There are plenty of discussions these days about financial inclusion, but lenders must think twice before lowering standards to embrace the unbanked and those with thin files with the current economy.
Consumers have plenty of options, with some new-wave credit cards that rely on alternative data. Petal Card is an example of a good option for that market. Another option, though, is a secured credit card.
Mercator covered the secured card several years back, and we noted how the CARD Act changed the secured card market. Secured cards had a pretty ugly past a few decades ago. With one issuer, you would call into a 1-900 number (…remember those?), and you could pay a fee. Numerous firms required $500 to secure the deposit but laid $450 in “origination” fees; this left you with an open-to-buy of $50.
As our report explains, in 2003, the Office of the Controller of the Currency (OCC) issued advisory notifications to issuing banks regarding predatory pricing, the acceptance of deposits, and the use of excessive cardholder fees. In addition, in 2009, the Credit Card Accountability Responsibility and Disclosure Act (CARD Act) placed a limit on fees to ensure fair and proper payment card terms.
The OCC’s advice was an excellent example of prudent regulatory advice, and the market changed overnight. Bank of America, Capital One, Citi, Wells Fargo, and Discover got into the secured consumer credit card business. A card issued by a top national credit card company tends to help the credit score.
Mercator even wrote about a fantastic program at KeyBank that celebrates when the customer proves themselves creditworthy and can top stand on their newly enhanced FICO Score, earned while the secured card matured. In addition, Capital One has its spin on a secured card, where they can increase the credit line beyond the deposit amount to show the customer the rewards of good credit.
Few banks offer secured cards for small businesses. Wells Fargo was a leader in this niche, but now Bank of America announced their new small business secured card. The card is a full-featured product with rewards and links to the BoA small business center. So for a fledgling company, there is another opportunity to have a blue-chip lender as a credit reference.
The secured card provides a good path around the underwriting challenge for those with little credit references or poor experience. And for small businesses, it gives an excellent opportunity to move the enterprise forward.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
