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02.07.12

A Long Road: Using Prepaid Card Data to Build Credit (February 2012)

February 2012
 

By Bill Grabarek, Senior Editor

Financial pundit Suze Orman’s new prepaid card touts a competitive fee structure, free identity theft protection and other benefits. But, perhaps most interesting, is the card’s relationship with major credit bureau TransUnion, as it revisits the possibility of using consumers’ prepaid transaction behavior to determine their creditworthiness—and even improve their credit scores.

The Approved Prepaid MasterCard, which is issued by The Bancorp Bank, will  be sharing anonymous transaction information with TransUnion to determine whether the data could be used in factoring consumers’ creditworthiness and access to credit products.

“Suze has spoken extensively about her desire to remake the credit system in this country, and she truly appreciates TransUnion’s willingness to work with her on the Approved Card and consider how to give people credit for using debit,” an Approved LLC spokesperson tells Paybefore.

The goal of the information sharing, which could be a two-year process, “is for people to get the FICO score they deserve for responsibly using cash instead of going in debt with credit cards,” according to Approved LLC. None of the shared information is linked to specific cardholders, and the card cannot improve a consumer’s credit rating.

“Suze Orman’s card is on the right track. To have a major test of the predictive value of the data by one of the major credit bureaus is an important next step to convince market participants that there is business utility here,” says Rachel Schneider, vice president, innovation and research, at Chicago-based nonprofit Center for Financial Services Innovation (CFSI). “It’s terrific that she’s been public about that happening, so there will presumably be some motivation to then share the findings later.”

Schneider adds that if TransUnion determines that data from the Approved Card is predictive, it would remove a major barrier to the use of data from other prepaid card issuers. And, in turn, the other major bureaus, Equifax and Experian, could be more amenable to including the data, also.

Attempts at establishing a reliable link between prepaid card usage and a consumer’s creditworthiness is nothing new. However, this latest effort by Orman and the Approved Card could revitalize the movement—as well as provide program managers with a very attractive benefit to add to their prepaid card programs.

Fulfilling a Need

The potential popularity of a prepaid card that could establish or improve credit scores among thin- and no-file consumers, as well as those with damaged credit, probably can’t be exaggerated.

“There is certainly a need for products that help consumers build a credit history, whether it’s a secured credit card or some other vehicle like a prepaid card,” says Beth Robertson, director of payments research at Pleasanton, Calif.-based Javelin Strategy & Research. “There are a lot of target markets for prepaid products that could benefit from that additional feature.”

Because the CARD Act has made it more difficult for consumers under 21 years old to get credit cards, they will have a harder time building credit, according to Robertson.

“They are one group that has that need to build credit but is generally less able to get traditional credit cards or traditional credit,” she tells Paybefore. “The underbanked market also needs to build credit, often to enable them to get a checking account. Those are two good target groups for prepaid cards that could benefit from that particular feature.”

Establishing credit can be difficult, and repairing damaged credit isn’t easy either.

A bad economy that’s been slow to recover, high unemployment rates and well-publicized struggles with bankruptcies and foreclosures have resulted in millions of consumers trying to salvage what’s left of their credit scores, adds Schneider.

“All of those consumers are going to need ways to improve their credit history, a way to get out of that hole,” she says, adding that if prepaid was able to play a role, it would demonstrate real value to the consumer.

Prepaid plays a natural role in helping consumers get back on their feet financially because anybody, regardless of credit, can get access to a prepaid card and because it limits overspending, according to Schneider.

“But an important additional piece would be helping people improve their credit,” she says. “This data connection is potentially a major part of how prepaid could deliver greater value for consumers, presuming it turns out the data [collected as part of projects, such as the one with TransUnion] can be predictive.”

All in Favor?

Schneider says CFSI has long thought including consumers’ prepaid usage data in the credit assessment process could be a great support in helping consumers establish credit.

“A great deal of negative data makes its way into the credit process, but regular payment of bills doesn’t make it in. If you’re behind on your utilities and your bill goes to collections, that’s on your credit history. But if you pay your utility bills like clockwork, it’s not in there,” she tells Paybefore.

In theory, Riverwoods, Ill.-based Discover believes in the concept of using prepaid data to help determine a consumer’s ability to pay on time, says Jeffrey Lewis, Discover’s director of prepaid and alternative payments.

Account limits on a consumer credit card account, for example, typically increase based on having a history of timely, full-balance payments. Within those bounds, Lewis says prepaid card accounts used to pay bills also should be able to determine a person’s propensity to pay on time.

“This would provide a much deeper understanding of a person’s spending and saving behavior, as well as determine a different way to rate, grant and increase the amount of credit an individual is capable of managing,” he adds.

“The risk, however, is that consumers may stop using the [prepaid] account at a point in time and walk away, thus not having built enough time to establish a history of repayments as an indicator of their ability to manage credit,” Lewis explains.

“A prepaid card is not a borrowing card, but what we’re able to establish are payments trends.”

—Rob Rosenblatt, RushCard

For any prepaid card issuer interested in the success of its customers, that success would be defined, in part, by its customers getting accustomed to using a prepaid card to manage their financial lives: paying their bills on a regular basis, living within their means and, ultimately, becoming creditworthy by achieving an improved set of scores with the three major credit bureaus, according to RushCard CEO Rob Rosenblatt.

RushCard was founded by entrepreneur, philanthropist and hip-hop impresario Russell Simmons in 2003. The company encourages its cardholders to take control of their financial futures.

“A prepaid card is not a borrowing card, but what we’re able to establish are payments trends,” Rosenblatt tells Paybefore. “We’re able to do that at RushCard for a large number of customers and we have eight years’ worth of data.”

What’s Being Done?

RushCard announced a program in 2008 that its cardholders could opt into called RushPath to Credit. As part of the program, regular bill payments made with the card would be reported to PRBC, an alternate credit reporting agency that helps consumers build a credit file by demonstrating on-time bill payment.

Rosenblatt says RushCard continues to report information to PRBC (or “the fourth credit bureau,” as he likes to call it), and lenders that use PRBC data to augment their credit-granting decisions include Ford Motor Credit, Dell, mortgage companies Fannie Mae and Freddie Mac, along with furniture and jewelry stores and used-car dealerships.

“We know that the reporting of information to PRBC may be helping some of our customers obtain credit from some of those lenders,” Rosenblatt says. “Do I think PRBC is the source of those lending decisions? In many instances probably not solely due to PRBC, but we do think that some of the lenders who subscribe to PRBC are using the information as an additional data source with which to make good credit decisions.”

Experian launched its Emerging Credit Score in 2008,  which relies on alternative data, such as purchasing history and bill payment, to score risk among consumers with little or no history with a credit reporting agency.

“Empowering underbanked consumers to have access to credit is a priority for us,” says Michele Pearson, vice president of product management at Experian Credit Services. “As such, we are constantly assessing new alternative data sources, including prepaid data, to enhance our ability to help lenders evaluate risk for thin-file/no-hit consumers, but it is not a part of our current Emerging Credit Score.”

In 2009, LexisNexis and MasterCard began working together on research to validate the predictive value of prepaid card transactional data as an underwriting element for other products and services. LexisNexis says the project is ongoing, but could not comment further.

More recently, American Express launched its Make Your Move program, and American Express Prepaid Card members are automatically enrolled. The program isn’t designed to improve or repair a consumer’s credit score, and American Express doesn’t share any prepaid transaction information with the credit bureaus. However, the program helps consumers build a history with American Express that could lead to a credit relationship.

American Express recommends that its American Express Prepaid Card members use their cards for everyday purchases, including groceries, gasoline and recurring bills. The company also suggests cardholders use email and text alerts to keep track of their balances and reload when balances are low. After a minimum of six months, American Express evaluates cardholders’ eligibility and may invite them to apply for a charge card, according to a spokesperson.

Will It Ever Happen?

Does a link exist between consumers’ prepaid card behavior and their creditworthiness? And, is that link strong enough that the major credit bureaus will begin to factor prepaid usage into their formulas for determining credit scores? Experts say it remains a possibility and those in the industry are hopeful that one day a connection can be made. However, they caution that such a day still appears to be far off.

According to Pearson, Experian’s criteria for assessing data sources are: Is it predictive of future credit behavior? Is it of sufficient data quality? Is the coverage large enough? Can we report it in a way that’s transparent to our clients and consumers?

“There is nothing that prevents us from adding prepaid debit cards necessarily, but we’d need to be conscious of their ongoing use,” she says, adding that gift cards wouldn’t apply, but GPR cards would. “Additionally, it may not fit into a traditional trade line because it doesn’t represent a debt obligation the way that a loan or a lease does.”

After years of on-and-off discussions, Rosenblatt says talks between RushCard and TransUnion have “heated up again,” and the prepaid card provider also has reached out to Experian and Equifax.

“This concept is still in its infancy and further work to scope out all implications and risks needs to be evaluated.”

—Jeffrey Lewis, Discover

“We don’t kid ourselves that any time soon there will be a one-to-one relationship between prepaid card spend and credit,” he says. “However, it helps to be a part of an organization that has a healthy amount of direct depositors, has relatively high spend and relatively high tenure in its cards. So, if there are patterns that emerge statistically, we’d like to think we’d be one of the companies that could get any of the big three to start to look at this data in a predictive fashion.”

An alternative credit scoring model makes sense for prepaid, according to Discover’s Lewis, and the addition of creditworthiness scoring would provide another example of how the functionality of prepaid cards is becoming just as flexible as debit/credit solutions. 

“Plus, adding creditworthiness would be another strong feature for young adults, a lucrative target demographic for prepaid products.That said, this concept is still in its infancy and further work to scope out all implications and risks needs to be evaluated,” says Lewis.

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