Fintechs want to fix the secured credit card
Well hello there, and welcome to Protocol Fintech. This Monday: fintechs try to improve the secured credit card, Gary G. takes on Kim K., and a surprising new field for “buy now, pay later.”
Credit where it’s due
About one in six Americans has a subprime credit score, according to the CFPB. Another 23% have too thin a credit file to score, or no file at all. That puts them in a credit trap: To build credit, these consumers need someone to give them a line of credit with which they can demonstrate good financial habits. But with scores that low, few lenders are prepared to offer them anything.
Neobanks say they can solve the problem through a new twist on secured credit cards. But regulators are already scrutinizing their offerings.
Secured credit cards have been an answer to the thin-credit problem for decades because they allow subprime borrowers to open a line of credit when they otherwise can’t by depositing cash upfront. Most require several hundred dollars as a deposit and impose hefty interest rates and fees, which low-income borrowers struggle to afford.
Neobanks like Chime, Varo, and GO2bank say they can avoid those problems with cards that allow customers to repay their credit balance directly using their deposited cash, rather than keeping that money set aside.
Some in the industry see red flags. “They are, functionally, prepaid credit cards,” fintech analyst Alex Johnson told Protocol.
That raises the concern that neobanks may be helping users increase their credit scores with a tool that doesn't actually indicate their ability to repay. “If I was a lender, I’d be pissed about having to untangle the trade lines in these consumers’ credit files in order to make sure I wasn’t mistakenly granting credit to high-risk applicants,” Johnson said.
Chime, Varo, and GO2bank’s secured credit cards each have similar mechanics: A user moves money from a checking account into a separate credit-builder account, and the amount they move determines their credit limit. Users can then pay off their credit card balances with the money they’ve deposited.
Varo and GO2bank told Protocol that it’s that third step — having to pay off the credit card at the end of the payment period — that makes the cards credit cards, not prepaid debit cards. Late payment or failure to repay can damage users’ credit scores. GO2bank additionally charges up to $39 for a late payment. Chime declined to answer any questions for this story.
The CFPB may be eyeing such cards. The agency acknowledged Varo’s and Chime’s secured credit-builder products in its 2021 Consumer Credit Card Market Report without mentioning whether the products might deserve further scrutiny.
Protocol asked the bureau for an update on its views. A spokesperson said that “the CFPB is aware of this market development, and we are monitoring this issue closely.”
For consumer advocates, the ambiguity around such programs is a symptom of a larger problem: The CFPB has yet to bring neobanks fully under its regulatory purview. Under the law that created it, the bureau can supervise participants in consumer financial markets that work in consumer reporting, debt collection, or the servicing of some loans. The bureau invoked a dormant authority to investigate nonbank fintechs in April.
A crucial question is whether consumers understand what they’re getting into. Abhijit Chaudhary, chief product officer at GO2bank parent Green Dot, said the company overcommunicates, if anything. “At times we get annoying, but it’s extremely important to ensure our customers know when the bill is due, at what time they need to make a payment, and that we do everything we can do so that they can at least make a minimum payment and not fall delinquent,” he said. Consumer advocates are wary, and the CFPB is watching.
Protocol link: https://www.protocol.com/newsletters/protocol-fintech/neobank-secured-credit-cards