See invisible credit | Nasdaq


Through Kate hao

They are immigrants and refugees. They are women in shelters for domestic violence. These are apartment dwellers who take public transport. Many are hard working people, salt the earth, but they have no credit score.

These are the invisible credits.

For various reasons, many consumers do not take out traditional loans and do not have a great deal of credit history, but are more than worthy of loan money nonetheless. And they could use a helping hand.

This is a message that must be heard – and ignored – by banks, credit unions and many lenders. Most financial institutions are chasing high net worth clients, which is understandable – that’s where the money is.

But this is not the only place. For those who work in the financial industry, start thinking about marketing to the underbanked and unbanked, for several reasons.

That’s what you should do. That’s really all there is to say – and that customers tend to reward companies for doing the right thing.

It’s a big market. It’s easy to think of the under-banked or unbanked as a few hapless scattered people who have fallen through the cracks and simply never opened a checking account. Research suggests that 10 percent of adults do not have a bank account and 25 percent are underbanked, which means they have an account but also use other financial services such as loans. salary.

Ten percent of the adult population, 25.8 million, according to maths and the latest censuses. It’s a big part of the market to ignore. The underbanked are an additional 64.5 million Americans who could pay interest on affordable small dollar loans that banks and credit unions could give them. Instead, an estimated 12 million Americans regularly use payday loans and pay $ 9 billion a year in fees that amount to 375% APR.

Credit scores aren’t the only answer. Technology, especially when offered to opting customers, has made it very easy to track invisible credit financial behavior. Now that most of our lives are digital, algorithms can make it relatively easy to determine whether an underbanked or unbanked consumer is good or bad credit risk.

But most banks are weirdly closed when it comes to accepting new technology and new markets. They always focus on the wealthy and put all their trust in credit scores, even though numerous studies have suggested that credit scores are often an unfair and inaccurate way of judging a consumer’s propensity to repay.

For example, The Atlanta Journal-Constitution do an investigation which revealed that consumers filed 175,000 complaints with the Consumer Financial Protection Bureau regarding credit reports between 2015 and 2017. The Report of the Consumer Financial Protection Bureau found that the invisibility of credit has a major impact on people of color and people living in low-income neighborhoods.

But this can be fixed with new solutions. Beyond adopting new technologies, banks and credit unions could work with nonprofits directly involved in helping vulnerable consumers – and work with financial empowerment centers that have the infrastructure needed to facilitate banking relationships with invisible credit.

Bank executives may well say to themselves: “But what does this get us in? At the end of the day, we are a business, not a charity. “

Exactly, and the bankers who think that marketing to society’s most vulnerable citizens is a charitable endeavor are missing the point. After all, there are plenty of predatory industries like payday loan and auto securities companies preying on underbanked and unbanked consumers with high interest loans. These lenders already know that there is a profit to be made with customers who are creditworthy but whose credit is not visible. If banks and credit unions were to compete in this market with reasonable fees and interest rates, they could also generate profits and force predatory businesses to clean up their own actions. It would be good for everyone.

Serving the financially underserved is a billion dollar profit opportunity for banks and credit unions. And it can be done. Most importantly, it should be done because it’s the right thing to do.

Kate hao is the founder and CEO of Happy mango, a data technology company innovating in consumer credit risk assessment.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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