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