Card: Hybrid Cards

Card Programs

Hybrid Cards

A Hybrid Prepaid Card is a prepaid card that also offers the user some form of credit or line of credit they can access through the card.

Hybrid credit/debit cards employ a prepaid card as the transaction device, plus a credit facility and deposits as sources of load; the two functions are addressed by different consumer protections under Fed Regulations Z and E.

Hybrid cards typically target unbanked, underbanked, subprime and no file/thin file consumers and compete on a continuum of products ranging from pure prepaid to secured credit cards.

Loan products in this space are addressing consumers short-term borrowing needs recognized by the FDIC in its small-dollar loan initiatives.

Hybrid prepaid cards come in two key types:

• Credit Builder
• True Credit Lines (give the consumer access to additional funds over and above their own)

A slight variation on the above has been where the card is made multifunction with multiple wallets. This has been developed for sectors where the prepaid is restricted acceptance with sometimes a separate wallet for other expenditure sometimes offering a line of credit

Credit Builder

Three different models exist:

1. The Loan Structure

The user on purchasing the card in effect takes out a loan. This is then repaid monthly to the issuer who at the end of the year reports a complete loan repayment; for example:

• Consumer takes out a card; but the fee of $59.40 is an Installment Loan
• Consumer makes 12 monthly payments of $4.95
• 0% APR
• On complete payment of loan reported back to Experian and/or other credit bureaus

2. Lending Back

Three accounts…

The Cash Account is used for cash loads, Money Transfers, ATM transactions, and Bill Payments. This is also where the user must add cash to cover the automatic monthly minimum payment.

The Secured Account is used to secure the Credit Line. Money is transferred from the Cash Account into the Secured Account to increase their Credit Line. Funds in the Secured Account are not accessible. These funds are used to secure their credit line through Credit-On-Demand.

The Credit Account is used for all your purchases, and consists of three parts:

1. The Credit Line is how much total credit the cardholder has
2. The Available Credit is the amount of credit they have to spend
3. The Outstanding Credit Balance is how much of their credit limit they have spent, which is thus how much they owe

• Available to Spend is the total spending power. This balance is the sum of the Available Credit and the Cash Account balance and it reflects the total amount they can spend. Their purchase transaction will be declined if it exceeds this balance.
• There is a monthly minimum repayment of around 4% of $10. Cards position themselves sometimes as a Credit Card and other times as Prepaid Card
• In effect the cardholder can only borrow/spend the amount already in the secured account
• While providing credit the user must “pre fund‟ that credit first
• The issuer reports to the credit bureaus the successful payments of the Loans/Credit.

3. Reporting History

The card sets itself up as the method of payment of bills and stated they will report you have paid these bills to a credit agency

Consumers have a choice and an equal opportunity to show that they pay their bills on time. The credit builder provides the payment history, and is an optional service that is made available at no additional cost as part of the bill payment service. The credit builder service does not improve or repair a credit record, credit history or credit rating. It also does not provide advice or assistance for the improvement or repair of credit record, credit history or credit rating.

True Credit Lines

Types/models offered in the market:

Pay Day Loans

Many of the companies offering “true additional‟ lines of credit to users do so on a basis similar to PayDay Loans. The cardholder have a choice of either a small loan based on payroll history i.e. an advance on payroll; or a loan based on equal funds held on deposit

Requirements example…

• Have an income of $10,000.00 (or more) in yearly income
• Establish payroll direct deposit of at least $500 each month for 2 consecutive months and each month thereafter and receive a maximum line amount of $300.

Or

Deposit a minimum of $300 in a savings account for a maximum line equal to the amount deposited.

• The loans are designed for short term small payments
• Consumers normally have to establish a history of regular payments/direct deposits into an account or for instance in the UK show a cheque guarantee card
• The consumer can then obtain the loan once the qualifying period has been reached
• A slight variation on this is called overdraft protection/privilege. Overdraft Protection is a “fee per event” model that accesses a specified amount based on a financial institutions rating of the cardholder. The cardholder used to be told what that amount was but this has evolved to a “black box” process to avoid the perception that these fees are an effective interest rate. They are not related to the amount at all.

i.e. a card that has been flagged as having an open to buy of $300 but only $50 for Available Balance, when faced with a $75 purchase would access the portion of the open to buy necessary to cover the $25 purchase price as well as the overdraft fee for the transaction (which can range from $2 -$25) necessary to bring the balance to $0. The “cost of funds” is the same regardless of the amount.

Pawn Broker Credit

A slight variation on the above structure is where Pawn Brokers are paying funds from pawned goods directly onto prepaid cards

Small Line Credit (Loan to Card)

Some consumers want to save a small amount regularly for use later. Others want short term loans with a regular repayment plan that is easy to conform to.

• Qualified customers establish a small dollar line of credit, and have advances loaded directly onto the card
• Balance must be repaid in installments over a 4 to 10-week period