Financial institutions are facing increased pressure to identify new, sustainable revenue sources. This need to diversify is driven by changes in the banking industry that have heightened consumer demands, introduced stiff competition from newer market entrants and upended traditional revenue models by constraining income from some of the mainstay products banks have long relied upon. 

Amid this squeeze, banks must find new ways to drive robust revenue streams, grow customer bases, enhance loyalty and engagement and offer products that make financial services more accessible to a wider audience, including the underbanked.

With more than 45 million Americans considered underserved by traditional credit products, secured credit card programs offer a promising solution to drive this critical revenue diversification, market expansion and long-term business growth. 

Yet despite this potential, traditional financial institutions have often overlooked secured credit due to misconceptions about market demand and the perceived predatory nature of traditional models. 

However, next-generation secured credit offers a fresh approach that can help banks offer a responsible, highly functional payment tool that enables underserved customers to build credit and improve their financial lives, while also providing FIs with crucial short- and long-term business benefits.

Why banks are facing pressure to drive more revenue

Along with stiffening competition from challenger banks and fintechs that increasingly offer banking services, traditional financial institutions are affected by the growing impact of debit card interchange fee caps.

These caps, introduced as part of regulatory measures like the Durbin Amendment, limit the amount banks can charge merchants for debit card transactions. While intended to reduce costs for businesses and consumers, these regulations have significantly slashed a once-lucrative revenue source for financial institutions. 

In addition to ongoing regulatory pressures, banks face increased uncertainty after a recent U.S. Supreme Court ruling that allows a long-standing debit card interchange fee lawsuit to move forward. The case, originally filed by retailers, could potentially further impact how banks profit from debit card transactions. The lawsuit challenges the fees that banks charge merchants for processing debit transactions, claiming they are unreasonably high and anti-competitive despite existing caps under the Durbin Amendment. 

If the lawsuit ultimately succeeds, banks could face additional reductions in the fees they collect from merchants on debit card transactions–thereby shrinking an already diminished revenue stream and increasing the urgency for banks to find alternative sources of income. 

Amid this uncertainty, secured credit card programs–which, as credit products aren’t subject to the same interchange fee caps as debit–have become an attractive alternative, offering higher revenue potential while also helping financial institutions expand their potential customer pool for credit products to include consumers unable to qualify for a traditional credit card. 

The problem with secured credit—why the traditional model is broken

The traditional secured credit model, which has remained largely unchanged for years, presents some significant challenges for both providers and consumers. These issues often result in programs that fail to achieve essential goals: attracting new customers, growing revenues, and driving true program profitability.

Under legacy secured credit models, cardholders must open and maintain a collateral account, which is used to mitigate the issuer's risk. This structure imposes a substantial deposit requirement on consumers, who often need to have the same amount of money in both the collateral account and their checking account to maintain spending power–essentially requiring them to hold double the amount of funds that they can actually spend. 

Additional barriers inherent to the traditional model include delayed access to credit, as funds are only accessible once they are locked in the collateral account–a rigid, slow-moving process stifles customer engagement, hampers credit-building efforts and creates friction in the user experience.

This inflexible approach has contributed to low adoption rates for traditional secured credit programs. Many potential customers are deterred by the complexities and restrictions, ultimately resulting in lost revenue opportunities for financial institutions.

How next-gen secured credit paves the way to serve more customers

The next generation of secured credit offers a transformative approach that addresses the pain points associated with traditional models, offering enhanced flexibility that drastically improves functionality and user experience for cardholders and significantly reduces barriers to adoption by potential customers. 

The key ingredient to this optimized secure credit experience? Dynamic funding. Here’s how it works–and why it’s better. 

In a traditional secured credit model, customers are required to make an upfront deposit that serves as collateral for their line of credit. This deposit typically matches the credit limit, and the cardholder cannot access the deposited funds while using the credit card. 

In contrast, dynamic funding changes the way funds are stored, managed and moved, making the process more automated, faster, and more user-friendly for both consumers and financial institutions.

Unlike traditional secured credit, dynamic funding doesn’t require an upfront deposit into a separate account to secure the credit line. Instead, customers store all their money in a single account with one "available to spend" balance, which powers both debit and credit transactions. 

Under this arrangement, only the amount the cardholder actually spends is secured, in contrast with traditional models, where the entire credit line needs to be secured upfront. The cardholder’s credit limit adjusts as their checking account balance fluctuates, providing flexibility without requiring users to make manual transfers into collateral accounts in order to secure higher-cost purchases when the need arises. 

And because customers don't need to set aside a large lump sum as collateral, they retain access to their funds for daily expenses while still building credit. The flexibility of real-time transfers also ensures that customers aren't burdened by a frozen collateral account.

Galileo’s secured credit with dynamic funding 

Here’s a detailed look at how Galileo Financial Technologies’ new secured credit with dynamic funding works to provide greater flexibility, ease-of-use and protection for cardholders and bank issuers alike. 

1. Deposit - When a cardholder signs up for dynamic funding, all funds in their deposit account, and all future deposits, will be automatically transferred to the collateral account. 

2. Credit limit - The amount in the collateral account sets the credit limit for the credit card. Cardholders have the highest credit limit possible since all of their cash is routed to the secured collateral account.

3. Credit purchases — The cardholder makes purchases using the secured credit card. The matching amount of funds is held in the secured collateral account and cannot be withdrawn except to repay the credit account balance.

4. Debit purchases — The cardholder can pay with cash using the debit card. Although the deposit account has a balance of $0.00, authorizations are checked against the amount in the secured collateral account that is not being used as collateral for credit transactions. These funds are moved to the deposit account in real time to fund the transaction.

5. Billing cycle — At the end of the billing cycle, the cardholder is billed for the full amount owed against the credit limit.

6. Payment — The cardholder can pay off their credit balance directly from the secured collateral account (reducing their credit limit) or from an external deposit account.

Here’s how the above process works using a real-world example. 

1. Tom applies for a secured credit card program and is approved because he has a DDA account with the issuing bank.

2. Tom's $2,500 paycheck is directly deposited into the DDA, and the amount is automatically routed to the secured collateral account. The funds are held in the collateral account, fully secured.

3. Tom’s deposit account is now $0.00 and the secured credit account balance is $2,500. Because the secured credit account balance is $2,500, Tom’s credit limit is $2,500.

4. Tom uses his secured credit card to purchase a new keyboard for $100. The transaction is approved because there are sufficient funds available in the secured collateral account. 

5. The credit spend puts a hold of $100 in the collateral account and adjusts the available credit from $2,500 to $2,400. Tom’s credit limit remains 2500.00.

6. Tom then makes a $50.00 purchase using his debit card. Galileo checks the balance available in the secured collateral account and confirms there are sufficient funds.

7. The debit purchase is approved and $50 is automatically pulled from the collateral account to cover the purchase.

8. Tom’s credit limit is adjusted from $2,500 to $2,450, with $100 held for the credit purchase.

Learn more about Galileo’s secured credit with dynamic funding

By offering a more user-friendly, streamlined experience, dynamic funding enables banks to overcome traditional adoption barriers associated with secured credit programs, tapping into an underserved, high-potential market and generating durable, scalable new revenue streams. 

The opportunity to provide a consumer-friendly credit solution can also pave the way for cross-selling additional products, such as mortgages or unsecured loans, once a customer has established a solid credit history–further increasing financial inclusivity and building mutually beneficial, long-term customer relationships.

The time is now to capture the next-gen secured credit opportunity 

For financial institutions seeking to diversify revenue streams and capture new market segments, next-gen secured credit solutions represent a key opportunity. By enabling customers to build credit while maintaining financial freedom, banks can grow their user base and develop profitable long-term relationships while expanding financial inclusivity and helping consumers develop brighter financial futures. 

But for banks looking to secure early-mover advantage on this fast-developing market opportunity, the time to act is now. By embracing innovation to offer a secured credit product that offers high levels of functionality and flexibility, banks can unlock the potential of the credit underserved segment to drive long-term business growth and stay relevant as the financial services landscape transforms. 

Contact us to learn more about Galileo’s secured credit with dynamic funding.