Credit Builder Cards

Last week, in CardsFTW 62, I covered the launch of Chase’s new Rise Freedom card, designed for those new to credit. The card has tangible benefits, but in a very traditional banking fashion, the initial roll-out is not digital-friendly. Applicants must physically enter a Chase branch to apply and are strongly encouraged to open a Chase checking account to increase their approval odds.

Creating new products to help people build credit has long been a pursuit of startups and big banks alike. If you can help people build their credit, so the thinking goes, you can build long-term relationships and help people on their financial journey throughout their lives. It doesn’t always work like this, though.

First, you must figure out how to profitably underwrite and extend credit to those with limited or no credit history or bad credit. These groups face similar challenges as users–they have limited access to credit–but are very different from each other from an underwriter’s viewpoint. If you’re new to credit, we just don’t have information, but you may very well be a responsible payor. If you have bad credit, you have demonstrated behavior that includes late or missed payments. (Especially here in the US, that may be due to our weak social and medical safety net rather than simply irresponsible credit behavior, but the fact remains).

From a profitability standpoint, when you have limited ability to underwrite a user and provide them with a small credit line, you limit your revenues (as they are directly tied to the volume spent on a card). Spending volume of $200 per month on a card generates just a few dollars in interchange, hardly enough to operate the card. In response, the business desires to raise revenues and charges additional fees, which makes the card unfriendly. You must also account for the credit losses, which can rapidly overwhelm the portfolio.

To avoid credit losses, an issuer can choose to leverage a secured card product, which uses an asset to secure the credit line in the case of a user not repaying the debt. Traditionally, theses cards are secured with cash deposits. Not all users have the cash to secure the card, however. Several startups have recently innovated around alternative securitization, such as Yendo with cars, Aven with home equity, and Pesto with personal valuables.

Another approach embraced by companies is to provide credit-building cards that are associated with a linked checking account. Each example tends to work slightly differently.

Extra is a debit card to your existing checking account. The company calculates an “available to spend” limit based on the balance in your account and takes risk on whether the resulting daily ACH payment will clear. Two of the three major credit bureaus accept reporting of these payments as credit-building behavior. Extra charges a monthly fee to its users.

Fizz is focused on college students and works similarly to Extra, but as far as I understand, it includes a traditional credit line, which is in part determined by your linked checking account. Fizz says they can report your monthly payment activity to all three bureaus. Fizz’s college focus has a unique benefit in that specific regulations limit credit card marketing aimed at college students, and Fizz is very similar to a credit card in many ways. Still, it isn’t a credit card legally.

Zolve’s Azpire Credit card is an actual credit card linked to a checking account. Users must also open a linked Zolve debit account, which helps Zolve to understand the user’s cash balances, but a real credit card is used, enabling traditional score reporting. Zolve also promises an upgrade path to a more conventional card they offer.

I’ve also recently covered companies like Petal that offer a conventional unsecured credit card, but use alternative underwriting, focused on cash flow vs. credit bureau signals, and create underwriting opportunities.

Helping people to build credit is a challenging space. It’s hard to do something innovative that helps people without the revenue requirements and other terms making it look like you are taking advantage of consumers. In addition, many traditional credit-builder and secured products take advantage of consumers.

I’m encouraged by the innovation in the space. I don’t expect all of these entrants to scale and survive, but helping people to build their creditworthiness and positive payment habits is a good thing, especially if it can be done in a consumer-friendly way.

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Ultra Expensive Revolut

I missed an earlier press release from Revolut, one of the world’s leading challenger banks, on its new Ultra membership. After announcing this at the beginning of the year, the company is letting folks off the waitlist and into the Ultra product. These users can now pay a lot of money for some premium benefits on a debit card!

In the regions where Revolut operates, unlike in the United States, interchange is highly regulated, and consumers are more accustomed to paying fees for debit and credit card products. However, this upsell is impressive in its cost and benefits.

We’ve all heard about metal cards, but Revolute Ultra is coated in Platinum! Not just a Platinum Card in name, this card has very expensive metal on it. Why? I don’t know.

You also receive built-in benefits, such as we see with credit cards here in U.S., including an odd set such as NordVPN, Financial Times Premium, and WeWork. I guess privacy-minded tech workers are the target demo. There are travel insurance benefits, airline lounges, and cashback (up to a limit of what you pay in membership fees, and at very low earning rates in the EU).

The company says the plan is £540 a year (!) and offers up to £4,100 in benefits. That’s a lot of cash for a debit card. I might be wrong about the appeal because Revolut says there are more than 430,000 people on the waitlist (although, as we know, being on the waitlist does not equal converting to a paying customer).

Ultra certainly is the right word: Ultra Expensive and Ultra Flashy.

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CFPB Encourages Open Banking

The CFPB has been very active lately! Last week, they published an article entitled Laying the foundation for open banking in the United States. In it, the agency says they are “working to accelerate the shift to open banking through a new personal data rights rule intended to break down these obstacles, jumpstart competition, and protect financial privacy.” The CFPB says that legislation passed in 2010 has powers for this and that they hope to finalize rules in 2024. So slow.

CFPB efforts on open banking might be too little, too late! Many of us were advocating for open banking rules in the years after 2010. At the time, companies had few options to connect to banks and download transactions. Today, hundreds of apps connect to banks through APIs via companies like Plaid, Finicity, MX, and others.

I agree with the agency: Consumers should have open access to their banking data securely. However, I do not see that the market hasn’t largely solved this by now. I’ll be curious to know how the CFPB balances its authority with its desire not to “micromanage open banking” (their words!). Are you seeing continued challenges with banking data? Leave a comment.

CardsFTW

Thanks for reading CardsFTW, a debit and credit newsletter by Matthew Goldman. Matthew is the founder of Totavi, LLC, which provides GSD Product Consulting with real operational value. Visit totavi.com to learn more and engage us.

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