But these types of cards can also benefit people who might otherwise struggle to access credit. More than a billion people worldwide they are considered “unbanked”—that is, they do not formally use financial or banking services. The researchers worked with retailers to develop smart ways to determine the creditworthiness of these first-time borrowers, such as using past purchasing behavior to predict who is likely to pay their bills on time.
However, it is not entirely clear whether it is in the best financial interest of the retailer to provide credit to these customers.
“The main part of it [figuring this out] would be, Are these customers spending more? And then, if so, can we explain why?’ he says Eric T. Andersonprofessor of marketing at the Kellogg School.
Using data from a Peruvian group 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 early access to credit habits affects those customers.
The researchers were able to compare their buying behavior before getting a credit card. They also compared their behavior with that of unbanked customers who have never received a card and with 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 benefiting the retailer.
The deal also helped customers. By giving unbanked customers easy access to credit from a place they already knew—say, their grocery store—retailers gave those customers a simple on-ramp into 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 pay cycle,” Anderson says. “It’s a global problem.”
Chicken or egg
Research has it seems that issuing co-branded credit cards to typical consumers works well: customers spend more because it’s easier to shop, with cardholder benefits to boost loyalty. However, these credit cards may not similarly influence the purchasing behavior of unbanked customers, who often have low-wage, intermittent work and are paid in cash.
“There may be nothing going on with their retail spending,” Anderson says. This outcome may be good for the credit issuer, as they “just want to make sure you pay your bills on time,” but it offers little incentive for the retailer.
It’s a chicken or egg problem. To find out how unbanked customers can use their cards, a retailer must first issue them their cards. But because customers don’t have a credit history, it’s hard to get the cards issued in the first place.
A large Peruvian company (which owns retail chains and a credit card company) overcame this problem by noticing that a customer’s utility bill payment history, as well as retail spending habits, served as a good indicator of creditworthiness even for people with no credit history. That led the company to run a temporary test in 2022: it offered its unbanked retail customers the chance to apply for a co-branded credit card, using their unofficial financial history as a sign of approval or rejection.
This test created the perfect data set for Anderson and his colleagues to study how first-time access to credit affects the spending habits of unbanked customers. Some of the unbanked applicants were approved for the co-branded card, which created a before-and-after picture of their purchasing behavior. Other applicants were rejected, leaving their spending habits unchanged. In addition, the company also had similar data on its existing credit card customers, so the researchers could observe how the behavior of first-time borrowers compared to that of a typical credit card holder.
“One of the biggest things we solve is how you build more than just a credit score [for these customers] but then what happens after you lend them,” Anderson explains.
Doubling
The results of the Peruvian company’s test were impressive. Once unbanked customers were approved for a co-branded credit card, their in-store spending doubled over the next 12 months. Unbanked customers whose card applications were rejected, meanwhile, saw their spending habits stay the same.
“We didn’t know if spending was going to go up 5 percent or 10 percent [after getting the card]says Anderson. “The fact that it went up 100 percent was surprising.”
What drove this immediate and steady increase in spending? It wasn’t that first-time cardholders suddenly started buying more expensive items or were lured by exclusive perks. Instead, almost 70 percent of the increase in spending was due to an increase in shopping frequency.
“If you’re the manager [of that retailer]that’s great,” Anderson says. “They didn’t come as often when they paid in cash. Now that I give them credit, they can come more often.”
Consumers who already had an existing line of credit also increased their spending and shopping frequency after getting the co-branded card. Although their purchase frequency did not increase as much as for new credit card holders, the trend still shows the value of the co-branded card for typical customers as well.
A financial inclusion tool
Anderson suspects this increased shopping frequency is because credit cards ease the “liquidity constraints” that plague unbanked customers.
“If your jobs are intermittent, like cleaning houses, you might not work for a week and then you can work five days the following week,” she says. “That will affect your shopping behavior. You can only go grocery shopping when you get paid. But when you have a credit card, you don’t have to anymore. You can shop multiple times a week.”
This increased flexibility, Anderson says, is what makes co-branded credit cards a boon not only for retailers but also for unbanked customers.
“They don’t have access to credit and they can’t get into formal financial systems,” Anderson says. “The stories are shocking.”
She gives the example of a target customer in the UK who is a young single mother and works sporadically as a cleaner. While her children get free breakfast and lunch during the school year, she has to buy more food for them when summer arrives.
“These [credit cards] it can give her more access to credit so she can buy meals during the summer season,” says Anderson. “It’s a big push to try to create less of a gap between the haves and the have-nots.”
