Nearly 60% of millennials report subprime credit scores, making it harder for them to get credit from traditional sources and build a credit profile. A new PYMNTS report highlights the role of FinTechs in creating new products that balance credit risk with credit-building outcomes.
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Not being able to use a general-purpose credit card is not just an inconvenience — it is an impediment. Roy Ng, co-founder and CEO of Bond, learned this firsthand as a child when his family moved to the United States from Hong Kong.
In an interview with PYMNTS, Ng recounted how his mother, lacking a credit profile in the U.S., struggled to access a credit card that could be used at any store, instead having to make do with a Sears card, which could be used only at that retailer.
“A lot of people, not only immigrants, have a challenge because they’ve never built credit in the past,” he said. “There’s a little bit of a [vicious circle, wherein if] you can’t build that credit profile in the beginning, you’re never going to have great credit.”
There are tools that can help consumers stuck in this Catch-22, however. Secured credit cards, Ng explained, are one such solution — and one that his company is focused on making more widely available.
Secured credit cards can help consumers build a better financial foundation. Ng explained that these cards provide consumers with access to the features associated with a regular credit card, but without the revolving balance. For instance, consumers can use these cards to improve their credit profiles because, unlike debit cards, on-time payments count toward users’ credit history.
Another benefit is that secured credit cards have built-in spending limits, as users are limited by how much money they load onto the card in advance. This gives secured cards an advantage over other alternative lending types that have no such safeguards in place.
“Whatever payment you’re making on the card, it’s actually from the security deposit account that you already put into the card,” Ng said. “It works more like a debit card, but the consumer will still be able to build credit history as they continue to spend on that card, and it doesn’t enable the consumer to spend beyond what they have. That’s why we believe this is a relevant financial product in this market today.”
FinTechs can benefit from secured credit cards too. Because this product, being a credit card, relies on credit rails, issuers earn a credit interchange fee.
“From a revenue standpoint for FinTechs and tech companies, that’s pretty attractive,” Ng said.
He added that the credit interchange fee can be nearly two times that of a debit card, which is the payment method on which many underserved consumers are currently relying.
While many FinTechs have set their sights on providing unsecured credit cards to credit-deficient consumers, Ng said their efforts have been largely stymied by approval ratings sometimes as low as 20%, resulting in a failure to scale — and highlighting how normal credit products are often unattainable for these demographics.
At present, secured cards remain a relative rarity, with Ng estimating that there are only 6 million or so secured cards in circulation, a quantity vastly dwarfed by the roughly 700 million unsecured cards in circulation.
The future, however, might be much different. Ng predicted that as the negative economic situation continues and distressed consumers become more in need of reliable credit options, more FinTechs will jump into the secured card space.