CardsFTW #4: New Cards for People With Bad Credit

Plus, Stepping into Influencer Marketing and Maybe Miles Aren't So Great

Petal’s Challenger Cards Evolve

Petal Card, a four-year-old challenger credit card startup, announced a new product lineup this week, following a recent $55M Series C announcement. Petal focuses on expanding access to credit through alternative underwriting.

The names of these new products are confusing: We now have Petal 1 and Petal 2. We have to start with the older product, which is now named Petal 2.

Petal 2

For the past few years, Petal has offered a single product (formerly known as simply the Petal Card), which is now called Petal 2. This card is a basic fair-credit, cashback card. Petal utilizes cash flow-based underwriting for consumers who may not be eligible with traditional underwriting (FICO-based scoring models). The Petal 2 card has no fees and an APR of 12.99% - 26.99%, average for this consumer type.

Petal 2 has an incentive-based cashback program where you earn a base 1% cash back on purchases. The reward rate can grow to 1.25% after six on-time payments and 1.5% after 12 on-time payments. The card also includes merchant-specific card-linked offers (a topic we'll be covering more in a future newsletter).

Petal 1

The new card is called Petal 1 and targets a lower-end credit demographic. Users for this card are likely to have low-to-fair credit and a smaller income. The underwriting continues to be cash flow-based. The card has an APR of 19.99%-29.49%, along with late payment and returned payment fees in line with industry averages. The card does not have base level rewards but does still provide the card-linked merchant offers capability.

Both cards are issued by WebBank and run on the Visa network. Collinson powers the card-linked offer capability.

I don’t understand the naming here. Is the idea that I can graduate from Petal 1 to Petal 2? Why not Petal and Petal Plus or Petal and Petal Pro? Naming is hard, but this one is a miss. Naming aside, the new card looks and feels like a normal low-to-fair credit card and the proof of its success will come in the coming months and years when the underwriting is put to the test.

Bad & No Credit Card Competition is Growing

Startups continue to attack the new-to-credit space. Each startup has a slightly different focus, but there is a general feeling that large issuers ignore or mistreat low credit score consumers. In addition to PetalCard, there are offerings from Jasper, TomoCredit, Deserve, Mission Lane, Upgrade, Cred.ai, etc. This list does not include companies that are waitlist only or haven't disclosed an issuing bank partner. Also, neobank giant Chime has a secured card offer, about which I am excited. The Chime secured card has no fees, reports payments to generate credit history and, because it is secured, has little underwriting risk for both Chime and its consumers.

Underwriting is Hard

Capital One pioneered the modern use of large data sets to develop alternative underwriting, but they still heavily use credit reports and credit scores. While it can often seem unfair, the credit report system does have value. Cash flow is not a direct indicator of willingness to pay or the ability to pay on time; it indicates the theoretical capability to pay a bill of a certain size. There are people with large incomes who have bad credit scores and the same in reverse. Paying attention to your bills, paying on time, and living within your means is undoubtedly easier when you have more money, but cash flow itself isn't the only indicator.

Without any unique insight into Petal's books, I will assume that their investors can see something is working. Given our economy's battered state and the length of credit cycles, it remains to be seen if any of these new underwriting methods work.

🚨Light it Up

Gaming company Razer announced a new prepaid Visa debit card that lights up. The Razer card is in limited beta in Singapore only. The upgraded premium card includes an LED that "lights up on payment." I'm not sure how that works and it probably only works for EMV transactions. It's a fun gimmick. I doubt this card is very far along as the graphic appears to have that "we stole the Apple Card image and played with it in Photoshop look" (see the custom EMV chip design from Apple.) Like other co-brand cards, the card has a base 1% cashback and 5% on Razer items.

Upsells!

Azlo, which provides a debit card solution for entrepreneurs and freelancers, announced a new product, Azlo Pro, which provides more services as part of the card. Pro is a pricing bundle, allowing Azlo to charge a monthly fee for access to a few additional services and reduced fees on other per use items. Many startups card companies have two key points of differentiation:

  1. Pricing (free)
  2. User Experience (better)

It's unclear for most neobanks if the free pricing is sustainable, so it is not surprising to see an upsell appear. I think we will see more upsells across the space over time that better match customers' needs. I hope to cover a lot of exciting innovation in neobanks for businesses in a future newsletter.

Azlo issued by BBVA and runs on the Visa network.

Step Into Influencer Marketing

Poor form to have that Mastercard number on the back of this Visa card. I don’t know that got approved by brand!

Step is a neobank for teenagers. They have been building for a while and have a solid team, and I understand they are very good at fundraising. They put some of their money to use last week, launching a big influencer campaign with influencers on TikTok, so frankly, I am out of my depth. The product appears like a very typical neobank for parents and teens, with the removal of fees. Green Dot had a popular student card in the early 2000s. That card lacked budgeting controls, but controlled funds because it was prepaid (you can’t spend what’s not loaded). Parents were issued two plastic cards, one for them and one for their student, with a shared balance. Since that time, many, many startups have attacked this space, with Greenlight being the largest. Greenlight offers a family management card for $4.99 per month. Greenlight targets parents, while Step focuses on the teenager-direct marketing channel.

As I was finishing writing this story up, Chase announced the new Chase First Banking product, which is a white-labeled Greenlight account with no fees. I’ll have to dig into this next week. This new product is a huge deal for Greenlight in terms of reach, but also puts them into direct competition with themselves (a Chase First card competes directly with Greenlight’s core product). We did this at Green Dot with our Walmart card and it worked out, but was a big bet.

The Step card is issued by Evolve Bank and Trust and runs on the Visa Network.

Don't Trust Those Miles

The New York Times put out a skeptical piece about airline miles, pointing out to consumers that the travel brands can limit the availability or change the value of the miles at will. While leading Wallaby, we did extensive modeling to understand each mile's value or points currency in the US ecosystem. There were always outliers. My co-founder Todd was great at finding high-value international first-class flights, raising his American Airlines miles to 3-8 cents per mile vs. an average value of 1.7 cents at the time. On the other hand, I was usually lucky to hit the average, due to constraining my travel time to school vacations and my destinations to family-related excursions.

If you don't know me, I love credit card points, and I have earned millions across several dozen cards in the past 20 years. I'm much worse at using them and think that there will be a consumer shift to more cashback or rewards that can be enjoyed more frequently across additional categories beyond travel. People will always love to get a good deal, but it behooves consumers to view all these travel offers with skepticism. The chances you get that first-class seat to Tahiti seem pretty low.

CardsFTW

Thanks for reading CardsFTW, a weekly newsletter about all things debit and credit. CardsFTW is written and curated by Matthew Goldman, Founder and CEO at Vertical Finance, a challenger credit card startup. If you’re looking for insights into everyday payments beyond deal blogs, please subscribe for free at cardsftw.substack.com. If you enjoyed this, please share it with a friend! Follow me on Twitter @magoldman

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