As Chime & Apple Launch Credit Building Product, Look For Others To Follow
Hi all, Julie here. With the recent launches of new ways to build credit by some notable names in our space, I wanted to explore the topic a bit more.
In case you missed it, Goldman and Apple launched a program for people that don’t get approved for a card the first time around to build their credit and hopefully get approved again in a few months. After getting rejected, applicants will get an email informing them of the new program. If they enroll, they get personalized monthly updates and tips for improving their credit, with the recommendations coming from what Goldman learned about the applicant when they applied for a card. After a four-month program is complete, they can apply again. It’s a win-win—consumers get free personalized tips around building credit, and Goldman and Apple can eventually get the card in the hands of more applicants without adding on much risk.
Last week, Chime debuted its first credit card, which is basically a debit card that can help its customers establish or improve their credit scores. Moving into credit was a natural expansion for Chime (and other neobanks), and a possible revenue driver in the future, but it also makes a lot of sense that they are starting out with this type of product. Its users typically skew younger, and younger users aren’t fans of credit cards. Second, Chime’s users like getting their paychecks early and in some cases it helps them avoid payday loans. If someone is trying to avoid payday loans, being able to safely build their credit or improve their credit with a card that’s not going to let them go into debt is pretty enticing.
Credit building programs aren’t new, but they have been improving and companies have been finding new ways to offer these types of programs. Typically, a credit building card can have an annual fee without many rewards, or a loan meant to build credit could come with a higher APR.
Experian launched a free program not that long ago that can help consumers improve their credit scores as well, called Experien Boost. This program in particular reminds me of a recent life event. My fiance and I bought a car in May. We financed it (0% APR for 5 years at Toyota right now!!), and when the employee pulled my credit, it was an easy yes (humble brag). We wanted to have my fiance’s name on it though since the car was his idea, and even though our credit scores are the same, it took almost an hour to get him approved.
The employee went out of his way to show us why this was the case. I have a lot of items on my credit history, while my fiance did not. I knew that having a larger number of items in your history is a good thing, but my fiance is like the majority of people and had no idea that only having 4 items on his credit history was actually a bad thing. In the eyes of FICO, his 4 items and a score of 800 was actually less desirable than probably even a person with a 700 or 750 with 8 items in their history.
Why do I mention that? There’s going to come a day where not even I understand my credit score, let alone someone that doesn’t cover finance. Fintechs can help. This adds on to trends we’d already been seeing, like younger people preferring debit to credit. You can also throw in the fact that lenders are growing more concerned about a turn in the cycle, so any lenders will be looking for new ways they can better assess risk and ability to repay without having to drastically scale back on how many consumers they can serve.
Who else might we see offering these types of products? It wouldn’t surprise me to see someone like Uber do this in the next year or two. Perhaps even more imminent than that, there have been rumors that Greendot is going to launch a similar program soon (yes, they already offer some secured cards, but a no fee approach could be coming). In a more distant future, I could even see someone like Kroger, Kohls, Amazon, and others have programs like this as well, through a whitelabel partnership with a financial institution.
I don’t think it’s a standalone business for many, unless you are the firm helping whitelabel it and selling it as a Saas product. In that case, you could have enough partners that want to pay a fee for a product analyzing the data and running the behind the scenes aspects of a credit card (basically what Goldman did with Apple…but with a ton of retail partners and not just one).
It’s looking more likely that credit building products could be the next big evolution for consumer fintech companies. Regardless of whether that consumer is ever going to like using a true credit card or not, there’s no arguing that they will need some sort of credit history when they eventually buy cars or homes. On top of that, despite what startups may have pitched for years, FICO isn’t going away in the next decade. So keep an eye out for more new products from companies with lots of users to add more products around tracking and improving your credit score.