Access to liquid savings and affordable credit are serious challenges for many Americans. Over 30% of U.S. households lack the savings to cover basic expenses for more than 3 months if faced with an unexpected drop in income, such as losing a job or having benefits cut. And nearly 45 million Americans don’t have sufficient credit history to generate a credit score and gain access to mainstream credit products like a credit card. As a result, when unexpected financial shocks occur, many consumers rely on high-cost small dollar credit products or must juggle bill payments, endangering their credit profile and harming their overall financial health.
In an effort to transform and increase awareness of the intersection between savings and credit behavior, especially for financially struggling consumers, Visa is supporting research with the Center for Financial Services Innovation (CFSI). Our project, called “Innovating at the Intersection of Savings and Credit,” will explore solutions to the savings/credit challenge with a particular focus on the secured credit card.
Secured credit cards function like typical credit cards, except that the customer is required to leave funds in a savings account as a security on the credit line. This minimizes issuer risk and enables providers to offer the card as a credit-building tool to consumers whom they might otherwise deny. Customers who successfully use the card can see significant increases in their credit score over time and may eventually “graduate” to an unsecured card and regain access to their savings.
Secured credit cards are already used by approximately 6 million consumers driving roughly $46.8 billion in spending volume each year. However, the product has seen little innovation of late and millions of consumers are still missing out on this potentially transformative product. The need to lock away funds for the security deposit is
a huge obstacle, and there is little variation in terms, features, or pricing across the market (with some exceptions). Developing positive consumer behaviors towards credit usage is an additional challenge, especially among a market segment often unfamiliar with financial services.
CFSI, as the authority on consumer financial health in America, will work with Visa to better understand consumer decision-making challenges with secured credit cards, to identify innovative product design features to address consumer pain points, and to explore potential solutions to help direct consumers towards successful usage of the product.
Visa continues to demonstrate its commitment to financial inclusion in the U.S. with the launch of “Innovating at the Intersection of Savings and Credit,” and will look to release the results of this research with CFSI in early 2016.