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Written by Cyndie Martini
on October 13, 2016

Getting that first credit card can be a liberating experience. For just a small piece of plastic that conveniently fits inside your wallet, it can hold a lot of power. However, limited credit data or poor credit scores prevent many Americans from obtaining their own card.

According to the Federal Reserve Bank of New York, 15 percent of credit card applications were rejected in June 2016. Though this is relatively low compared to the highs of 22 percent less than two years before, it's still up from the 13.5 percent in June 2015.

Getting turned down for a card can be a frustrating experience. It's a signal to the consumer that their finances may not exactly be in the best shape. Credit unions and banks have attempted to implement new credit card programs that feature fewer restrictions to encourage people with lower credit scores or no credit to apply for these "junior cards," Payments Leader explained. The idea is to create a sort of gateway to higher credit limits and more prestigious credit products. However, the idea has yet to take off with consumers at large.

Payments Leader pointed out that this could be for several reasons. One of the most important causes could be the fact that a similar product that has gained traction is already available: the prepaid card.

Prepaid gains popularity

According to a Pew Charitable Trusts survey, an estimated 23 million U.S. adults use prepaid cards on a regular basis, about a 50 percent increase between 2012 and 2014. They are commonly used as a budgeting tool, either replacing or complementing the traditional bank account.

Most of these consumers aren't currently obtaining their prepaid cards at credit unions or bank. Just 19 percent of banked and 6 percent of unbanked consumers head to a financial institution for these cards, while the majority (56 percent of unbanked and 38 percent of banked) of consumers receive them at retailers that sell everyday items, such as drug stores or convenience stores.

Previously, one of the downsides to having prepaid cards was the limited protections they offered compared to credit cards. Fraud protection, while offered by many prepaid card issuers, was not required, and there wasn't a guaranteed limit on losses. However, recent legislation passed Oct. 5 changes that.

New rules for prepaid

According to The Washington Post, the Consumer Financial Protection Bureau will now require fraud protection and losses to be capped at $50. Plus, card issuers will temporarily fund accounts while fraud investigations take place.

This is important to many prepaid consumers, as many of them are unbanked. This means their prepaid card, in many cases, acts like a checking account. Three-quarters of unbanked prepaid users reload their cards on a regular basis, and 43 percent have their cards reloaded through direct deposit, indicating that the card is their main financial management tool.

Prepaid cards offer credit unions, not just consumers, an opportunity. When someone gets a prepaid card from your institution, they allow members to become acquainted with credit products at their own pace, which can help them build trust. It also provides a pool of potential members that would be good prospects for cross-sell opportunities.

While the new financial regulations may require credit unions to change some of their policies and practices regarding the cards, there is the potential to leverage prepaid to bring in new members. Consumers who are turned down for credit cards may become discouraged from interacting with credit unions or the financial industry as a whole.

By showing these consumers that you are there to help them build their credit and learn how to manage their money effectively, they are more likely to grow to trust your institution. Offering prepaid cards is a great place to start, as this is a product they are already aware of and see the benefits of. By strengthening your prepaid marketing, you may be able to draw in new members who might have otherwise dismissed your credit union as just another financial institution that will turn them away.


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