With new secured card, Amazon and Synchrony venture into subprime

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Targeting consumers with poor or thin credit, Amazon is launching its Credit Builder Card, enabling those who put down a security deposit to shop online — while earning rewards on par with those offered to mainstream cardholders.

Amazon Prime members with the new secured card earn 5% back on all Amazon purchases, the same reward provided by Amazon’s private-label credit card and by its open-loop card. Amazon Credit Builder is one of the industry’s first private-label secured cards, according to Stamford, Conn.-based Synchrony, which issues the new card.

There's a growing demand from subprime credit customers to access new lending tools and earn rewards in the process, said Tom Quindlen, Synchrony’s executive vice president and CEO of retail cards, in an interview.

“A big segment of America falls into this with thin credit files or not a lot of credit history, and we wanted to give people a way to establish or rebuild their credit while getting some tangible benefits,” Quindlen said. Synchrony also issues Amazon's mainstream private-label card; JPMorgan Chase issues its open-loop card.

The move by Amazon and Synchrony also aims to address the rising tide of fintech-driven alternative credit and financing products that are putting competitive pressure on traditional lenders.

Customers who apply online receive a response within 30 seconds. If approved, the applicant must supply a security deposit of $100 to $1,000 based on Amazon’s instant risk-scoring model, Quindlen said.

Amazon Credit Builder typically offers customers a credit limit of $500, and consumers who make several consecutive on-time payments may be upgraded within seven months to a regular Amazon store card, he said.

Secured credit cards, which were dominated by hard-money lenders often operating outside of accepted industry practices before the 2008 recession, were reined in by the CARD Act of 2009, said Brian Riley, a director at Mercator Advisory Service.

“Today well-designed programs allow consumers to progress to standard, general-purpose cards, in a process that raises financial inclusion and broadens consumers' credit files,” Riley said.

More issuers are coming to the realization that there is an untapped market for secured credit cards, and that many of the potential users of secured cards would be good long-term customers once they establish a credit history.

"Twenty-five percent of them are considered superprime once they have demonstrated some credit performance," Larry Santucci, senior research fellow for the consumer finance institute at the Federal Reserve Bank of Philadelphia, said at SourceMedia's Card Forum last month in New Orleans.

Graduating these consumers to a standard credit account simply means releasing the security deposit. As a result, "a lot of the issuers are reporting these cards not as secured cards but as regular credit cards," Santucci said.

Justin Zeidman, head of credit card products at Navy Federal Credit Union, said his company took a renewed interest in secured credit cards after seeing fintechs encroach on that market.

Navy Federal increased its marketing outreach to this audience, but didn't see any increase in secured card acquisition, Zeidman said at Card Forum. Then it realized that its minimum deposit requirement of $500 was too high for those members.

"They didn't have a lot of deposits on the books with us," Zeidman said. "On average we saw $700 … you're asking them to shove over 75% of their savings, just so they can establish credit."

To make its card more appealing, Navy Federal lowered the secured credit line to a $200 deposit — and saw acquisitions nearly double.

Its next step was to look at graduation. Most of the secured cardholders, upon graduation, were applying for a different Navy Federal card. The credit union chose to instead upgrade those members to its standard cash-back card.

"I know it's no secret secured credit isn't the most profitable place to play, but when you think about the lifetime value of being the first issuer to lend to someone — and then the value of that loyalty over the course of years and years — for us it made a lot of sense," Zeidman said.

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