
SimplyCredit: Keep the credit cards you love, Ditch the terms that suck - sksk
https://www.simplycreditinc.com/
======
sksk
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.

~~~
commentzorro
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?

~~~
sksk
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.

~~~
commentzorro
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.

~~~
sksk
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.

------
brandonb
Joyce and Karthik are awesome, I love their vision to make compound interest a
thing of the past.

~~~
sksk
Thanks, Brandon. My friends from the industry are already starting to hate us
:)

------
jugad
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.

==================================================

[ 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](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...

    
    
      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.

~~~
sksk
[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 and simple interest. For most people here it $100 more is not a big deal may be but that could be one additional payment for someone else.

* Yes we are making people pay their interest each month but why should we compare against ourselves? Shouldn't be comparing it against what the industry does, which wants things compound away without your realizing it?

* If this is so trivial as you said, why isn't ANYONE doing this? Some people who claim 'simple interest' in their marketing but actually compound. They all do personal loans with EMI. Guess what the standard formula for EMI is a compound interest. Just because you get fixed monthly payments does not make it simple interest.

* To answer my own question above: the industry will not do simple interest any time soon and this is why: A typical bank's gross yield is about 11% and with simple interest they will drop down to roughly 10%. That's a 10% drop in revenue. BUT, their ROA is 3% so a 1% drop in revenue without reducing default rates (switching interest rates formulas will not help here) or opex, their profit drops by 33%. You think a bank will willing take 33% hit to their profit? To you it may sound minuscule but these dollars add to a huge amount. This is in turn used against the very same consumers in the form of heavy lobbying. Is this the world we want?

In summary, I appreciate your calling out on the simple interest page. We
certainly not using it as a marketing tool as we are indeed trying to fix a
system as I explained to you above -- we are giving up huge sources of revenue
(fees and the compound interest delta). But this page is important and we will
make it better -- we will try to come up with a typical credit card user
payment behavior and show the difference.

I would urge you to look beyond the simple interest delta. To you it is not a
big difference but to a lender it is and we are making the sacrifice to keep
things simple for the consumer. We are eliminating a whole bunch of crap from
the terms that trip up consumers along the way.

I wish we are ready to signup 1000s today but alas integration with banking
system requires a measured roll out. We will release more and more information
over time to show how this is really different for a consumer. If you have
additional suggestions, please send it our way. you can guess my email easily.

Thanks for reading this far.

~~~
jugad
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.

~~~
sksk
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?

