Fintech
How Startups Are Making Better Credit Available to All Americans
Startups are thinking beyond credit scores to make more responsible credit available to everyone… [+] Americans
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The news on consumer debt is bad and getting worse. As I explained in my february articleNearly all Americans are turning to credit to cover ongoing cash flow gaps, with consumer debt hitting an all-time high $17.7 trillion in the first quarter of this year. Clearly, large groups of Americans are accessing consumer credit, but for many it remains surprisingly expensive and ill-suited to their needs: 47 million Americans have subprime credit scores, and 9% of the credit is currently delinquent. Near 80% of all small businesses Credit applications are rejected unconditionally.
A number of startups have stepped in to begin the important work of improving access to credit for people who need it, and many are starting with credit scoring itself. But the spectrum of solutions runs from the helpful to the downright manipulative; in fact, The CFPB recently announced that was suing SoLo Funds, a consumer lending fintech, in part because it created an “unsecured social credit score.” That’s because of an approach that seeks to generate synthetic improvements in scores, rather than addressing ability, stability, and willingness to pay, which could lead to negative outcomes for consumers.
Fortunately, there is a new generation of fintech startups that are moving beyond score manipulation and toward genuine score improvement through new, genuine lines of credit, superior analytics, found money for credit, and better application and denial methods, to make credit more available at a better price at the right time. Thinking outside the score, these startups are tackling credit with resilience in mind.
Create new genuine lines of credit
Companies like Livable AND Arrone are creating new lines of credit based on rent payments and financial literacy gains, respectively. Their borrowers take real and appropriate risk, borrowing to pay rent or borrowing small dollars, which are new and genuine indicators of willingness and ability to pay, as opposed to score manipulation.
Enhance your analysis with alternative data
Other startups are opening up our definition of creditworthiness to alternative data sources like Cash Flow Analysis and Trade Finance. Companies like Foresight are transforming small business lending and improving underwriting efficiency through proprietary credit engines that leverage accurate transactional data, while Credit Pulse monitors data such as bankruptcies, liens, layoffs, revenue, expenses, and credit changes to determine small business credit eligibility.
Misha Esipov, co-founder and CEO of New creditthat leverages unique data sources to fill the gaps of traditional consumer credit bureaus, says, “We’ve updated an antiquated credit bureau system with real-time connectivity, credit analytics and compliance based on cash flow, payroll and other much-needed data sources. This data paints a much more complete picture of a borrower’s financial health, especially for underserved segments.”
Using Found Money for Credit
Some fintech startups are going even further than scoring by innovating around what we call Found Money for Credit: de-risking access to credit by enabling previously hidden or unused collateral or down payment funds. Featured in more depth in our previous article, Money found for Credit can help applicants find suitable assistance or unlock existing funding sources by sharing fees with service providers.
For example, in the mortgage industry, we have seen companies like Foyer offer prospective homeowners tax breaks through First Time Homebuyer Savings Accounts (FHSAs), increasing down payments while offering a concierge service to anyone looking to buy a home. Stairs similarly helps borrowers access government-backed initial payment assistance programs and silver lining is coupling debt repayment with the development of collateral through investments. In the small business lending sector, companies such as Mark III are providing credit insurance to help credit unions and banks expand lending to small businesses.
Rethinking the Application and Rejection Processes
Even further down the list are companies that are rethinking the most basic elements of the credit application process, while offering transparency to potential borrowers to drive better outcomes. Multiple betFor example, it helps business loan applicants create accurate and complete loan applications, guiding them through a personalized journey to improve their credit score. Mountain of Credit helps financial institutions provide rejected consumer loan applicants with an empathetic path forward, helping these potential future borrowers take corrective action and ultimately stay on track.
All of these companies are thinking beyond credit scores to significantly and sustainably improve access to appropriate credit for the people who need it most. They are not manipulating scores, but trying to figure out how to substantially improve them, or in some cases work beyond them, to improve the financial lives of Americans.