Why issuers—and Amazon—are bringing back secured cardsJuly 9, 2019
Sensing a profitable opportunity in an underserved market, a variety of companies — ranging from traditional banks to fintech startups and even Amazon — are rushing into selling secured credit cards and other products designed for consumers with poor or thin credit.
The market for secured credit cards, which require a deposit and set a relatively low spending limit, generally ebbs and flows with the economy. It shrinks during recessions and grows when times are good; and given the current economy, the secured card sector is booming.
Because secured cards are designed for consumers with subprime credit, they are riskier for banks to offer due to a higher potential of default. Overall more than one-in-three (34.8%) U.S. consumers is considered a subprime credit, according to Experian. Risk-averse lenders may focus on the prime demographics, but many are seeing an opportunity to “graduate” subprime consumers into higher categories.
“The problem with our credit system is that it punishes people for a very long time for any financial mistakes made that could have been the result of a situation beyond their control, such as an illness or job loss. It creates a huge market of people who need access to credit but are not being served by banks and it’s only getting bigger,” said Tim Coltrell, chairman and CEO of CARD, a prepaid card firm that’s expanding to serve subprime credit markets.
The total addressable market is 53% of the U.S. adult population, when adding both subprime credit-scored consumers and a group named the “credit invisibles” by the Consumer Financial Protection Bureau. The CFPB’s tally of 45 million credit invisibles comprises comprises two unique groups: 26 million adults who have no credit score, and 19 million adults who are considered unscoreable by a commercially-available credit scoring model.
While the sheer number of people may be enough to compel some banks and fintechs to serve this market, the numbers alone don’t explain the gold rush. However, when examining who makes up the subprime and credit invisible categories, the opportunity becomes clear.
The CARD Act
This trend has its beginnings 10 years ago, with the passage of the CARD Act of 2009.
The Act largely forbids issuing credit cards to consumers under 21, unless co-signed by a parent or guardian, and severely restricts credit card marketing on college campuses has cut off a traditional credit onboarding process for many consumers. Today most college students graduate without a credit card and a mountain of student debt–a toxic mix for most banks.
Millennials (ages 22 to 38) make up the single largest generation in the subprime market at a 37% share, followed by Gen Xers who represented 33% of subprime consumers in the fourth quarter of 2018. According to Experian, the latest generation just reaching adulthood, Gen Z, made up only 5% of the subprime market in that quarter.
“Millennials have some challenges in…