Thought Bubble: Will banks’ plan to better serve those without a credit score result in meaningful change?
In a new, government-backed pilot program that is expected to launch in the fall of 2021, a number of large US banks plan to share data on customers’ deposit accounts to increase their chance of being approved for credit cards despite not having a credit score.
The effort to better serve underbanked consumers is not a new concept, so what is the trajectory of this trend and what can we expect from financial services marketers? What are the broader industry implications? What impact will this have on consumers? Why now? Our financial services analysts consider these questions and share their opinions and expertise.
Mark Miller, Associate Director of Insights, Payments, Mintel Comperemedia
The recently reported news of several large banks pledging to issue credit cards to people with no credit history is a significant development in the longstanding effort to better serve the underbanked customer. While there are surely (and rightly) some social justice components that contributed to the decision, it follows a growing trend of extending credit to those who have been unable to access it through more traditional means, ie a strong FICO score.
Fintech lenders, for example, have long used alternative risk metrics, including cash flow, to determine creditworthiness. More recently, newcomers have entered the credit card competitive space, for example, the TomoCredit Card targets high-earning immigrants with no US credit score. American Express partnered with Nova Credit to provide access to international credit history. Petal announced in late April 2021 that it would make its proprietary decisioning tool, Prism Data, available to the broad market. This will allow issuers to gain access to a “CashScore” to rival FICO which has also taken its own steps to expand the applicant pool. In 2018, they created an UltraFICO score that incorporates information about checking and savings behaviors. Unfortunately, it has yet to take off.
Another component of this trend is Open Banking which US banks have been reluctant to adopt. For this reason, it is surprising that these banks are willing to share data with each other under this program.
Finally, the plan is reminiscent of the BankOn initiative, led by the Cities for Financial Empowerment Fund, that aims to provide equitable and affordable bank accounts to those previously locked out of the system. While many large banks participated by introducing new “Safe” accounts, they have not been marketed at any significant levels.
Given that, we don’t expect to see any significant marketing initiatives for the new credit card program and it will remain buried primarily within a product website. Taking a different approach by challenging the challengers and obtaining new, potentially lucrative customers, could set up one of the large banks for even larger success.
Andrew Davidson, SVP, Chief Insights Officer, Mintel Comperemedia
The FICO score transformed the credit landscape when it was introduced in 1989 and has since become the key to consumer upward mobility, part of the American psyche, and arguably a cultural icon in its own right. FICO brought credit cards to the masses fueled by targeted direct mail that enabled credit card issuers to pre-approve potential customers based on risk.
More than 30 years later, the credit scoring business has become a victim of its own success with a banking industry over-reliant on the scores it generates and consumers frustrated by the limited control they have over their own destinies. In addition, some 53 million households don’t even have a credit score, according to Fair Isaac, which means they are excluded from mainstream financial products such as credit cards.
The news that Chase and other large banks will be piloting a program to exchange deposit account information when credit scores aren’t available shows that banks are finally acknowledging the disparities in a system that disproportionately impacts people of color and are willing to find new ways to include financially responsible consumers who were previously excluded. It also acknowledges the emerging threat from fintech.
It’s a move in the right direction but whether it will result in meaningful change remains to be seen. For one, the focus is on consumers with a bank account which means those who have no credit score and no bank account are still excluded. More specifically, the pilot is based on deposit accounts which means applicants will need to have some money in savings to qualify for a credit card when millions of Americans live paycheck to paycheck. Finally, a very big question remains: will consumers grant their permission for banks to access their deposit accounts in the same way they access credit scores?
Amr Hamdi, Financial Services Analyst, Mintel Reports US
Increasing inclusion in the financial services industry is key in regaining the trust of BIPOC communities which have had a historical lack of access to credit and other lending products. As a result of this lack of trust and/or access, these consumers are significantly more reliant on cash and debit rather than credit cards. Providing BIPOC consumers with more opportunities to build their credit history without the barrier of a credit score can accelerate credit card adoption. It could also increase future borrowing activity for these consumer groups: as they start establishing a credit history they can eventually qualify for the more lucrative loans like a mortgage – a loan they would have otherwise struggled to get without a credit score.
Immigrants also serve to benefit from the initiative, considering how challenging it can be for these consumers to get a credit card without a US credit history. It would also remove the need for a cosigner, which can often be a barrier given that many immigrants lack a support system when first moving to the US.
For BIPOC and recent immigrants, affording these consumer groups easier access to credit can be the foundation from which they can start creating wealth, benefiting consumers and banks alike.