Secured Credit Cards Help FinTechs and Consumers Weather Macro Storms

For neobanks, the debit card is no longer going to be enough — not to brave the storm clouds gathering at this moment, and which will last a few years.

Bond Financial Technologies Co-Founder and CEO Roy Ng told Karen Webster the reckoning will be tough — winnowing down the ranks of the hundreds of FinTechs and neobanks that span the globe. The business models that underpin so many of them, dependent on interchange fees, are being threatened by regulatory challenges.

Venture capital funds are pulling in their horns, as their own sources of capital are challenged — which means the FinTechs will find it ever-harder to go to the proverbial well to raise operating cash.

The competitive landscape is changing too. We’re a long way away from the heady (for the FinTechs) days of the pandemic, where by some estimates as many as 80% of all digital account openings were done with neobanks. Since then the brick-and-mortar players have been able to make up some lost ground, using their deep pockets to invest in and upgrade their own digital offerings.

Looking ahead, in the near term, it won’t be surprising to see some consolidation in the market.  Bond, he said, has seen some stirrings within its own customer bases, as larger client firms eye smaller companies with similar or adjacent markets.

Eyeing Profitability

With all of these challenges massing at once, “the FinTechs are going to have to find new ways to get to profitability more quickly, and to acquire customers in a more cost-effective way,” Ng said.

And yet, Ng sees no shortage of silver linings to keep in sight: “I’m long-term bullish on neobanks,” he said, “because they do a good job of serving specific, and specifically underbanked populations.”

In meeting the needs of those customers, and creating long-lived and sticky relationships, FinTechs will have to focus on getting multiple products on their platform to supplement and even overtake interchange fees.

FinTech neobanks will benefit from expanding their go-to-market approaches. Historically, Ng said, neobanks’ distribution was direct to consumer. But increasingly, to broaden reach and save marketing costs, neobanks will distribute their products through channel partnerships — a B2B2C shift.

Against that backdrop — and illustrative of the partnership model and the focus on underserved customers — Bond has brought its Credit Builder Card solutions to market to help clients launch their own branded cards. The card functions as a bank account with its own routing number — and as consumers pay down their balances each month they build their credit while the security deposit earns interest.

“The market is still pretty early around this credit building capability,” Ng said. To get a sense of that relatively low penetration, there are hundreds of millions of unsecured cards in circulation in the U.S., but only a few million secured cards. The cards are specifically targeted to subprime consumers — with credit scores between 580 to 669, which includes 40% of millennials — or who may have thin credit files.

“The Fintechs are excited about this,” he said, “because it helps them move to more sustainable business models,” by creating a credit “wedge” that then can be wrapped by other offerings. Along the way, the consumer builds a credit history and eventually graduates to an unsecured card.

“If you get to a place where your customer is now credit worthy,” he said of the FinTechs, a new challenge emerges: Whether “they will stick with you to get to the next level in terms of lending.”  Thus, FinTechs are finding staying power and value in targeting underserved, segmented markets such as college athletes, police officers or teachers.

Looking ahead, he said that secured credit cards and BNPL options will gain traction in an environment where paying the bills is a continuous challenge. Those consumers who are able to get credit remain good stewards of it — PYMNTS data shows that credit card payments are among their top priorities.

“The credit score and the credit profile is more important than ever before,” he said. Asked about the current spending environment, consumer sentiment is such that most of us expect inflation to last well into 2024. Right now consumers are enthralled with the great reopening, and but are making adjustments, pulling back on nonessentials and going back to basics (so they can spend more on experiences).  That caution may abound — but consumers and FinTechs can weather the storm together.

As Ng told Webster, “You’re going to see lots of innovations ahead — there’s always  a resurgence of FinTech innovation when the markets are challenged.”