Why credit card issuance needs a makeover

• The following is a panel recap from our "On the Road @ Money 20/20" coverage in Las Vegas.
• The session discussed why traditional credit-scoring systems exclude a large cohort of consumers and what FIs can do about it.
• Insider Intelligence publishes hundreds of insights, charts, and forecasts on the Payments & Commerce industry. Learn more about becoming a client.

Session name: "Modernizing Credit Card Issuance"

Speakers:

• Dan Rosen, general partner, Commerce Ventures (moderator)
• Joseph Bayen, CEO, Grow Credit
• Kristy Kim, CEO, TomoCredit
• Michael Spelfogel, co-founder & president, Cardless

Findings:

• The panelists kicked off the conversation with a brief overview of their businesses: Cardless is a cobranded credit card company, and TomoCredit and Grow Credit offer credit cards to customers with no or subprime credit history to help them build their credit.
• When asked why credit card issuers need to innovate, the panelists all agreed that there's a market of customers whom banks aren't serving-and each of their businesses taps into that demographic. Kristy Kim and Joseph Bayen emphasized the need for financial inclusion, referencing their own experiences immigrating to the US and struggling to understand the credit system.
• The panelists also agreed on the idea that traditional credit-scoring systems like FICO, while beneficial in many scenarios, shouldn't be the sole credit eligibility determinant. And alternative methods like using cash flow and brokerage data to replace FICO-or using them in conjunction with systems like FICO, as Michael Spelfogel suggested-can help bring more consumers into the credit system.

What This Means:

• Kim said many banks recognize that their credit eligibility practices exclude a large portion of customers-and while she believes that they will eventually come around, at the moment, they prioritize security over innovation.
• Companies like Grow Credit and TomoCredit are emerging now thanks to the evolution of open banking-which lets them access customer data to get a holistic view of consumers' financial standing and credit eligibility.
• Bringing customers into the credit system helps improve their financial well-being and gives them access to critical products like mortgages or auto loans.
• Ultimately, agility is key-letting go of the bureaucratic processes that can sometimes hinder innovation while maintaining security is the sweet spot issuers need to find.

Payments & Commerce senior analyst Jaime Toplin weighs in:

"Providers are angling to expand the credit ecosystem to reach new customers. Alternative or hybrid approaches to scoring can do just that by letting providers attract potentially low-risk, high-lifetime-value customers who may have previously been excluded. But fintechs' digital bent and unique offerings might pose a threat to major issuers, who are also pursuing this population."

"As a result, we've seen major issuers launch new products that might target credit-building users, including Wells Fargo's Reflect card and Chase's Slate Edge, which reward on-time payments with APR reductions, and US Bank's new secured cards, which offer robust cash-back rewards tied to existing card programs. This push could help issuers widen their net and grab a share of this demographic in the hope of upselling them later and building lasting relationships."

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