As financial and economic pressures mount on a growing cross section of U.S. consumers, new asset building strategies are being developed for low- and moderate-income households. One strategy for helping unbanked and underbanked individuals build credit histories without requiring access to credit cards or bank accounts is to employ hybrid prepaid cards.
One type of hybrid card allows for the card's monthly maintenance fee to be converted into a loan; that loan is then repaid over time via that monthly fee. When the loan is repaid, a report is made to a credit bureau.
"The credit building feature, where you can essentially borrow the amount of your monthly fees and then pay it back as a loan, I think is terrific," said Rachel Schneider, Vice President, Innovation and Research at the Chicago-based Center for Financial Services Innovation.
Another strategy that shows merit is a prepaid card with a secured collateral account attached to it, according to Schneider. Money loaded on the card can be transferred to the secured account to increase the amount of credit available to the cardholder. "A secured card, by definition, offers the ability to build your credit history," she said. "One of the advantages of prepaid over credit is the ability to not spend more than you have."
In the CFSI research paper, The Future of Financial Services: Recommendations for Asset Building, Schneider wrote that a core need for the unbanked and underbanked is to develop credit histories as part of an overall financial asset building strategy.
"There's a lot of work in the U.S. around building credit histories, where the goal is for the transaction data on a prepaid card itself [to] be used to build a credit history," she said. "And I think that shows that that idea has promise, but it's still very early stage."
Alternative credit scoring bureaus have been in existence for approximately 10 years, according to Schneider. Companies like PRBC Inc. and LexisNexis Risk Solutions score consumers' creditworthiness based on alternative data.
"They look at things like how long have you lived in the same place, how long you've had the same job," Schneider said. "They're looking at stability and other variables that point toward whether or not you are able to repay [loans]."
For example, traditional credit reporting agency Experian Information Solutions Inc. entered the alternative scoring space through its June 2010 acquisition of RentBureau LLC, a company that gathers rental repayment data. "Renters who pay their rent promptly every month on time, and they are never delinquent, can develop a credit history," Schneider said.
The most conspicuous example of a hybrid card in the United States was the iAdvance loan program offered to consumers via Netspend Holdings Inc. prepaid cards. In October 2010, federal regulators ordered MetaBank, the program's issuing bank, to discontinue iAdvance. The regulators said MetaBank engaged in "unfair or deceptive acts or practices in connection with its operation of the iAdvance program," according to a NetSpend filing with the Securities and Exchange Commission.
In the only public comment concerning iAdvance, a MetaBank executive told conventioneers at the 2011 Prepaid Expo USA that the problem with iAdvance involved pricing.
Schneider said the annual percentage rate (APR) on short-term loans offered on the iAdvance program was high, but not as high as the APR on payday loans. "It was more like 120 percent APR versus 300 to 400, so it was a major improvement over traditional payday lenders," she said. "However, if you were rolling over the iAdvance, you would have encountered a larger APR than 120."
Despite the iAdvance issue, it seems hybrid cards have the potential to help the financially underserved re-enter the credit market by offering them small-dollar loans, which can in turn help them build positive credit ratings that may lead toward the achievement of larger financial goals.
For more information about hybrid prepaid cards, see "Under the hood of hybrid cards," by David Parker, SellingPrepaid, Jan. 18, 2011, issue 11:01:A. 
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