Roy Ng knows how difficult life can be when full economic access always seems out of reach.
Telling the story of moving to the United States from Hong Kong as a child, the co-founder and CEO of Bond recalled that his mother had to open a Sears card to buy durable goods at this retailer since the family had no credit history. in the United States It showed Ng that not having a credit card you can use at any store is more than a disadvantage – it’s a hindrance.
“For a lot of people, not just immigrants,” he said, “they have a challenge where, because they’ve never built credit in the past, there’s a bit of a circular reference where you can’t build that credit profile at first, you’ll never have great credit.
Now facing biting macroeconomic headwinds, more and more similarly situated consumers are turning to secured credit cards – a tool for building or establishing credit that has been around for years, but has taken more time. importance lately.
In a conversation with PYMNTS CEO Karen Webster, Ng said Bond, the banking-as-a-service platform company he co-founded, discovered that consumers’ problem with accessing credit occurs at the same time as the sector has begun to carefully seek new ways to differentiate itself, creating an opportunity for both to benefit.
“If you look at Findex data in 2021, 1.4 billion adults worldwide are still unbanked,” he said. “There is a huge opportunity for technology companies and FinTechs to really reach out to this segment of the population” with tailored financial products – including secured credit cards, which are the first steps in the credit journey of this population.
According to a study by the Center for Financial Services Innovation, 121 million Americans face credit problems with subprime credit scores (68 million) or thin or no credit records (53 million).
Noting that nearly 35% of Americans have subprime credit scores, defined as 580 to 669, or thin or no credit records, Ng said, “We’re not talking about a small group of people here. This is a fairly large population confronted with this problem on a daily basis. On top of that, 40% of subprime scores are represented by millennials.”
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Ng noted that “there are many places where a debit card is not an ideal instrument to use”. Problems can arise with card holds at gas pumps, and even when booking hotel rooms or renting cars, the debit is often not accepted – or if accepted, deductions can be placed in the current account.
He said secured cards allow consumers to make transactions that debit cards do not support, adding that secured cards allow consumers “to access many other types of merchants.” For FinTechs, this is a new source of exchange revenue that also builds brand credibility with consumers, which tends to have a ripple effect.
Bond’s Credit Card Builder product enables FinTechs and Financial Institutions (FIs) to create secure cards for distinct market segments.
“A secure consumer card allows you to have the features associated with a credit card, but without a revolving balance,” Ng said. “It works more like a debit card, but the consumer will still be able to build up a credit history while continuing to spend on that card, and it doesn’t allow them to spend beyond what they have. This is why we believe it is a relevant financial product in this market today.
Harness the power of credit
While the problem being addressed is the large number of consumers who cannot take advantage of credit card benefits like freedom to spend and credit scores, the needs of FinTech are at the heart of this solution.
The standard FinTech 1.0 offering of a current account and debit card falls short of the novelty. The market has become crowded and saturated, and the debit exchange is an insufficient business model to grow this business. It also doesn’t give people with poor credit — or no credit history — what they need to function in the digital economy.
Acknowledging this, Ng said FinTechs introduced insecure cards to drive revenue growth, but experienced very low approval rates – some as low as 20% – and failed to scale as the Unsecured credit cards are often inaccessible for their target demographics.
See also: Consumer demand drives banking-as-a-service innovation
Ng said customers need a more innovative way to be accepted for a general purpose card with credit building features and product design. This is the basis of Bond’s credit creation product, which it enables FinTechs and technology companies to offer to their customers.
“Because it’s a credit card, it runs on credit rails, and the credit interchange is about twice the debit card interchange,” he said. “From a revenue perspective for FinTechs and tech companies, that’s quite attractive.”
Compared to simpler payment terms like buy now, pay later (BNPL), Ng said the secured card has advantages because the limit is the amount the consumer has placed on that card. He says it works as a fail-safe against budget overruns.
“Whatever payment you make to the card, it actually comes from the security deposit account that you already put on the card,” he said.
Go beyond the traditional
Ng added that, unlike unsecured credit cards, consumers only need to pass Know Your Customer (KYC) validation, which reduces barriers to adoption of this old but new type of payment card. .
Additionally, the secured card may be the consumer’s best choice for building or repairing a payment history, putting them on the path to qualifying for an unsecured card.
“A FinTech with a debit card, then an unsecured credit card, and the decline rate is extremely high on the unsecured credit card,” can offer a secured credit card to get them to a point where they can now graduate and apply for the unsecured card.
This results in a drastic improvement in FinTech sales and marketing ROI in signing new customers.
Estimating that only 6 million secured cards are currently in use, compared to around 700 million unsecured credit cards in circulation, Ng predicted that more FinTechs will enter the secured card space as the economic downturn drags on. to 650 days longer, according to recent PYMNTS research.
Ng also thinks consumers are eager for direct access to financial services from companies they trust. Bond recently commissioned research from Cornerstone Advisors that shows the majority of American consumers want financial products from their favorite brands, and 32% will spend more with the brands they do business with than before.
“Things are just a lot more expensive,” Ng said. “It’s very difficult to be financially secure. How do we get consumers off to a solid start with such a product so that they can really build the right foundation to improve their credit profile? »
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