By Dion Harrison
October 24, 2019 at 5:00 am ET
Every day, Americans deal with difficult financial situations, from rising health costs to burdensome student loan debt. For some of us, it’s a simple fix: Go to the nearest bank and take out a loan to cover costs while you get back on your feet. For the 160 million Americans with credit scores below 700, the available options are vastly different.
At the National Bankers’ Association’s 92nd Annual Conference this month, I heard much discussion of barriers to access for non-prime and credit invisible borrowers. This is an often-overlooked community whose needs are not well understood by traditional banking institutions and policymakers. A decline in credit is often caused by a combination of factors, including job loss, medical costs or a drop in income. These circumstances could happen to anyone, and non-prime consumers are 86 percent more likely than their prime counterparts to cite multiple causes negatively affecting their credit score.
When those unfortunate events do arise, the access to money that many of us take for granted is simply not an option for this group. Non-prime Americans are nine times more likely than prime consumers to have been turned down for credit in the past year, and 10 times more likely to say that they can’t make financial progress because of poor credit. They are shut out of the system and subsequently become disillusioned. Two-thirds of non-prime Americans — and almost half of prime borrowers — don’t believe that banks design products for them. And the truth is, they don’t; traditional lending institutions have largely left the business of directly lending to this population.
These are the barriers, but where are the solutions? They lie in the intersection of tools already at our fingertips: combining innovative financial technology and the existing network of banks, all enabled by forward-thinking regulation.
Bank-fintech partnerships have enabled this community to gain access to much-needed credit that is fast, accessible and responsible. One in 3 non-prime Americans have seen their income change by 25 percent in the last year, compared to 1 in 5 prime Americans. That increased volatility means non-prime Americans are twice as likely to be focused on short-term financial matters than long-term ones. New products are serving that need, but they often have high fixed costs of capital to be able to underwrite these loans and get funds to consumers quickly.
This is where there is rich opportunity to work together and fill the gap for non-prime borrowers. Federal Deposit Insurance Corporation Chair Jelena McWilliams put it well: fintech firms can develop and offer responsive consumer products quickly, and banks provide a built-in customer base, regulatory know-how, access to the traditional payment system and deposit insurance.
At the NBA Conference, I listened to community banks say that rate caps don’t address the barriers to serving non-prime customers. Access to capital and risk are the main obstacles, and there is a dire need for regulatory guidance that promotes innovation and collaboration rather than cutting off access for an entire community that already faces scarce options. Barely more than a third of non-prime consumers think their bank would approve them for a loan, compared to 85 percent of prime consumers.
Innovative new products cannot reach the communities that need them without the capital to drive development and lower costs. Regulators need to incentivize larger banks to support community banks with resource investments and encourage growth plans through fintech partnerships. While the FDIC and OCC have proclaimed their desire to support bank-fintech partnerships, there are still challenges ahead. Millions of Americans are waiting on our industry to serve them — let’s not keep them waiting.
Dion Harrison serves as director of bank products at Elevate Credit, a leading fintech company headquartered in Fort Worth, Texas.
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