) -- it is really about doing the right thing for the consumer and keeping it simple.
Oh btw, I am comparing compound interest like how a normal person will calculate it. A credit card company does not do it this way. It is a mess and it not trivial to reproduce their calcs.
Regarding minimum payment: the evilness is not whether interest is being required at the end of the month or not (in non-deferred situations they are) but how artificially low they set minimum payments. For example, my Chase card is 1% of principal. ~40-50% of the people only pay minimum payment in the US and imagine paying at 1% principal, will take you 8-9 years to pay it off. If you change the payment just a little bit (even $50-100 / mth more) can dramatically lower your overall costs.. the credit card companies fought tooth and nail to not put 'minimum payment warning box' saying it is confusing (the idea behind the box was to tell the consumer how much the payment should be to pay it off in 3 years). Wouldn't you want as a consumer to know what's the right thing to do? We have treated credit card companies like doctors -- let them decide what's right for you. That's why we got into the financial crisis and we can do better.
We know consumers are not just going to give up on credit cards and that's why we built SimplyCredit to work on top of the existing system instead of trying to create a new one. They don't need to change anything but they now have a better financial product. Our customers not only like the convenience but also the fact they know exactly what they are getting into and there is a company that is not trick you into paying more.
I am glad you have not paid any interest to these credit card companies. Our hope is that we can make more and more people like you. They made ~$100+ billion in revenue just from interest charges and I think it is time to put an end to it.
One more thing. 30 days is not the right point as payments are usually due 28 days after the statement is issued and most people (people who carry a balance) pay closer to the end -- all this while things are getting compounded. So your 0.53/mth will be more like 0.9/mth in practice.
As you could this gets into a lot of nuances on how people use credit cards today. We attempted to keep things simple and it lead to a totally different issue, which you raised. We will try to revise it to make it more like a what a user will do over the life of their debt and compare. Again, financial delta for each user is not the issue but rather the 'fairness' of this whole thing -- how does compounding really benefit the consumer?
12 comments
[ 5.6 ms ] story [ 43.6 ms ] threadWe created SimplyCredit because we were tired of credit card companies’ approach of 'paying billions in fine is easier than doing the right thing'.
To fight credit card companies, you need to understand why their product has been very sticky -- for example, attractive rewards programs incentivizes spend and gimmicky terms keep people in debt for a very long time. Most consumers are not good with managing their finances so handing cash over to them (in the form of personal loans) to manage their credit card debt does not work -- most of their paid-off cards start accruing balances shortly thereafter. We wanted to build SimplyCredit so the credit card companies will not even see a single dollar in interest charges.
Happy to answer any questions you guys have. I used to work at FICO for nearly a decade so I would like to think I know a thing or two about the credit card industry.
If you ask me higher rates are justified because consumer's get tricked into it. Take department store cards for example, they charge 25% - 30% because no one thinks they need to carry this balance forward when they are buying a refrigerator -- they just want the 15% off at point of sale and 0% for 6 months is a bonus. Fast forward 6 months, they have not paid it off and the credit card company calculates interest by going back in time as those interests were 'deferred'. Now with all the compounding they end up getting stuck in debt for much longer they needed to be.
For people we give credit to, we focus on consumers with good credit. For others, we will still service them and help them by optimizing their payments and those payments will directly come from their checking account.
Edit: I want to clarify one thing. When I say good credit -- it does not mean you need to have a FICO Score or long history. We look at everyone holistically so it comes to down whether you are a responsible borrower measured across many dimensions.
Sort of like selling cheap health insurance to the young and healthy so the rates for the old and sick rise.
Especially, the poor disproportionately suffers from compounding of interest. Imagine going to a payday lender (or heck a subprime credit card) and missing a payment. First of, those APRs are insane and on top of it, they compound and just makes it impossible for them to get out of it. We really believe compounding of interest should be abolished on the lending side. In the software world, when users struggle to use a product, the product fails, you don't ding the users. But in finance it is the other way around -- the consumer pays the price for mistakes the lender does. If more main stream consumers demand simple interest and no fees across the entire industry, we will slowly get rid of these evil practices and eventually benefit everyone. We are also talking to regulators on how we can make many of these principles (dead simple terms) as the model for future lending products.
The Economist recently had a very interesting article about how the poor end up paying more fees even though they are the ones who cannot afford it -- for depositing money they pay fees, for withdrawing money they pay fees..they really cannot win either way. While, it is harder for us to help the poor on basic banking (deposit type products) at this time but we certainly have plans to do so.
Lending can be profitable, we just don't think it has to be predatory for it to be sustainable.
This looks like marketing a very marginally better product (if at all), with excessive pomp. This is no revolution... its much more like well disguised misleading stuff from financial institutions that we are so much used to.
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[ edited to clarify some points ]
Karthik,
Since you insist on the complete interest being paid at the end of each month, the grand idea of "simple interest" has very little meaning. Hear me out here...
The whole idea of compound interest is to charge interest on the unpaid interest. You are "solving" the compound interest problem by not compounding interest for a month and forcing people to not have unpaid interest at the end of the month. However, the benefits amount to very little. If people are capable of paying off their interest at the end of each month, there is little difference between simple and compound interest.
I find your explanation on simple interest (https://www.simplycreditinc.com/simpleinterest) a bit misleading and self serving.
The difference between simple and compound interest (as stated in your essay) arises only in the long run, and your service does not allow long runs of unpaid interest... which means there can only be very little difference. Its misleading to compare long runs (> 30 days) if you don't allow them. The large savings from simple interest only apply to people who cannot pay the interest for 4 years. But you will kick them out after 2 months of non-payment.
Also, if a person is capable of paying the interest every month, they don't gain anything by signing up with your service... maybe a few cents on 5000$ every month, but that's it. Nothing more.
The positives I really see...
Also, it will be useful to give us some ballpark figures on the APR... I would like to see a table of some figures before I take the pains of giving out further details.Hi Jugad,
Thanks for the constructive comment. I want to first clarify one thing -- we are not 'claiming' we are revolutionizing the industry by switching to simple interest (it is a pretty big deal though for the industry as you will see in my comment below but that's not a claim we are making) . As you pointed out the biggest value prop of our service is convenience (you get to keep your credit cards -- no change in your day-to-day use) and lower rates (our rates will be 3% to 15% lower than credit card companies for comparable risk rating) and really diverting the revenue from the credit card companies so they will be forced to change their ways. I can write pages about all the ways a credit company screws a consumer but that will take us away from your very balanced comment.
All the current approaches rely on giving people cash in the form of personal loans supposedly to pay down credit card debt. I can tell you from working in this industry for so long that this does not really put a dent on the credit card companies. At least, for now those consumers eventually start using their cards again and get trapped in debt because the credit card companies don't want them to pay more than the minimum payment. This is what's unique about what we are doing:
Normal: Consumer Spends $1000 -> Pays less than full balance -> Incurs interest -> Bank gets paid handsomely
Ours: Consumers spends $1000 -> SimplyCredit Pays the bank $1000 -> Consumers incurs interest at a lower rate -> Bank gets nothing -> We get paid what we believe is a fair amount
The above picture eliminates the vital revenue source from the banks. Now why this is better for the consumer:
* We have no fees (no late fees, no penalties). The credit card terms are practically irrelevant.
* We don't re-price you upwards (credit card companies do this all the time and that's how they start low and increase your rates as you start building balances -- CARD only solves a portion of this problem)
* We really encourage people to pay much more tan the minimum payment. Banks fought so hard for minimum payment warning in CARD that it is only marginally useful now. We don't want to be like them and that's not our goal.
Back to your original point about simple interest:
* You are correct, we can probably do better in characterizing the benefit as no one is going to compounded their balances over 4-years without paying down principal. We will try to come up with additional examples -- we wanted to keep it simple to illustrate the issue of compounding but point taken.
* The benefit will be meaningful when it look at it over the life of the debt. People paying $2 extra per month means they pay $24 / mth. Over 5+ years period they have paid a good chunk in extra interest just because of compound interest.
* That said, do you disagree with our characterization that this is 'unfair' and 'complicated'? If you ever had to pay interest on your card, please take a look at that statement and see if you can figure out how interest was calculated. Don't just read about the average daily balance and daily rate statements, try to calculate it on a piece of paper.
* I also don't quite agree that this change is 'minuscule'. There are a few things to keep in mind:
* First, department store cards defer interest 6 to 12 months and it is getting compounded away for a really long time. They also charge 25-30% interest. You can repeat the math for that period and interest rate and you can tell me whether that difference is meaningful. You will most likely see a 10-20% difference between compound interest an...
I also find it a little surprising that the 30 day numbers are missing from your simple interest page... that's the single most important time frame, given that its common to everything that we are talking about.
I did some numbers on the 5k outstanding debt. After 30 days, simple and compound interest difference, on 5k debt looks like this...
So, a regular joe would save 53 cents a month on debt of 5k, if they pay off more than the interest every month.Also, you seem to be putting a lot of emphasis on the evils of minimum payment in your comments... and if the minimum payment is less than the monthly accrued interest, that is EVIL. I hate paying a single cent to the banks in interest, and have had enough money to pay all debts in full every month. So I never felt the need to study the minimum payment booby trap in detail. But if banks are doing that... I hope you succeed in derailing them.
Good luck convincing people to be financially responsible, while other banks are inviting them to be irresponsible.
I think building a story around "avoiding the minimum payment booby trap" might be useful... but its a complicated story to tell in a way that an average joe with a short attention span can understand.
Oh btw, I am comparing compound interest like how a normal person will calculate it. A credit card company does not do it this way. It is a mess and it not trivial to reproduce their calcs.
Regarding minimum payment: the evilness is not whether interest is being required at the end of the month or not (in non-deferred situations they are) but how artificially low they set minimum payments. For example, my Chase card is 1% of principal. ~40-50% of the people only pay minimum payment in the US and imagine paying at 1% principal, will take you 8-9 years to pay it off. If you change the payment just a little bit (even $50-100 / mth more) can dramatically lower your overall costs.. the credit card companies fought tooth and nail to not put 'minimum payment warning box' saying it is confusing (the idea behind the box was to tell the consumer how much the payment should be to pay it off in 3 years). Wouldn't you want as a consumer to know what's the right thing to do? We have treated credit card companies like doctors -- let them decide what's right for you. That's why we got into the financial crisis and we can do better.
We know consumers are not just going to give up on credit cards and that's why we built SimplyCredit to work on top of the existing system instead of trying to create a new one. They don't need to change anything but they now have a better financial product. Our customers not only like the convenience but also the fact they know exactly what they are getting into and there is a company that is not trick you into paying more.
Check the first link: https://www.google.com/search?q=Citigroup+to+Pay+%24770+Mill... Also check: http://blogs.wsj.com/moneybeat/2015/07/16/credit-card-fee-in...
I am glad you have not paid any interest to these credit card companies. Our hope is that we can make more and more people like you. They made ~$100+ billion in revenue just from interest charges and I think it is time to put an end to it.
As you could this gets into a lot of nuances on how people use credit cards today. We attempted to keep things simple and it lead to a totally different issue, which you raised. We will try to revise it to make it more like a what a user will do over the life of their debt and compare. Again, financial delta for each user is not the issue but rather the 'fairness' of this whole thing -- how does compounding really benefit the consumer?