Evolutions in Secured Cards: Not Ready for Traditional Lenders

An emerging fintech payment card is a variation of the long-established secured credit card, with a significant twist. Instead of requiring a credit-challenged consumer with a weak or thin credit file to place secured funds in escrow to back their credit limit, the new card creates a dynamic relationship between a credit card and a checking type of account. When a purchase is made with the card, the fintech immediately withdraws funds from an associated demand deposit account to pay the debt. Credit builder cards are available only on Mastercard and Visa products; they are not branded under American Express or Discover, which are direct issuers. 

The regulatory position on this new function is cloudy. In this variation, instead of measuring the cardholder’s ability to directly manage their credit card obligations directly, the fintech arranges for the card transaction to get paid through a connection to the DDA. Another area of concern for financial institutions is vulnerability, or at least the appearance of pushing higher interchange costs on merchants when transactions flow on the credit card rails rather than the price controls on debit cards.

Key questions discussed in this report: 

• What is the difference between a financial institution’s secured card and a fintech’s credit builder?
• How does the fintech credit builder work, and why does it gain traction?
• Should financial institutions adopt the credit builder model?
• How many people can benefit from secured or credit builder cards?
• Why would there be an issue about a debit card directly funding a credit card? 

Companies Mentioned: 

American Express, Bank of America, Capital One, Chase, Citi, Discover, Empower Finance, Experian, Equifax, FICO, Mastercard, Petal Card, Plaid, TD Bank, TransUnion, U.S. Bank, Visa, Wells Fargo