Recovered from the original publisher: Kellogg Insight
But these types of cards may also benefit people who might otherwise have a hard time getting access to credit. More than a billion people worldwide are considered “unbanked”—that is, they don’t formally use mainstream financial or banking services. Researchers have worked with retailers to develop clever ways of determining the creditworthiness of these first-time borrowers, such as using past shopping behavior to predict who is likely to pay their bills on time.
But it’s not entirely clear whether it’s in the retailer’s best financial interest to provide credit to these customers.
“The core part of [figuring this out] would be, Do these customers spend more? And then, if so, can we explain why?” says Eric T. Anderson, a professor of marketing at the Kellogg School.
Using data from a Peruvian conglomerate that issued co-branded credit cards to unbanked customers as part of a pilot program in 2022, Anderson and his colleagues Joonhyuk Yang of the University of Notre Dame and Jung Youn Lee of Rice University created a unique snapshot of how first-time access to credit affects these customers’ spending habits.
The researchers were able to compare their purchasing behavior before versus after receiving a credit card. They also compared their behavior with that of unbanked customers who never received a card and to consumers who have or have had other credit cards.
They found that unbanked customers roughly doubled their spending after receiving a co-branded credit card—significantly benefitting the retailer.
The arrangement helped the customers, too. By providing unbanked customers with easy access to credit from a venue they already knew—say, their grocery store—retailers gave these customers a simple on-ramp to the financial system.
“Tons of people need access to credit; maybe they’re working, but they don’t have jobs that are on a two-week paycheck cycle,” Anderson says. “It’s a global problem.”
Chicken or the egg
Research has shown that issuing co-branded credit cards to typical consumers works well: customers spend more because they find it easier to make purchases, with cardholder perks to strengthen their loyalty. But these credit cards might not similarly influence the purchasing behavior of unbanked customers, who often have low-paying, intermittent jobs and get paid in cash.
“It might be the case that nothing happens to their retail spending,” Anderson says. That outcome might be fine for the credit issuer, since “they just want to make sure you pay your bills on time,” but it offers little incentive to the retailer.
It’s a chicken-or-the-egg problem. To find out how unbanked customers might use its cards, a retailer would have to issue its cards to them first. But because the customers have no credit history, it’s hard to issue the cards in the first place.
A large Peruvian corporation (that owns both retail chains and a credit-card-issuing company) got around this problem by observing that a customer’s utility-bill-paying history, as well as spending habits in its retail stores, acted as a good indicator of creditworthiness even for people with no credit history. This led the corporation to perform a temporary test in 2022: it offered its unbanked retail customers the opportunity to apply for a co-branded credit card, using their unofficial financial history as a signal for approval or rejection.