The role of the credit engine in offering cards

The role of the credit engine in offering cards

Running a credit card business can be a great way to enter the world of financial services thanks to the facilities and investment returns it offers. However, managing it in the digital age would not be possible without a fundamental tool: the credit engine. This automated solution keeps the administration of granted credit lines up to date to operate correctly and provide the appropriate visibility to its users.

Next, we explain everything about the credit engine, its features, and all the advantages it offers to companies with credit card businesses. In addition, we delve into one of the most important markets in Latam for this segment, Mexico, and explain why it stands out and continues to generate opportunities. Let's go!

What role does the credit engine play in a credit card business?

Basically, it is the fundamental piece that automates the management and administration of all lending products with active credit lines, in addition to cards, such as:

• BNPL;
• personal loans;
• financial credits: secured, mortgage, to businesses or individuals.

It is a technological development designed to digitally configure the business rules behind the granted credits. Therefore, it automates all the calculations associated with credit granting, in addition to complying with the bureaucracy and regulations of the markets. This can be internally built by companies looking to venture into the segment, or they can leverage a tech-savvy partner that already has the solution developed and offers integration via APIs.

Why is it so important for credit card businesses?

This effective credit management tool provides companies in any industry seeking to enter this segment with:

• an automated operation that avoids manual errors and optimizes risk management;
• greater clarity and simplicity for their users in managing their credits;
• already processed information, such as reports or summaries, that will help them make data-driven decisions to refine their strategy and place more products;
• the possibility to scale their solution and offer it to more users, as the credit engine will be able to perform the same functions regardless of the number of credits granted;

And, as we mentioned at the beginning, there are financial services infrastructure providers that offer the rapid integration of lending solutions through embedded finance, such as the issuance of credit cards accompanied by their credit engine. More and more companies throughout Latam, from sectors like fintech, retail, or insurance, are leaning towards adding financial solutions in this way to complement their users' experience and gain extra income. What customers appreciate most is not having to sign contracts with more than one company for their credit products. Having a single partner for card issuance, along with the credit engine, simplifies the operation and administration of the contracted services, helping to resolve potential problems and unifying their pricing in the event of potential growth and regionalization of the company.

Mauricio Téllez, Customer Success at Pomelo in Mexico.

In detail: what does it allow you to do?

One of the main functions of the credit engine is to enable businesses to configure the pricing of their products according to their strategy and thus automate its operation. Let's see each possible configuration below:

• Interest rate calculation:
• 
• Revolving: interest generated on unpaid amounts from a statement of account;
• Cash Advances;
• Late fees: charges related to overdue payments according to the pre-set rate;
• And installment or deferral of a statement of account

• Commission calculation:
• 
• Per transaction: e.g., cash withdrawal;
• Time frequency: e.g., monthly or annually.

• Calculation of the minimum payment that users can make;
• Closing dates;
• Due date;
• Grace period: these are the days after the due date configured so that a user does not default if not necessary. Let's see a practical example: if a person made a credit payment on a weekend or holiday, the notification of the same may be delayed from being reflected in the system. Therefore, to avoid mistakenly charging late fees, grace days are configured.
• Paused for delinquency: configuration of the number of days that can pass before a granted credit is paused if the user remains in default.
• Limits by product: according to the person's credit history or the business's strategic decisions.
• Scoring analysis or “decision engine” for credit eligibility and risk evaluation: this tool may not be present in the standard credit engines on the market, as scoring and risk analyses can be conducted with various methodologies, chosen based on the business model and criteria of each company. For example, in some cases, they prefer to do so through AI, and in other cases, the goal may be to bank those who have never had access to credit before, and therefore they will be more flexible with approvals.
• Account statements: issuance of summaries with all the relevant information, according to the regulations of each country, to provide users with visibility of their updated debt status. Among other data, it must include the annual financing cost, due dates, and payments made.

All these configurations pertain to the general organization of the business. Additionally, the credit engine allows for others at a micro-level, specific to each client and their credit history, such as purchase limits or cash-out limits, in addition to personalized due dates.

It is also important to mention that the lending of money and the granting of credit can be independent of the credit engine as a solution. That is, if a technology infrastructure company offers its credit engine for integration, it does not mean they will also lend the money or manage collections. The credit engine is a tool that helps companies manage their money lending and credit allocation business, which is independent of the cash flow.

Its highlighted component: the debt engine

Yes, there is one more piece of the credit engine! And we dedicate a special section to it as it handles some of the most important functions:

• Keep debt balances updated: when a user does not pay the full balance of their card statement, it calculates the interest on the unpaid amount.
• Calculate taxes: for example, VAT on commissions and interest in Mexico, or the IOF (Tax on Financial Operations) in Brazil.
• Calculate financial statements: such as the CAT (Total Annual Cost) in Mexico, which represents, in percentage, the total costs and expenses inherent in the credits granted by institutions. In Brazil, its equivalent is the CET, or Total Effective Cost.
• Installment or payment plan arrangements: setting how many there will be and when each one is charged.
• Payment allocation hierarchy: determines which debt each payment is allocated to, for example, first to interest and then to the principal granted.
• Calculate the refinancing requested by the user.

Bonus track: Why is offering credit in Mexico so convenient?

In Mexico, the lending or credit granting segment stands out year after year: according to the Finnovista Fintech Radar of Mexico published at the end of 2023, it is the one with the most fintech companies in the country, with 165. In that year, 22 lending companies emerged, and the segment maintained the positioning it already had in 2022 compared to others, such as payments or remittance sending.

And the reason? The ability to grant credit is unregulated, so any commercial corporation can venture into this segment and launch their credit cards to offer them. There are only a few companies that cannot offer credit, find more information here:

And if we talk about income, in addition to all the commissions and interest that can be generated by issuing credit, the credit cards themselves also generate their own! The interchange fee, a percentage present in each card transaction destined for its issuer, has gained importance for those who grant credit due to how it is regulated in the country.

According to the Banco de México, the interchange fee percentage for debit cards cannot exceed 1.15% of each transaction, but it has a maximum return limit for issuers of $13.50 -which limits the profit they can obtain-. However, for credit cards, there is no cap and the percentage is higher: up to 1.91% of each transaction. It undoubtedly becomes a key factor for companies considering venturing into a lending business with credit cards.