How a Store Credit Card Can Be a Bridge to the Banking System

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. 

This test created the perfect dataset for Anderson and his colleagues to study how first-time access to credit affects unbanked customers’ spending habits. 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. What’s more, the company also had similar data on its existing credit-card customers, so the researchers could observe how first-time borrowers’ behavior compared with that of a typical credit-card holder.  

“One of the biggest things we solve is how you construct not only a credit score [for these customers] but then what happens after you lend to them,” Anderson explains. 

Doubling up 

The results of the Peruvian company’s test were striking. Once unbanked customers were approved for a co-branded credit card, their spending at the retailer doubled over the next 12 months. Unbanked customers whose card applications were rejected, meanwhile, saw spending habits stay the same. 

“We didn’t know whether 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 a surprise.”  

What drove this immediate and stable spending increase? It wasn’t that the first-time cardholders suddenly started buying more-expensive items or became enticed by exclusive perks. Instead, almost 70 percent of the spending increase was due to an increase in shopping frequency. 

“If you’re the manager [of that retailer], that’s a great thing,” says Anderson. “They weren’t coming 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 receiving the co-branded card. Though their shopping frequency didn’t go up by as much as it did for the new credit-card holders, the trend still demonstrates the co-branded card’s value for typical customers as well.    

A tool for financial inclusion   

Anderson suspects that this increased purchasing frequency occurs because credit cards relax the “liquidity constraints” that plague unbanked customers.   

“If your jobs are intermittent, like cleaning houses, you may not work for a week, and then you may work five days the next week,” he says. “That’s going to affect your shopping behavior; you can only go buy groceries when you get paid. But when you have a credit card, you’re not forced to do that anymore. You can shop multiple times a week.”   

It’s this increased flexibility, says Anderson, that makes co-branded credit cards a boon not just for retailers but for unbanked customers as well.   

“They don’t have access to credit and can’t get into formal financial systems,” Anderson says. “The stories are heart-wrenching.”    

He gives the example of a target customer in the U.K. who is a young single mother and has a sporadic work schedule as a cleaner. While her kids get free breakfast and lunch during the school year, she has to buy more food for them when the summer arrives.   

“These [credit cards] can provide more access to credit so she can buy lunches during the summer period,” Anderson says. “It’s a big push to try to create less variation between the haves and the have-nots.”