BankThink Fintech’s Achilles heel: Reaching low-income consumers

As published on American Banker

Over the last decade, fintech companies have launched robo-advisers, digitized lending, improved fraud detection and created virtual currencies. In short, fintech firms have helped change our understanding of what is possible in financial services.

However, the fintech revolution has largely ignored the financial needs of the bottom third of the U.S. population. For instance, fintech companies have so far failed to successfully create an alternative to credit scores for the 51% of people with subprime scores. Secondly, fintech firms have yet to help move our national savings rate in a positive direction. Thirdly, the amount of money that lower-income households have left over every month after paying their expenses is still declining despite fintech apps’ promise to help people budget. According to data from the Pew Charitable Trusts, the typical low-income household had $1,500 of income left over after expenses in 2004. In 2014, they were $2,300 in the red after expenses.

Why is fintech failing to address the needs of such a large swath of the market? One explanation: Consumer spending dictates the preponderance of innovation and investment, and spending by 5% of households with the highest income now directs one-fifth of gross domestic product. The result is a robust ecosystem of advanced offerings catering to a select few high-income earners.

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To strengthen entrepreneurs’ focus on lower-income individuals, fintech companies look to incorporate this famous Silicon Valley precept: User acquisition trumps monetization. Under this well-known growth mantra employed by tech companies like Amazon and Google, fintech companies would actively seek out adoption of their services by middle- and lower-income earners since this group represents the largest potential user base. This massive market size could redeem a slow-to-start revenue model, allowing fintech providers to play white knight to millions of people.

To help technologists “peek” into the lives of low-income Americans and capture the obvious low-hanging fruit, we have outlined four opportunities from our field research that, if executed well, could solve problems for a sizable population of low-income consumers.

AI can help people save more of their paycheck

Close to half of Americans have expenses that equal or exceed their income, making every month a financial balancing act. For example, people pay bills before the due date to time them with their income or they round up their loan payment to the next $10 or $20 to painlessly speed up repayment. But fintech developers have an opportunity to help Americans more quickly execute on this mental math challenge, and ultimately, help reduce the stress of living paycheck to paycheck.

A fintech company could use artificial intelligence to identify patterns in someone’s past family financial behavior — both successful and unsuccessful — to recommend an easy-to-follow budget, send reminders or prompts, and eventually, say, help someone consistently lower expenditures and increase savings. Digit, for instance, is one example of a fintech company paving the way to do just that. The digital service mines someone’s checking account data to determine what he or she can afford to save and then Digit automatically transfers that amount into someone’s savings account.

This is a great start to forming a healthy savings habit. But digital services catering to low-income individuals will also need to go a step further by also helping users reduce their spending so that they can save more. Incorporating some human input into the experience could also help the service gain traction faster.

Improve government-issued benefit cards

Each month, 52.2 million Americans receive government benefits — and most of them receive the benefits on a payment card. Most of these payment cards lack associated mobile apps that could make it easier for someone to check balances, track spending or fund savings. The cards also fail to let someone pay utility or phone bills directly. The payment cards’ lack of functionality pushes people into using more costly and time consuming alternatives, such as withdrawing cash to pay bills with a money order.

Fintech providers could help increase the potential for government assistance to lift people out of poverty with more convenient and empowering options for people to transfer money off the card. One simple but promising opportunity is to build a fee-free way to transfer money online from government cards to a more robust payment platform with modern banking features. This is a potentially huge market, in the trillions of dollars, considering the amount of benefits through Temporary Assistance for Needy Families, Social Security and disability programs.

Peer-to-peer platforms that enable lending between friends and family

Twenty percent of Americans have a credit score below 600 and another 19.3% of Americans are considered to be “unscored” or “credit invisible.” Many of these Americans approach payday lenders when they have unexpected expenses or bills that exceed their regular income. They also use informal lending from friends and family to help fill a cash flow gap. However, the model is rife with inefficiencies and problems of scale.

While many payment platforms and money transfer systems like Xoom and Venmo exist, most of these services are not optimized to facilitate friends and family borrowing use cases and most are not designed for low-income populations.

We need platforms that allow users to track and return money to family versus the services that just let someone send funds. For instance, friends and family lenders should be able to customize the terms of their loan to allow for non-regular repayments. The informal lender should also be able to tag that money to be used by the recipient for a specific purpose, such as health or education expenses.

Pro-consumer auto and mortgage loan calculators

In 2014, auto loans (29%) and mortgages (28%) were the second and third largest debt categories in America. In a world where visiting two additional mortgage brokers (or getting two more quotes) could save someone over $24,000 over the lifetime of their loan, the lack of clarity and understanding when people are signing their loan documents is reprehensible.

Today, most online loan calculators available are developed by lenders, and thus, they serve the incentives of the lender. Case in point, most online calculators don’t take into account something as simple as someone’s income or other financial goals such as retirement. Instead, nearly all calculators will tell you what you can afford to spend based on limited data.

What if, instead, loan calculators asked the would-be borrower not just about his or her current dreams of car or home ownership, but also about the person’s overall financial picture? By accounting for other expenses like education, retirement savings, child rearing, and more, a more robust loan calculator could help borrowers get a more accurate number of what they can afford.

To be sure, these ideas are short-term opportunities and are based on our experience in the field. Many more opportunities exist. But the bottom line is that fintech companies can accelerate their businesses by focusing on the needs of low-income consumers, and ultimately, help build a more equitable fintech ecosystem that delivers revenue-earning impact at scale.

Thinking about Irrationality. Behavioral Scientist. Co-founder of Irrational Labs and Common Cents Lab.

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