U.S. banks have been undertaking many initiatives to curry favor with consumers. But in doing so, they seem to be neglecting a significant share of the population: Americans who are credit-challenged and have a subprime credit score, and those with a thin credit file or no credit file at all. According to the Center For Financial Services Innovation (CFSI), 121 million U.S. consumers fall into the first category, while 53 million fall into the second.
Admittedly, banks do offer prepaid cards. Consumers can load the cards themselves via cash or a checking account and/or have their employers do so via direct deposit, in lieu of a paycheck. In either scenario, the cards can be used to pay bills, as well as to purchase goods or services online and in bricks-and-mortar stores. Some banks issue prepaid cards to consumers as a stepping stone to opening a checking account; PNC, with its SmartAccess, Regions, with RegionsNow, and Chase, with Chase Liquid, are among them.
The problem, though, is that all of this is just not enough. Banks should allow consumers with poor or no credit to leverage prepaid cards for credit-building purposes. Failure to do so is hypocritical on financial institutions’ part, given that their “marketing-speak” is constantly pinned on financial inclusion, rather than on exclusion.
The logic of it all is rather backwards as well. Banks talk about bringing consumers into the financial mainstream, but how can that be done if a prepaid card cannot be used by consumers to qualify them for credit? It makes no sense for payments industry players to tell to consumers that the only way to obtain a “real” credit card is to sign up for a prepaid card, only to deny them that credit card based on a ridiculous premise. That premise—the prepaid card the bank instructed them to get for this purpose—i.e., the prepaid card—does nothing to prove the credit-worthiness necessary to upgrade to a credit card.
Allowing consumers to build credit using prepaid cards, and checking that credit to determine whether they should be issued a traditional credit card, is definitely a way to for banks to foster “financial inclusion” and appeal to a broader swath of customers. However, some changes in systems to support credit reporting of prepaid cards would need to be made first.
Notably, because consumers aren’t borrowing money from banks to utilize prepaid cards, banks do not check their FICO® Score before deciding whether or not to issue them. Yet prepaid cards have routing and transit numbers and, as noted above, function like credit cards in many ways. If systems could track prepaid cards via these numbers and affirm to banks that they are being used responsibly, and customers indeed treated cards in that fashion (e.g., re-loading them when balances are low and avoiding attempts to use them when balances won’t cover a particular transaction), at least some obstacles in the path could be removed.
It’s important to note here, though, that relying on traditional credit bureau reports containing consumers’ FICO scores is not a way to support credit reporting for prepaid cards. Consider the result of research by FICO itself. The research revealed that more than 70 percent of credit applicants who previously were unscorable because of a lack of traditional credit card data became scorable using alternative data, such as landline, mobile, and cable company payments; public records and property data, all of which are taken into account by FICO’s SCORE XD2 tool.
Banks would do well to take such data into consideration, along with other data, such as rent payment history in the case of individuals who do not own property. The latter is a common practice in Europe and being tested in Canada.
Credit reporting for prepaid cards, and the use of prepaid cards as a real push to credit card ownership, is a concept whose time has come. Without it, true financial inclusion remains a myth.