Credit Is Being Rewritten and Banks Are Running Out of Time, Says Thredd CEO

Watch more: Need to Know: Thredd’s Jim McCarthy

There’s new urgency for banks to innovate as consumers embrace flexible repayment options and new digital channels.

What once looked like a stable structure of credit cards, billing cycles and fixed repayment terms is being reshaped by FinTechs, neobanks and emerging agentic artificial intelligence models that give consumers more control at the point of transaction.

PYMNTS CEO Karen Webster and Thredd CEO Jim McCarthy said during a discussion that these forces are pushing banks to rethink their foundations and build new ways to deliver credit where and when consumers want it.

Competing With FinTechs and New Digital Expectations

Banks now face a crowded field of players offering alternative credit experiences that are simpler, faster and more personal. FinTechs have set new expectations for seamless digital repayment journeys.

While the largest banks have the budgets to experiment, the thousands of smaller institutions across the United States face a much more difficult task, McCarthy said. They see what digital-only players like Chime and other innovators deliver, yet many remain held back by outdated systems and organizational silos.

Smaller institutions are often “still stuck just trying to get Apple Pay out the door,” he said.

Consumers, meanwhile, have moved beyond basic payment conveniences. Webster pointed to the broad spread of pay in three, pay in four and revolving models that give the consumer flexibility with respect to how they want to manage their repayment schedules.

That flexibility is no longer a differentiated feature. It is now an expectation. Smaller banks risk becoming secondary financial providers if they cannot offer comparable tools.

Innovation Through Debit, Paycheck-Linked Loans and Flex Credentials

Debit has emerged as a central foundation for this new era.

“Debit has become the preferred way most consumers like to pay,” McCarthy said, and that preference is reshaping how credit is delivered.

Innovations tied to income visibility have opened the door to short-term credit that does not depend on a traditional credit line. Salary advances and short-term loans based on incoming paychecks give consumers the buffer they need while helping them build credit scores.

When neobanks “saw your paycheck coming in, they knew you’d be good for it,” which made it possible to offer responsible short-term credit at scale, McCarthy said.

Flex credentials are another promising development, Webster said, describing how a single debit credential can support pay in three, pay in four or long-term installment options.

McCarthy connected these capabilities to tokenization, virtual card infrastructure and account-level processing, which together make it possible for consumers to shift among credit modes within the same familiar account.

This model aligns with Thredd’s view that debit is the natural starting point for modern credit journeys. By layering tokenization, dynamic credentials and account-level controls, banks can evolve from simple debit issuance to graduated credit capabilities within the same customer relationship. For smaller banks, these tools are not theoretical.

A Massive Opportunity, Bottlenecked

The potential for innovation across the nation’s 9,000 banks and credit unions is massive, yet structural friction remains a barrier. Internal alignment across credit and debit lines of business is one of the toughest obstacles, McCarthy said. Each business unit has its own incentives, systems and risk frameworks.

“It’s oftentimes very difficult to get the mindset right,” he said, and that misalignment slows the rollout of flexible credit features even when teams agree on the strategy.

Technology compounds the problem. With multiple systems for underwriting, servicing, fraud and risk that must all function together, even the simplest product enhancements become complex.

“It can be very difficult to pull these types of things off,” McCarthy said.

Smaller banks feel this pressure most acutely because they do not have the resources of national providers, yet they are held to the same consumer expectations. For them, modernizing credit is not optional. It is the path to remaining relevant.

Repackaging Old Ideas Into New Standards

A recurring theme in the evolution of credit is that new ideas are often updated versions of old ones, McCarthy said. Installments were not invented by buy now, pay later (BNPL) providers but were reimagined through a better user experience.

Webster said Bill Me Later was the “buy now, pay later pioneer online,” and McCarthy said it “rode on card rails of early, early, BIN sponsorship, Rent-a-BIN.”

McCarthy also described his own work at Visa launching account-level processing, which led to Visa Signature and the upgrade strategy that helped consumers move across value tiers more easily. Across decades, innovations that once looked disruptive eventually became standard infrastructure.

Sidecars as the Fastest Path Forward for Banks

Given the cost and complexity of updating core systems, many banks are now exploring different models that allow them to evolve quickly.

McCarthy said that “the only way they get there in the short term is to stand up some sidecar capabilities” that sit alongside legacy systems rather than replace them. Thredd’s experience powering flexible credit for FinTechs positions it to help banks adopt these models quickly. Modern issuing capabilities, not lending software alone, are the missing piece for banks trying to deliver flexible repayment models.

“They’re tired of being the last ones at the table,” McCarthy said of smaller banks and credit unions. They want BNPL, flex credentials, tokens, digital wallets and embedded finance, and they need them sooner rather than later. Sidecar models let these institutions accelerate without waiting for multiyear infrastructure projects.

The Next Frontier: Agentic AI and Embedded B2B Credit

Agentic AI will become a transformational force in credit distribution, McCarthy said, predicting “a proliferation of agents that will be effectively transacting on our behalf,” making decisions about which repayment method is optimal in context.

Modern issuing rails will be essential in an agentic world because these systems need dynamic tokens, virtual credentials and configurable authorization logic to act on behalf of consumers, he said.

He also pointed to embedded B2B credit as a major frontier, where financing can be triggered by payment flows inside platforms rather than through manual processes. In both cases, credit becomes programmable and responsive. Institutions that move early will shape the next decade of consumer and business credit.

Where Thredd Is Focused Now

For 2026, McCarthy said the priority is “focus and execution,” adding that the foundational tools for modern credit are now ready and demand is rising. Smaller banks have the most to gain by moving quickly and the most to lose if they hesitate while consumers shift further toward flexible, technology-driven repayment. Thredd is concentrating on helping these institutions deploy new capabilities without waiting for core replacements.

McCarthy closed with a pointed reminder that the winners in the next cycle will be those that act before the market moves again.

“Everything in my life and around payments has been almost a 10-year cycle,” he said, underscoring the urgency. “The market, as you know, moves around us. It’s constantly evolving.”