Making Prepaid a Gateway to Credit

David Johnson
Senior Vice President, Emerging Commerce Products
Posted on September 22, 2016

Happy woman holding credit card and showing thumbs up, using laptop sitting on sofa, paying over internet for online shopping, surfing internet

Combining prepaid with credit facilities improves retention through better rating algorithms

In a world where credit is becoming harder to come by, card uptake rates are falling. Uninspiring attempts have been made to reinvent credit cards through lightweight, junior cards that offer lower barriers to entry. The reality, however, is that credit facilities are not for everyone, and a more practical solution is already close to hand.

Instead of applying additional rules and special limitations to a credit card just to add customers that wouldn’t normally qualify, why not offer a prepaid card instead? Prepaid cards are a good alternative for the majority of credit refusal cases, and a reinvigorated prepaid business will provide a steady stream of strong prospects for cross-selling credit services further down the road.

The Prepaid Bridge to Credit

All too often, the prepaid card is a consolation prize for customers who were refused credit. It is the turn-down card, and a negative impression that can turn off customers. Consequently, prepaid has been somewhat sidelined.

That’s why simply offering prepaid cards in place of credit cards will neither guarantee better customer retention, nor speed up the migration to full credit service. The major problem is that prepaid transaction history traditionally doesn’t count toward a consumer’s credit. After years of prudent use, a prepaid customer may still not have impacted their credit enough to qualify. But given that prepaid and credit cards use similar technology and processing mechanisms (albeit under very different rules), there is an urgent need for increased leverage between the two.

According to the CFPB, around 45 million U.S. consumers do not have credit histories. In past, it was easier for them to build that history because access to credit was freer. Now, however, more regulation and market caution have made it much harder for people who fall just below the threshold score.

Rather than losing a customer for life due to a negative credit card assessment, why not combine the prepaid and credit businesses into a single service where customers can improve their rating through prepaid usage? With a prepaid card, consumers could prove consistent and responsible financial management that could count toward their credit rating. Banks’ credit scoring algorithms operate on many variables – transaction history, income, stability of residence, employment record, rent/mortgage payments, etc. – before returning a score that translates into yes or no for the applicant. Adding diligent use of a prepaid card could easily be added to that list.

The Prepaid Accelerator to Credit

The end game here is ultimately to increase credit card usage, but we cannot underestimate the importance of prepaid as the bridge to those more profitable credit services. By combining prepaid with credit and changing credit assessment algorithms to include prepaid usage, customers stay in-house as their service demands grow. Existing prepaid users can then be fast-tracked to credit services seamlessly and more efficiently than if they went to a different provider.

To achieve this synchronicity, financial institutions need to break from their silo approach whereby prepaid, debit and credit services are seen as unique and independent from each other.

For many demographics, i.e., students and employees just starting out, credit cards are not the only game in town –  prepaid cards are more appropriate. With a prepaid card, parents can make funds available as needed, from their own debit or credit accounts. Using a combined online interface, top ups are instantaneous. And with combined prepaid/credit services, a student armed with a prepaid card will be continuously improving his or her credit rating, preparing for when they need full credit services.

A Complementary Combined Offering

The goal is to offer the right financial product to customers and prospects based on their current life phases and circumstances. Because the products are complementary, it is not pragmatic to push either prepaid or credit over the other. Prepaid may be the best fit today, but, with compelling services and a credit assessment that includes prepaid history, the same customer could migrate to a credit card sooner. Larger banks with nationwide coverage have made some moves on improving the synergy between prepaid and credit, but smaller, mid-sized banks probably have the most to gain.

The first step may be to ensure credit services take prepaid into account when assessing prospects, but it can go much further. Given the fact that prepaid, debit and credit services all use similar technology, feeds, interfaces and databases, a combined loyalty scheme that encompasses the different services would increase retention.

It’s not about prepaid vs. credit. Instead it is about how you can leverage prepaid and credit together for a better user experience. By putting the two products together, banks can provide the right financial products to their customers.

Will banks’ silos between prepaid, debit and credit adapt to accept a combined offering?

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David Johnson
Senior Vice President, Emerging Commerce Products

DJ is the Product Division Lead over Emerging Commerce which includes the Prepaid, Loyalty and EBT product lines. He has over 20 years of payment industry experience with roles in product development, strategy, consulting and business development. DJ recently managed the largest prepaid implementation and account conversion in industry history, involving over 98 million accounts conversions to FIS.