By Kate Hao
They are immigrants and refugees. They are women in domestic violence shelters. They are apartment dwellers who take public transport. Many are hard-working, salt of the Earth people – but they lack a credit score.
They are the credit invisible.
For a variety of reasons, there are many consumers who don’t take out traditional loans and haven’t much of a credit history but are nonetheless more than worthy of being lent money to. And they could use a helping hand.
It is a message that needs to be heard – and isn’t being heeded – by banks, credit unions and many lenders. Most financial institutions chase after wealthy clients, which is understandable – that’s where the money is.
But it’s not the only place. For those working in the financial sector, start thinking about marketing to the underbanked and unbanked, for a few reasons.
It’s the right thing to do. That’s really all that needs to be said – and that customers tend to reward companies that do the right thing.
It’s a large market. It’s easy to think of the underbanked or unbanked as a few scattered unfortunates who have fallen through the cracks and simply never opened a checking account. Research suggests that 10 percent of adults have no bank account and 25 percent are underbanked, which means that they have an account but also utilize other financial services such as payday loans.
Ten percent of the adult population, 25.8 million, according to math and the latest census records. That’s a big slice of the market to ignore. The underbanked is another 64.5 million Americans who could be paying interest on affordable small dollar loans that banks and credit unions could be issuing to 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 customers who opt in, has made it very easy to track financial behaviors of the credit invisible. Now that most of our lives are digital, algorithms can make it relatively simple to tell whether an underbanked or unbanked consumer is a good or bad credit risk.
But most banks are oddly close-minded when it comes to accepting new technologies and new markets. They still focus on the affluent – and put all their faith in credit scores, even though plenty of studies have suggested that credit scores often are an unfair and inaccurate way to judge a consumer’s propensity to repay.
For instance, The Atlanta Journal-Constitution did an investigation that found that consumers filed 175,000 complaints with the Consumer Financial Protection Bureau related to credit reports between 2015 to 2017. The Consumer Financial Protection Bureau report found that credit invisibility has a major impact on people of color and people living in low-income neighborhoods.
But it can be fixed with new solutions. Beyond adopting new technologies, banks and credit unions could collaborate with nonprofit organizations that are directly involved with helping vulnerable consumers – and work with financial empowerment centers that have the infrastructure to facilitate banking relationships with the credit invisible.
Banking executives may well think to themselves, “But what’s in it for us? At the end of the day, we’re a business and not a charity.”
Exactly, and bankers who think marketing to society’s most vulnerable citizens is a charitable endeavor are missing the point. After all, there are plenty of predatory industries such as payday lending and auto title companies that prey upon underbanked and unbanked consumers with high-interest loans. Those lenders already know there is a profit to be made from customers who are credit worthy but are credit invisible. If banks and credit unions competed in that market with reasonable fees and interest rates, they could also generate profits and force predatory companies to clean up their own acts. That would be good for everybody.
Serving the financially underserved is a billion-dollar profit opportunity for banks and credit unions. And it can be done. More 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 that brings innovation to 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.