Mercator Advisory Group’s view of the secured card market showed how the product changed since the CARD Act of 2009 drove out hard money lenders. Gone are the predatory lenders who offered $300 credit limits that netted only $50 in available credit after ridiculous administration fees. In came established firms such as Bank of America, Citi, Discover, KeyBank, and U.S. Bank; many credit unions also offer the option.
Secured cards are a far better option than the use of alternative data, which the WSJ reported as a way to open up lending to the non-and-under banked. Instead of diverting from the well-established use of FICO scores, in search of a way to justify lending, secured cards take a chance with consumers by simply holding the funds against available credit.
Most credit card issuers require two consumer credentials: a deposit to back up the credit line and a checking account number (Yes, neo banks like Chime will work also). The checking account is necessary to ensure there is a path to make the monthly payments.
With COVID’s credit upheaval, the secured credit card product is positioned perfectly for consumers on the mend or seeking to enter the credit card market. Here’s an excellent success story on how well KeyCorp’s program worked during the past year. Payments Journal reported on KeyCorp in 2019, so consider this as an update.
Every secured card program should measure itself on two metrics: credit risk and the graduation rate. The graduation rate looks at the number of accounts that progressed from secured card status to general-purpose card status without the required security.
No banks report on credit risk for the secured card even though it exists. While credit lines limit deposits on hand, there can still be nominal credit losses and fraud risks. Banks do not typically report on secured card graduations. However, KeyBank provides an annual review.
According to KeyBank’s press release,
- KeyBank today announced their May 2021 graduating class from the Secured Credit Card, including a record 4,513 clients.
- The recent graduation class size has doubled in size when compared to last year’s graduating class.
- This product empowers clients to build their credit or make a credit comeback as we emerge from the COVID pandemic, enabling credit score improvement for the 2,974 clients starting with no FICO score.
- Low FICO clients were also able to improve their scores by an average of 78 points in six months.
Those results are stellar. Let’s break it down.
- Credit Acquisition Cost Avoidance: a good rule of thumb for booking a new credit card account is to use an acquisition cost of $250. With 4,513 new graduating accounts, KeyCorp saved $1,128,250 through its program this year.
- Product Growth: Two times prior-year volume bears note. KeyCorp’s program works!
- Almost ¾ of consumers now have FICO Scores: And, with these FICO Scores, consumers will be open to Auto Loans, Personal Loans, and perhaps Mortgages.
- Weak Scores Improved: Assuming that secured cards target FICO Scores at or below 600, it seems like consumers could better their scores by 10% in six months. That’s a win for everyone.
As lenders look to rebuild their portfolios, secured cards open the opportunity for all. The requirements are low, and the benefits are considerable. And with KeyCorp’s case study, this is a program for a wide range of consumers and every credit card issuer.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group