Credit and savings are usually viewed to be on the polar ends of the financial spectrum. Individually both instruments help cushion unexpected financial distress in their own way.
But the real ‘best of both worlds’ magic happens when credit cards and savings go hand in hand, in the form of secured cards.
In this article, we explore the world of secured credit cards and the synergy effect, credit and savings have on the issuer and consumer.
What are Secured Credit Cards?
Secured credit cards fuse the fluidity of a credit card with a mandatory savings instrument in the form of a security deposit. This security instrument is usually a Fixed Deposit (FD), that serves as a cushion to the consumer and issuer.
The FD earns interest to the cardholder (depending on the interest rate and tenure) and serves as the credit card’s credit limit. It helps cardholders to build credit scores, as they will never tend to default on payments because any default will break his/her fixed deposit for due collection. This process guides the cardholder to strengthen credit score and qualify for unsecured credit and other financial instruments.
To the issuer, the security deposit is the collateral that will help manage risk if the cardholder defaults on payments and the account turn into a Non-Performing Asset. As these credit cards are fully secured against the FD, the credit line is fool-proof. So, there is no need to check for cardholders’ income security or credit score. The inherent threat of losing the FD ensures that the customer manages spending and payments on time.
Market and Players in India
Secured credit cards have always been overshadowed by widely held unsecured retail credit cards. Though they have been in existence for more than 20 years, they hold less than 2% of the market share in the cards category.
Reason for Under Penetration
- Poor awareness — consumers with subprime credit scores have no idea about the availability of secured credit cards.
- Funding the security deposit is the biggest hurdle for credit-hungry customers.
- Deprioritized sub-optimal execution experience from banks with respect to the product, technology, and customer support.
- In case of pre-closure of FDs, banks lose Lifetime Value (LTV), so banks do not actively promote secured cards.
- Existing Current Account, Savings Account (CASA) holders are the default base for banks to reduce Customer Acquisition Cost (CAC); hence no effort is put in creating a good experience for New To Bank (NTB) customers.
- From an effort to payout ratio, it makes little sense for Direct Selling Agents (DSAs) to push this product.
- The exponential rise of loan apps that provide small-ticket loans within a few minutes.
Changing Dynamics in the Pandemic Age
In this pandemic era, consumers across income levels and other demographic factors mandate the need for digital payments that are high on convenience and low on risk. They believe in the power of credit cards like the west and the importance of Fixed Deposits like in the APAC region. So FD-backed secured cards are gaining more ground in India today.
For banks, secured credit cards have been a CASA cross-sell play. Banks with high NPAs in the credit card segment and with a high CASA customer base are managing to sell secured cards in India. Kotak, SBI, RBL, ICICI, Axis banks are among the many others that offer FD-backed secured cards in India. Fintechs like Wizi, Slice, and a few others are issuing strategically positioned secured cards with tangible rewards.
Survey to Understand Evolving Secured Cards Market
As pioneers and innovators in the secured credit card ecosystem, Wizi and M2P conducted a survey amongst users and issuers to understand the market better and make sense of the dominant themes. 90% of the consumers were within the 30K monthly salary bracket. The following are the findings we observed.
Consumers leaning towards secured credit cards
More than 1.5 times higher consumer interest was observed in using secured credit cards. This slant is largely triggered by the inability to get unsecured cards from banks.
The shift from consumers with poor credit scores to New to Credit (NTC)
This is a surprising turn in customer preferences. Over 80% of the survey respondents who preferred secured credit cards were New to Credit (NTC), meaning first-time credit users. And 15% had CIBIL score less than 600, whereas only 5% had more than 600 CIBIL scores.
Gold assets as rewards
Reward mechanisms are highly critical considering that the investment cum saving is on the top of the customer’s mind. Rewards that entail the cardholder to spend more did not hold good for the Indian mind frame. Tangible assets, for example, in the form of redeemable gold, was universally appealing and triggered greater adoption of secured credit cards.
Best target segments
The survey results identified the consumer segments who are most likely to buy secured cards.
- NTC consumers
Consumers new to the world of credit have no exposure to secured cards. By increasing marketing efforts and educating about saving, investing, and reward mechanisms will increase conversion in the NTC segment.
- FD investors
The FD investor with a high debit card spending pattern is the perfect target segment for secured credit cards. With the right incentives listed below, they can easily be converted into secured cards customer.
- High deposit rates
- Better buying experience, flexibility, and convenience
- Better rewards mechanism
Average fixed deposit banks demanded secured card issuance ranged from 20K to 30K. Whereas the average security deposit for NTB for fintech ranged between 12k and 15K. Hence customers will be more predisposed to buy secured cards from fintech.
- Customers to whom credit cards were rejected
Considering 25% of 45 million new card applications convert, there is still scope for 12 million secured cards from the 36 million rejects. This number is nearly 1 times the credit card market in India.
Who can Issue Secured Credit Cards?
Banks have been at the forefront of secured credit card issuance associated with payment processing networks such as VISA and MasterCard. But today, fintech firms have taken things a notch higher by collaborating with issuing banks, payment processors, card networks, acquiring banks, and merchants to issue and manage secured credit cards.
Fintechs focus on delivering enhanced experiences by customizing digital onboarding with quick eKYC and minimal to no physical documentation. Their virtual cards are hyper-personalized and instant, with a wide range of rewards and loyalty programs. Transaction statements are interactive, and dispute management and tracking are highly convenient.
What is the Profitability Potential of Secured Credit Cards?
Secured credit cards are fully secured at origination, and they enable issuers to build relationships and serve the high-risk customer segment. Though profit margins may be slim in the short term, the secured card accounts might hold good profitability potential in the long term.
Moreover, when consumers graduate to unsecured credit lines because of the credit score growth attributed to secured credit card usage, they feel some degree of gratitude or loyalty to the issuer that facilitated their credit score rehabilitation. This customer loyalty puts the issuer at a vantage point for increased Lifetime Value (LTV), lowered Customer acquisition Cost (CAC), and profitable futuristic associations with the customer.
How can you Issue Secured Credit Cards?
To issue secured credit cards, you must either be a bank or a fintech company (holding underlying bank partnership) with a deep understanding of customer propensity and digital engagement strategies. While the banks run the core process and infrastructure, fintech APIs will be necessary to layer customer experience, convenience, seamlessness, and security compliance into every aspect of the following.
- Customer Screening and Profiling
- Credit Decisioning
- Card Origination
- Card Management
- Card Controls and Exit
Collaboration between banks and fintechs is imperative in secured credit card issuance and program management. Only then banks can focus on innovation and product development without the pressure of in-house capacity building to manage card issuance.
Partner with M2P, India’s first and only fintech with proprietary secured credit card stack
The best way for banks and fintechs to issue secured credit cards is by partnering with M2P, India’s first and only fintech company with a proprietary secured credit card stack. Our cutting-edge APIs and cards stack cut across complexities and facilitate agile secured card issuance at an unprecedented go-to-market speed and Zero CapEX.
We are market leaders in the domain, with key programs running on top of our secured credit cards stack. Leveraging our strategic partnerships with banks and card networks, we instantly enable physical, virtual, and tokenized card payments. Even if you are not PCI-DSS certified, you can use our widgets and extensive libraries for compliance.
We provide customers with a hassle-free complete digital journey from depositing the collateral digitally to getting a virtual card. We also support billing cycle management, automated collections through NACH, UPI, NEFT, EMI conversions, and balance transfers. With M2P, you could go live within a matter of weeks with a low customer acquisition cost (CAC) and greater LTV.
Interested in launching a Secured Credit Card Program?
Get in touch with us at business@m2pfintech.com
Know 3 compelling reasons why you need a secured credit card.
FAQs on Secured Credit Cards
1. How does a secured credit card work?
Secured credit cards function like any other unsecured credit card. The only difference is that the cardholders must have a fixed deposit for security. Depending on the issue, the credit limit will be 80% to 100% of the FD deposited. The cardholder will earn interest on the FD, and any defaults in payments will be deducted from the FD amount.
Additionally, if cardholders display consistent, timely repayment patterns, lenders will consider graduating them to unsecured credit products by returning the security deposit. However, this process is purely optional.
2. What is the minimum deposit for a secured credit card?
Every secured credit card issuer specifies their own limit for a fixed deposit. In India, the minimum amount is quite affordable and can range between Rs 10K to 20K.
3. Why do consumers today prefer secured credit cards?
Credit cards, when handled wisely, will reward the users with profitable returns. One such feature-packed is the secured credit card that helps maximize savings, rewards and makes you creditworthy.
- Easy approval
The approval process for a secured credit card is easy and hassle-free. Consumers with low income and low credit scores can qualify for credit with minimal KYC procedures, provided they submit a security deposit.
- Build/rebuild credit score
Secured credit cards help rebuild the credit score and allow a higher chance of approval for future unsecured loans. As long as one uses the card responsibly by paying the bills on time and in full, it helps boost their credit score as the payment history is being updated to the credit bureaus (credit reporting agencies).
- Accepted everywhere
Just like every other payment card, secured credit cards are accepted online/offline, typically everywhere. They provide the users with the ease of spending and shopping anywhere.
- Avail low-interest loans
When you rebuild your credit history by using a secured credit card, you can easily avail of unsecured loans in the future. The bank or any financial institution will offer you loans at relatively lower interest rates, be it a personal, vehicle, or home loan.
4. What is the eligibility criteria to apply for a secured card?
The applicant must be an Indian citizen who is above 18 years of age. They should open a Fixed Deposit with the partner bank for a minimum tenure of 6 months. Anyone with low-income jobs with or without income proof can apply for a secured credit card.
5. How to use a secured card effectively?
From there on, use the card just like any other card. But don’t forget to keep a check on your spending habits and track the balance on your card regularly. Also, make sure to pay off your balance in full every month to avoid excessive interest charges. This is the key to boosting your credit score and building a good credit profile as your payment history is being reported to the credit reporting agencies.
Another important thing to consider is to maintain an ideal credit utilization ratio/ debt-to-credit ratio, which is the ratio of your total outstanding balance on your card to your overall credit card limit. It is a good idea to keep your credit utilization ratio at 30% or less. Another thing you could do is to pay the bills before the end of the billing cycle to help keep credit utilization low.
6. What is the difference between Secured Credit Cards and Unsecured Credit Cards?
Secured Credit Cards: These credit cards are a go-to financial tool to build/rebuild one’s positive credit history. These cards pose no risk as the credit limit entirely depends on the amount one drops in as a security deposit. A secured credit card is a great alternative for people in the low-income category who didn’t get approval for an unsecured credit card. Rewards are in the form of tangible assets like digital gold.
Unsecured Credit Cards: They are traditional credit cards that don’t require a security deposit. These cards are more likely to be approved for only those with good to excellent credit scores as banks allow them to spend the money first and then pay the amount every month at the end of the billing cycle. These unsecured credit cards pose a high risk to the card issuers as they can’t rely on any security deposit in case of missed payment by the cardholders. These cards also offer tangible rewards like cash back, miles, or points on purchases.
7. What are the cons of using a secured credit card?
Secured credit cards hold a lot of advantages for both the issuer and consumer. The pros in credit score rehabilitation, quick onboarding, and issuance hold good as long as payments are made in time. But when the customer starts missing payments, the money in the fixed deposit will get deducted. This may hurt credit scores and FD amount.
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