An emerging industry of financial services technology startups, known as FinTech, are creating a new wave of products for financially underserved customers. The underbanked market in the United States is currently estimated at $78 billion in annual revenue, serving 68 million consumers across 22 different financial product types. The Center for Financial Services Innovation and Core Innovation Capital co-released Financial Technology Trends in the Underbanked Market on May 7, 2013.
This report examines four key trends in emerging financial technologies impacting the underbanked marketplace today and highlights a selection of noteworthy companies capitalizing on these trends to improve consumer financial health and their own bottom line. The trends include:
This paper has been sponsored by Morgan Stanley and has benefited greatly from the company’s strategic input.
Download Financial Technology Trends in the Underbanked Market below.
Banks and credit unions can and should be doing much more to support consumer credit building – and, importantly, they can do so in ways that align their own success with the success of their customers. CFSI has identified a number of initiatives that financial institutions can implement over the short-term, medium-term and longer-term to help consumers build their credit profiles.
You can find the full paper CFSI released in June 2012 here.
Download CFSI's InBrief: A Winning Strategy for Financial Institutions and Consumers below.
Alternative Data Can Help Eliminate Credit's Catch-22
The Catch-22 of credit — that you need it to get it — should not exist in this day and age when data galore is at our fingertips.
By Rachel Schneider and Rob Levy
The use of alternative data, like rent and utility payments in credit decisioning – which industry professionals have been prophesizing about for years – should be more prevalent. Yet, millions of Americans continue to go without access to affordable, high-quality credit products, in part, because they lack a long credit history or do not have a credit history at all. This quandary could be at least partially resolved by the use of alternative data.
Some rental, utility and telecom companies report payment data, but not enough do. And the information that gets reported is usually negative, alerting the big three credit bureaus (Equifax, Experian and TransUnion) only when a consumer has been delinquent in paying a bill. Conversely, those consumers who pay their bills in full and on time every month are often unable to prove their creditworthiness since this positive financial behavior goes unreported. As a result, they may receive higher-priced credit or be denied credit by traditional lenders.
The Center for Financial Services Innovation has been studying the potential benefits of alternative credit data for several years. It is our belief that the use of alternative credit data has the potential to responsibly increase underserved consumers' access to high-quality credit products they can afford.
One of the reasons utility and telecom companies fail to report positive payment data to the credit bureaus is because many state regulators discourage it, leery of unclear federal regulations about the permissibility of doing so. Recently, two legislators have taken up this cause, introducing a bill to clarify that, under the federal Fair Credit Reporting Act, utility and telecom companies are permitted to report on the timely payment behavior of their customers to credit reporting agencies.
In September, the House Committee on Financial Services held a hearing to consider the merits of the proposed, bipartisan bill (H.R. 6363), known as The Credit Access and Inclusion Act. Introduced by Representatives Jim Renacci (R-Ohio) and Keith Ellison (D-Minn.), the bill is just one of the many ways to encourage more widespread use of alternative data and improve underserved consumers' access to high-quality credit products.
But this proposed legislation isn't just good for consumers. It has benefits for the financial industry, too. By having more rich data on consumers' payment history, financial institutions can better understand consumers' likelihood to repay. But, even more importantly, financial institutions can better reach the underserved market — which is a significant opportunity, considering there are 68 million financially underserved adults living in the U. S. today.
Many individuals without a lengthy credit history or credit score are creditworthy individuals. The Policy and Economic Research Council , a Durham, N.C. think tank, estimates that about 50 million consumers have credit scores that could be higher if utility and other alternative payment data was included in their files. PERC and the Brookings Institution also contend that including alternative data in consumer credit reports could place 40% of the currently unscoreable consumers into the prime category.
We recognize that not everyone shares our perspective on this issue. Some believe that full-file credit reporting is potentially harmful to consumers, because, in addition to the positive information utilities would report, a lot of new negative information could get reported. While we share some of these concerns, overall we believe this bill will have a positive impact on consumer access to high-quality credit.
H.R. 6363 is expressly not a mandate. It would simply clarify the landscape, thereby encouraging utility companies to report positive payment data. The need remains for a variety of affordable, high-quality credit options that meet the diverse needs of underserved consumers. After all, it may actually be in the best interests of lenders and consumers alike for financial institutions to provide some consumers a more limited credit offering because of full-file reporting..
Finally, credit reporting agencies are now, for the first time, being fully supervised and regulated by the Consumer Financial Protection Bureau, which gives us confidence that the consequences for consumers associated with adding nontraditional data will not go unnoticed.
Now is an opportune time to talk seriously about alternative data, considering how consumers' credit histories have suffered since the financial crisis. CFSI believes more research is warranted to show that alternative data can help a lender determine which consumers show positive credit behavior today, even though their traditional credit reports do not reflect as much. This would help both consumers and lenders, who can improve their bottom line with increased predictive ability.
H.R. 6363 advances the conversation about the power of alternative credit data — one of the many keys to increasing consumers' access to high-quality credit. The more the financial services industry and those who regulate it understand the potential positive ramifications of including alternative data in credit reports, the sooner we can eliminate the Catch-22 of credit.
Nonprofit microenterprise organization offers secured credit card to help clients build credit.
As a leader in microenterprise development and credit building, Justine PETERSEN emphasizes credit building as an empowering asset. In 2008, they partnered with Citi Banamex USA to deliver high-quality secured card to help their clients build their credit.
See more about Justine PETERSEN and Financial Capability at www.financial-capability.org.
See the full case study of their success in the document below.
An estimated 15 million Americans turned to small-dollar credit products in 2011. These individuals used payday loans, pawn loans, direct deposit advance, auto title loans and nonbank installment loans in order to obtain quick access to cash. Yet, these types of credit often come with high fees and challenging repayment terms (such as two week balloon payments) that make it highly unlikely the loans will be repaid without significant difficulty. As a result, many borrowers rollover or extend their loans multiple times, finding themselves in a cycle of repeat usage and mounting debt.
The lack of safe, affordable, high quality small-dollar credit options – and other solutions that will solve the problems for which people currently turn to credit – is a major pain point for underserved consumers. But meeting this need with high quality advice, products and services is also a significant business opportunity.
According to new research by the Center for Financial Services Innovation and Core Venture Capital, fees paid to access these small dollar credit products in 2011 amounted to $17 billion. This is revenue that should be shifted toward products and services that meet the need for credit in a way that aligns provider and customer success and builds economic opportunity for consumers – rather than seeing those opportunities stripped away.
Developing the innovative new products and services that are necessary to meet this goal will not be an easy effort. Listening to the experiences of these individual borrowers is the right place to start. CFSI hopes to contribute to this goal through a new consumer research study we've just released on small-dollar credit consumers.
Our findings show, even within the small-dollar credit category, different products are used for different needs. Products with shorter terms (payday and pawn) are more likely to be used for everyday living expenses, while installment loans are more likely to be used for larger or more infrequent purchases such as auto repair. Digging one step further into "why you borrowed" suggests that some borrowers have a structural mismatch in which their expenses exceed their income; some borrowers are solving for an emergency expenditure and some have a timing disconnect in which their bills and income are misaligned.
Nearly two-thirds of survey respondents reported having no savings. However, among the other third, more than half chose not to use all of their savings and relied upon very expensive credit options instead.
When considering credit options, access and speed were most important to potential borrowers.
While more than half of payday borrowers repay their loans within two weeks, a significant number of consumers rollover, renew or extend their loans multiple times. Our study found that the average payday consumer takes 11 loans or extensions per year and is in debt for approximately 150 days.
Finally, borrowers with a high loan-to-income ratio or those who report having expenses that consistently exceed their income are more likely to roll over or extend their loan repayment across nearly all the products CFSI examined.
Underserved consumers deserve access to a variety of safe, affordable, high quality credit options that are suited to their particular credit need and financial situation. CFSI's research suggests that developing these types of products requires satisfying a tall order of criteria. This criteria starts with budgeting and advice and savings, and then when credit is the right solution, balancing sound underwriting to determine ability to repay with speed, convenience and accessibility.
It is a tall order, but the potential rewards for consumers and providers are immense. Listening to the consumer is the start.
Rachel Schneider and Rob Levy are vice president and manager, respectively, on the Insights and Analytics team at the Center for Financial Services Innovation.
The original article can be found here on American Banker.
Every year, millions of American consumers use small-dollar credit (SDC) products for quick access to cash. Yet, these products—payday loans, pawn loans, direct deposit advance loans, auto title loans, and non-bank installment loans—often come with high fees or interest rates and can lead consumers into a cycle of repeat usage and mounting debt. This study seeks to elucidate the reasons why so many consumers rely upon these potentially dangerous products and to glean what can be learned from their experiences to promote the development of high-quality credit solutions.
This study covers the following angles of the SDC Consumer: who they are, how they decide to use a SDC product, how they fare once they have used a product, and what they think about the products they use.
Some key findings from the research:
Download the full paper "A Complex Portrait: An Examination of Small-Dollar Credit Consumers below.
Building Consumer Credit: A Winning Strategy for Financial Institutions and Consumers
Many financial institutions elect not to provide credit to consumers with damaged or insufficient credit history, believing the risk these consumers pose to the institution outweighs the potential benefits of serving them. This mindset is potentially detrimental to consumers, who may be inadvertently subjected to harm when they are forced to rely upon low-quality credit products, and to providers themselves, who miss out on real profit opportunities as well as the potential to develop loyal and long-term customer relationships.
Banks and credit unions can and should be doing much more to support consumer credit building – and, more importantly, they can do so in ways that align their own success with the success of their customers. With few large-scale consumer credit building solutions existing today, banks and credit unions have a critical role to play in bringing scale to the innovative solutions that do exist but that are not yet widely available to consumers. In this paper, we suggest a number of initiatives that banks and credit unions can undertake to help build the credit profiles of low and moderate income consumers. We offer initiatives that can be implemented in the short-term, medium-term, and longer-term, with the short-term solutions being the least labor and cost-intensive, and the longer-term solutions requiring a more significant effort on the part of individual financial institutions as well as more systemic, industry-wide change.
Strategies for Banks and Credit Unions to Support Credit Building:
Short-term – Credit Building Tools, Services and Partnerships:
Medium-term – Risk-Limited, Credit Building Products:
Longer-term – Go Beyond Traditional Credit Files:
Consumers approach banks and credit unions in search of an appropriate small-dollar credit product every day, and in some cases, these consumers do not qualify for the product they are seeking. However, consumers should never have to leave a financial institution completely empty-handed and without any knowledge of how to improve their credit standing. No matter the level of time and resources banks and credit unions are able to devote to customer credit building initiatives, there are a number of ways for financial institutions to help customers. Those institutions that do so will derive significant long-term benefits in customer loyalty and retention, and also uncover new potential revenue sources.
Click below to read the full research paper.
