Roy Ng knows how difficult life can be when full economic access always seems just out of reach.
Relaying a story of moving to the U.S. from Hong Kong as a child, the co-founder and CEO of Bond recalled that his mother had to open a Sears card to purchase durable goods at that retailer since the family didn’t have a credit file in the U.S. That showed Ng that not having a credit card you can use at any store is more than an inconvenience — it’s an impediment.
“For a lot of people, not only immigrants,” he said, “they have a challenge where, because they’ve never built credit in the past, there’s a little bit of a circular reference where you can’t build that credit profile in the beginning, you’re never going to have great credit.”
Now faced with biting macroeconomic headwinds, more consumers in a similar predicament are looking to secured credit cards — a tool for building or establishing credit that has been around for years, but has taken on more importance lately.
In a conversation with PYMNTS’ CEO Karen Webster, Ng said that Bond, the Banking-as-a-Service platform company he co-founded, has discovered that the consumer issue with credit access is happening at the same time the sector has started to look hard at new ways to differentiate, creating an opportunity for both to benefit.
“If you look at data from Findex back in 2021, 1.4 billion adults in the world are still unbanked,” he said. “There is a massive opportunity for technology companies and FinTechs to really address this segment of the population” with tailored financial products — including secured credit cards, which are the first steps for this population’s credit journey.
According to a study by the Center for Financial Services Innovation, 121 million Americans are credit challenged with subprime credit scores (68 million) or thin or no credit files (53 million).
Noting that nearly 35% of Americans have subprime credit scores, defined as between 580 to 669, or credit files that are thin or nonexistent, Ng said, “We’re not talking about a small sliver of people here. This is a fairly large population facing this issue every day. On top of that, 40% of subprime scores are represented by millennials.”
Ng noted that “there are a lot of places that a debit card is not an ideal instrument to use.” Issues can arise with holds placed on cards at gas pumps, and even when reserving hotel rooms or renting cars, debit is often not accepted — or if it is accepted, holds can be placed on the checking account.
He said that secured cards enable consumers to complete transactions that debit cards don’t support, adding that secured cards allow consumers “to have access to many more different types of merchants.” For FinTechs, it’s a new source of interchange revenue that also builds brand credibility with consumers, which tends to have a ripple effect.
Bond’s Credit Card Builder product enables FinTechs and financial institutions (FIs) to create secured cards serving distinct market segments.
“A secured consumer card allows you to have the features associated with a credit card, but without a revolving balance,” said Ng. “It works more like a debit card, but the consumer will still be able to build credit history as they continue to spend on that card, and it doesn’t enable the consumer to spend beyond what they have. That’s why we believe this is a relevant financial product in this market today.”
Tapping the Power of Credit
While the problem being addressed is the vast number of consumers not able to enjoy credit card benefits like spending freedom and credit scores, FinTech needs are central to this solution.
The standard FinTech 1.0 offering of a checking account and debit card isn’t cutting it for novelty. The market has gotten crowded and saturated, and debit interchange is an insufficient business model for building that business. It also doesn’t give people with poor credit — or no credit history — what they need to function in the digital economy.
Recognizing this, Ng said FinTechs have introduced unsecured cards to drive revenue growth, but have experienced very low approval ratings — some as low as 20% — and failed to scale because unsecured credit cards are often unattainable for their target demographics.
Ng said that customers need a more innovative way to get accepted for a general-purpose card with credit building characteristics and product design. It’s the baseline for Bond’s credit builder product, which it enables FinTechs and tech companies to offer their customers.
“Because it is a credit card, it runs on credit rails, and credit interchange is roughly two times debit card interchange,” he said. “From a revenue standpoint for FinTechs and tech companies, that’s pretty attractive.”
Compared to easier payment terms like buy now, pay later (BNPL), Ng said the secured card has advantages, since the limit is whatever amount the consumer placed on that card. He says that it operates as a built-in overspend fail-safe.
“Whatever payment you’re making on the card, it’s actually from the security deposit account that you already put into the card,” he said.
Leapfrogging the Traditional
Ng added that, unlike unsecured credit cards, consumers only need to pass a know your customer (KYC) validation, lowering the adoption barriers on this old but novel payment card type.
Moreover, the secured card can be the consumer’s best choice to build or repair a payment history, getting them on the road to qualifying for an unsecured card.
“A FinTech with a debit card and then they have an unsecured credit card, and the decline rate is extremely high on the unsecured credit card,” can offer a secured credit card to basically ramp them to a point where they can now graduate and apply for the unsecured card.
This results in a step change improvement in the FinTech’s return on sales and marketing investments in signing up new customers.
Estimating that only 6 million secured cards are currently in use, compared to roughly 700 million unsecured credit cards in circulation, Ng predicted more FinTechs will jump into the secured card space as the economic downturn drags on by as much as 650 more days, according to recent PYMNTS research.
Ng also believes that consumers are eager to access financial services directly from the companies they trust. Bond recently commissioned research from Cornerstone Advisors that shows the majority of U.S. consumers want to secure financial products from their favorite brands, and 32% will spend more from brands they bank with than they did previously.
“Things are just much more expensive,” Ng said. “It’s very hard to be financially secure. How do we enable consumers to start in a strong way with such a product so that they actually can build out the right foundation to improve their credit profile?”