Low-income consumers in the US face personal, institutional, and policy-related barriers to access the financial system. As a result, these underbanked consumers rely heavily on fringe financial service providers to conduct routine financial transactions and pay high fees in the process.
The Center for Financial Services Innovation (CFSI) is the definitive voice on US consumer financial health. CFSI and Core Innovation Capital have recently come out with their 6th annual market analysis to illustrate the size of the opportunity to address the needs of financially underserved consumers and identify significant trends driving marketplace evolution and growth. The report presents a snapshot of interest and fees spent by underserved consumers, volume of consumer usage generating revenue, current and projected revenue growth rates, and key trends driving market developments.
The three basic criteria used to determine underserved consumers are those who struggle with one or above of the below financial challenges:
- Consumers struggling with low to moderate incomes or income volatility
- Consumers that are credit challenged having subprime credit scores below 600 or having insufficient credit file information
- Consumers who struggle with access to mainstream financial products
CFSI research estimates that 57% of US consumers, or approximately 138 million adults, are financially unhealthy. Though all financially unhealthy Americans could benefit from quality financial products, this annual report focuses specifically on the financially underserved. These are the consumers with the acutest need for financial products and practices that meet their needs. This report examines 28 products that underserved consumers use to spend, save, borrow, and plan in their financial lives.
In 2015, underserved consumers spent $140.7 billion on fees and interest across five financial product categories: Single payment credit, short-term credit, long-term credit, payments & deposit accounts, other products & services.
According to the report, revenue continued to grow across nearly every payment and deposit account. The highest growth witnessed was for multi-use, account-based products, including Checking Accounts, GPR Prepaid, and Payroll Cards. However, many underserved consumers still rely on older payments product models, even as they simultaneously adopt modern transaction products and utilize traditional bank accounts.
After the global financial collapse, subprime lending is now gaining traction again. New-age startups are piling into the subprime market, and big-name investors are eagerly lining up to fund their efforts. Some of them which are enabling subprime lending are:
LendUp: LendUp believes that access to quality credit is a right for everyone. Even those that banks won’t approve. The startup’s first product is the LendUp Ladder, to incentivize responsible actions and enable borrowers to earn access to apply for larger loans at lower interest rates over time. LendUp is also launching its own credit card, which is free compared to the average payday loan that costs 500% to 700% APR.
Elevate: Elevate’s niche right now is providing loans to borrowers with credit scores between 575 and 625. As the company expands, it wants to provide loans to customers with even lower credit scores. Elevate works on a direct-to-consumer model. It rewards borrowers for watching financial literacy videos and also offers free credit monitoring.
Oportun: Oportun is focused on Hispanic borrowers with little or no credit record. Founded in 2005, the company aims to increase economic opportunity for its clients, promote community development, and serve low-income or underserved communities.
Vouch: Vouch allows friends and family to co-sign part of a subprime borrower’s loan effectively. People sponsor the loan applicant by choosing an amount of money and agreeing to pay their sponsorship amount if the loan applicant does not pay Vouch back.
More than half of Americans now have credit scores below 680, placing them firmly in the subprime territory. Moreover, a growing number of entrepreneurs now view subprime as fertile and under-served territory and have gained an advantage over traditional lenders with sophisticated algorithms to assess borrowers’ likelihood of repaying.
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