FinTechs Use Secured Cards to Fill Consumer Credit Gap

The path toward building a full-service bank in the digital age is a long and winding one.

And for the FinTechs endeavoring to do that, the challenge is to get critical mass, with an installed base of consumers sticky enough to embrace a wide range of products and services.

After all, customer acquisition costs can be considerable, cash burn cannot go on indefinitely and VC/PE/Wall Street funding is getting harder to come by. Balancing the pursuit of customer growth and rising costs is critical.  In the meantime, many of these firms are building out their platforms and offerings with a few initial use cases and then expanding from there.

We’re seeing some evidence of those pressures in place, with recent results from firms like Klarna, as spotlighted recently in this space. The BNPL giant reported that revenues were up 24% year on year but net losses tripled on continued expansion efforts.

And elsewhere, FinTechs are seeking to back more of their loans with deposits to lure institutional investors in a tougher funding climate. Those FinTechs are seeing some pressure on their own portfolios as individual consumers are making late payments.

Read Also:  FinTech Lenders Scramble for Investors as More Loans Backed With Deposits

Consumers Interested in Digital Cards

In the meantime, the jockeying among the digital players becomes ever-more intense. Late last year, U.K.-based Revolut expanded its credit products across several markets internationally. PYMNTS’ own data found that as many as 28 million consumers without digital cards would be interested in them. As of now, many FinTechs offer checking accounts and debit cards — but will have to branch out beyond those confines to keep customers in the fold and attract new ones.

As for secured credit cards, which are backed by individuals’ deposits with the issuer, we note that there can be a positive ripple effect in that consumers are effectively tapping into two products at once — the savings account and the card itself.  The cross-pollination is automatic, in a sense. There are a number of players offering secured cards (such as Varo and Chime), which help consumers build credit as payments data is reported to the major bureaus. The secured card also gives the FinTech a lower-risk way to extend that credit in the first place.

The push to offer secured credit cards is widening. Last month, Bond, the banking-as-a-service platform, announced the availability of the Credit Builder Card which makes it easier for FinTechs and other companies to introduce a secured credit card to their customers. In terms of the mechanics, the effort is powered by the Mastercard network and issued by Bond sponsor bank Evolve Bank & Trust.

In an interview with Karen Webster, Bond CEO and Co-founder Roy Ng said that close to 35% of Americans have subprime credit scores — between 580 to 669 — or credit files that are thin or nonexistent. The population here skews decidedly younger, as 40% of subprime scores are held by millennials.