By Ray Birch
GAINESVILLE, Fla.—The marked increase in credit cards offering 0% interest rates deserves the attention of credit unions, says one expert, who adds the new breed of plastic could steal niche business from CUs and even grab bigger share of younger cardholders.
Credit unions, meanwhile, could use the pricing to help better serve the underserved.
“I do think that this kind of product might offer an opportunity for credit unions,” stated said Bill Hardekopf of CardRates.com. “Credit unions are always trying to have a point of differentiation between the banks and themselves. This offering could help them to further stand out among the bigger competitors.”
The last 18 months have seen a crop of new competitors emerging in the card space. In 2020, young companies like Grow Credit, TomoCredit and Chime launched or expanded credit cards that are available to those with less-than-ideal credit.
The companies don’t run a credit check, and instead of relying on the traditional FICO scores the fintech offerings evaluate alternative factors like bank accounts and money management to determine eligibility.
“Grow Credit, for example, offers the Grow Credit Mastercard, issued by Sutton Bank. The company has proprietary technology that evaluates income,” MarketWatch recently reported, quoting the company’s CEO, Joe Bayen, as saying applicants must provide access to their bank account information.
A Subscription to…Good Credit
“The card allows you to build credit as you pay for qualifying monthly subscriptions like Netflix or Hulu. Subscription services traditionally aren’t factors in your credit reports, but Grow essentially gives cardholders an installment loan that can only be used to charge eligible subscriptions to the card. Cardholders pay off the bill in full each month and build credit along the way,” MarketWatch explained.
Similarly, the Chime Credit Builder Visa Secured credit card, issued by Stride Bank, also does not require a credit check. To qualify, consumers open a Chime Spending Account with an eligible direct deposit.
Hardekopf said the 0% cards fit with the credit union philosophy of serving the underserved, and can be a more streamlined and appealing way of helping members build credit than credit-builder loans.
“It's interesting. Who would have thought there would be competitors to credit cards coming out of the woodwork in the last couple years?” said Hardekopf, pointing to the emergence of buy now pay later solutions as one of those challengers. “You now see new ways for people to buy products and pay in installments, essentially, with no interest. We're really seeing some small financial companies taking on the big boys.”
The Appeal
Hardekopf pointed out the new breed of plastic allows people to build credit because the fintech companies are reporting to three major credit bureaus.
“So, if you make your payments on time, and do so diligently, you will start to build credit,” said Hardekopf. “They are appealing to people who might be credit and invisible. There are millions of people out there who don't have any credit, and they might be students, they might be immigrants, and they might just be people who have never been in the credit market. The small financial technology companies are going after them.”
Bill Hardekopf
According to Hardekopf, the consumer appeal-- outside of being able to establish credit--is avoiding the high interest credit cards charge for those who have little or no credit.
“If you don’t have credit, your credit card rates are very high. That is what these companies are zeroing in on,” Hardekopf said.
Hardekopf also believes the products have a “cool factor” to them that appeals to a younger audience.
“There are younger people just getting out of college and don't have a credit history, and this could be a good way to appeal to them with a product that has some pizzazz,” Hardekopf said.
A Philosophical Fit
The payments expert believes the cards fit well with the credit union philosophy of serving the underserved, and could add business to the CU’s bottom line.
“These cards will never be big competitors to traditional credit cards,” said Hardekopf, who added the new plastic will not fade away. “But they will claim niche business from other lenders who don’t add this model of plastic to their offerings.”
Tim Kolk, principal at TRK Advisors, agrees the plastic will not be significant competitor in the card space, but could be a bridge to more credit card business.
“These are not really credit cards, they are more like charge cards that require payment in full,” he said. “So, a very different model and not really a competitor to credit cards in a meaningful way. I think if they get people with no file or thin credit files to grow into more traditionally underwritable consumers, then these consumers will move to actual credit cards.”