# Common Product Structures in Consumer Finance
**Date:** October 2024
**Last Update:** October 2024
## Consideration of Product Structures
Financial products require a careful balance between business volume (revenue) and risk (cost) from inception, which differs from typical consumer products where business models can be optimized post-launch. Establishing the right product structure is fundamental to credit business sustainability. This is particularly important because financial products have universal appeal when perceived as "free money," yet their structure - including repayment frequency and maturity - directly impacts customers' ability and likelihood to repay. Therefore, thoughtful product design that aligns business objectives with risk management is essential from the start.
When evaluating product structures, I consider the following key dimensions:
- **Use Case and Acquisition Channels (Frontend)**: The primary use case defines both the target user segment and user quality. Understanding this is critical for product positioning.
- **Limit and Limit Type (Backend; Risk Management)**: These parameters determine risk exposure levels and should align closely with the intended use case.
- **Repayment Plan (Backend; Risk Management)**: The maturity period and repayment frequency significantly influence customer repayment behavior and must be carefully structured.
- **Collateral (Backend; Risk Management)**: The presence of collateral or required down payments can effectively mitigate risk exposure.
- **Interest Rate and Fees (Frontend and Backend; Target User and Risk Management)**: Interest rates not only define the target customer segment but also establish the acceptable margin of error for risk management.
## **Comparison of Consumer Finance Products**
| **Characteristics** | **Credit Card (Revolving)** | **Credit Card Installment Plans** | **Buy Now Pay Later (BNPL)** | **Peer-to-Peer (P2P) Lending** | **Payday Loan** | **Pay in 4** | **56 Loan (Philippines); 9出13归 (Hong Kong)** | **Auto Title Loans** | **Store Credit Cards** | **Personal Loans** | **Secured Personal Loans** |
|--------------------------------|----------------------------|-----------------------------------|----------------------------|--------------------------------|-----------------|--------------|---------------------------------------------|--------------------|--------------------|------------------|--------------------------|
| **Source of Fund** | Issuing Bank | Issuing Bank | Fintech Companies, Merchants | Individual Investors via Online Platforms | Non-Bank Financial Institutions | Fintech Companies, Merchants | Non-Bank Financial Institutions | Specialized Lenders | Retailers/Financial Partners | Banks, Credit Unions, Online Lenders | Banks, Credit Unions |
| **Limit Type** | Revolving | Instalment | Instalment | Term Loan | Term Loan | Instalment | Instalment | Term Loan | Revolving | Term Loan | Term Loan |
| **Repayment Frequency** | Monthly | Monthly | Bi-weekly/Monthly | Monthly | Single Payment | Initial + Bi-weekly | Weekly/Bi-weekly | Monthly | Monthly | Monthly | Monthly |
| **Repayment Maturity** | Revolving (no fixed end date) | Short to Medium-term | Short-term (weeks to months) | Short to Medium-term | Very Short-term (1-4 weeks) | 6 weeks | Short-term (1-3 months) | Short to Medium-term | Revolving (no fixed end date) | Medium to Long-term | Medium to Long-term |
| **Repayment Payment** | Minimum monthly payment | Fixed Monthly Payments | Equal installment payments | Fixed Monthly Payments | Lump Sum Payment | 4 Equal Payments (1 upfront + 3 bi-weekly) | Fixed Payments | Fixed Monthly Payments | Minimum Monthly Payment | Fixed Monthly Payments | Fixed Monthly Payments |
| **Secured or Unsecured** | Unsecured | Unsecured | Unsecured | Unsecured or Secured | Unsecured | Unsecured | Unsecured | Secured (Vehicle) | Unsecured | Unsecured or Secured | Secured |
| **Interest Rate and Fees** | **Interest Rate:** High
**Common Fees:**
- Annual Fee
- Late Payment Fee
- Balance Transfer Fee
- Foreign Transaction Fee
**Additional Notes:**
- Rewards programs may offset some fees for frequent users | **Interest Rate:** Moderate
**Common Fees:**
- Setup Fee
- Late Payment Fee
- Early Repayment Fee
**Additional Notes:**
- Converts large purchases into fixed monthly payments
- Lower interest rates compared to revolving credit if paid on schedule
- Predictable payment schedule for better budgeting | **Interest Rate:** Zero to Moderate
**Common Fees:**
- Late Fee
- Service Fee
- Interest on Extended Terms
**Additional Notes:**
- Often interest-free if paid on schedule
- Higher penalties for missed payments | **Interest Rate:** Moderate
**Common Fees:**
- Platform Fee
- Origination Fee
- Late Payment Fee
**Additional Notes:**
- Rates based on borrower's credit profile
- Transparent fee structure
- Direct lending between individuals
- Flexible terms compared to traditional banks | **Interest Rate:** Very High
**Common Fees:**
- Flat Fee Based on Loan Amount
- Rollover Fee
**Additional Notes:**
- Extremely high APR
- Intended for emergency short-term borrowing | **Interest Rate:** Usually Zero
**Common Fees:**
- Late Fee
- Failed Payment Fee
**Additional Notes:**
- Interest-free if paid on schedule
- First payment at purchase, followed by 3 bi-weekly payments
- Simple and transparent payment structure
- Growing alternative to traditional credit | **Interest Rate:** Very High
**Common Fees:**
- Origination Fee
- Late Payment Fee
**Additional Notes:**
- 56 Loan: Borrow 5000, repay 6000 in Philippines
- 9出13归: Borrow 9000, repay 13000 in Hong Kong
- Popular short-term loan product in Southeast Asia | **Interest Rate:** High
**Common Fees:**
- Origination Fee
- Late Payment Fee
**Additional Notes:**
- Vehicle title used as collateral
- Risk of vehicle repossession on default
- Lower rates than unsecured short-term loans | **Interest Rate:** High
**Common Fees:**
- Annual Fee
- Late Payment Fee
- Penalty APR
**Additional Notes:**
- Store-specific rewards and benefits
- Generally higher APR than general-purpose credit cards | **Interest Rate:** Low to Moderate
**Common Fees:**
- Origination Fee
- Prepayment Fee
- Late Payment Fee
**Additional Notes:**
- Rate depends on credit score and security
- Longer terms available
- More formal underwriting process | **Interest Rate:** Low
**Common Fees:**
- Origination Fee
- Late Payment Fee
**Additional Notes:**
- Collateral reduces interest rate
- Common collateral includes savings accounts, CDs, or vehicles
- Lower risk for lenders |
| **Use Cases** | Everyday purchases, Building credit | Large purchases, Budget Management | Online shopping, Retail purchases | Personal Loans, Debt Consolidation | Emergency Expenses | Online Shopping, Small-Medium Purchases | Emergency Expenses | Emergency Expenses | Store-specific Purchases | Large Purchases, Debt Consolidation | Large Purchases, Debt Consolidation |
| **Sales Channel** | Online, Bank Branches, Retail Partners | Online, Bank Branches, Retail Partners | E-commerce Platforms, Retail Stores | Online P2P Platforms | Online, Physical Stores | E-commerce Sites, Retail Partners | Online, Physical Stores | Physical Stores | Retail Stores, Online | Online, Bank Branches | Bank Branches, Online |
## Supplementary Notes on Credit Card Model
### Three-Party vs Four-Party Credit Card Models
The credit card industry operates primarily under two main models: the three-party model (closed loop) and the four-party model (open loop).
#### Three-Party Model (Closed Loop)
In a three-party model, the key parties are:
1. The cardholder (consumer)
2. The merchant
3. The card issuer/network (single entity)
Examples include American Express and Discover, where the company acts as both the card issuer and payment network. Key characteristics:
- Direct relationships with both cardholders and merchants
- Full control over fees and terms
- Typically higher merchant fees but also higher cardholder rewards
- More integrated customer experience
- Limited acceptance compared to four-party networks
#### Four-Party Model (Open Loop)
In a four-party model, the participants are:
1. The cardholder (consumer)
2. The merchant
3. The issuing bank
4. The acquiring bank/payment network
Examples include Visa and Mastercard networks. Key characteristics:
- Broader merchant acceptance
- Shared revenue and risks among participants
- More complex fee structure
- Greater competition among issuers
- Network effects benefit all participants
