By Einat Steklov, CEO, Co-Founder of Kashable
Almost one-quarter of American adults are underbanked. Finding themselves underserved by traditional banks and loan companies, they depend on alternative financial systems such as money orders and check-cashing services, which levy higher fees.
For the people affected, securing a credit card or loan often verges on the impossible since, as far as traditional finance companies are concerned, technically, these individuals do not exist. Even those who do have a credit score often find it is a low probability of success.
Despite consumer advocates’ efforts, regulatory authorities and private initiatives have been unsuccessful in providing universal access to financial services. The result is banking, in general, and financial services, in particular, in the United States have become a reflection of the different class lines.
For decades, the lending industry has relied on using credit scores to underwrite potential borrowers, but now it’s time for a change. Following the credit crisis in 2008 and, more recently, the pandemic, credit scores are not as trusted as they used to be – with analysis by the Federal Reserve Bank of New York finding the lenient conditions Americans experienced during that time diminished credit score reliability.
The importance of personifying potential borrowers
Serving the underbanked and unbanked means prioritizing financial inclusion – giving individuals access to affordable financial services and products delivered responsibly and sustainably.
When we consider financial inclusion, it’s important to humanize applicants. In today’s economy and with advanced technologies, there are better ways of assessing risk than falling back on the traditional credit scores approach, which fails to consider an individual’s circumstances and employment history.
There are other factors at play too. For example, while some individuals may have poor credit scores, this is often due to a medical emergency or other one-time emergency-related debt. As such, the debt may not reflect the individual’s true risk.
Alternative data used to assess credit risk
One way to increase financial inclusion is by using alternative credit underwriting data to assess the consumer’s ability to repay a loan. Obtained from non-traditional sources, alternative data helps evaluate an individual’s creditworthiness.
Traditional credit data looks at a person’s credit report and repayment history of past loans or credit cards. Alternative data refers to non-credit information – such as rent and utility payments, checking and debit account management, and longevity on the job to allow enhanced credit scoring. Using these data points assists lenders in accessing and verifying a person’s ability and willingness to repay a loan.
Some alternative credit data can be collected through traditional means, for instance, by asking the individual to grant them access to account data from banks or other financial institutions where they have accounts. This can be supplemented with different data aggregators, including teaming up with fintech providers and vendors to gain additional information on the applicant.
For many without sufficient traditional credit data for credit scoring, alternative data may offer a different way to get access to a loan. The pandemic may have negatively impacted the reliability of credit scoring. Still, advances in digitalization mean lenders can offer services based on alternative data to more people via an automated loan processing system, even those lacking on their credit profile.
The future of the credit score
Advances in technology are increasingly the key to financial inclusion and the credit score of the future. Our ability to analyze data not included in a traditional credit score can help identify less obvious risk factors faster and vice versa, the flow of data points that indicate stability on the job, and the ability to repay a loan that is not reflected on the credit file.
This heightened accuracy would allow more underbanked Americans to gain access to traditional financial services. Access to low-cost, responsible loan options allows these individuals to restructure their debt and strengthen their credit scores.
Serving the underserved
Providing access to traditional financial services means people can save money, invest in businesses, and make purchases they were previously unable to. Here, financial empowerment underpinned by fintech companies becomes a driver in breaking the cycle of poverty and creating a more inclusive environment for the underserved.
Equalizing lending inequality in times of uncertainty
Americans deserve a better and more inclusive system, and like education and healthcare, access to financial services should be inclusive and fair.
Fortunately, more and more companies are committing to financial inclusion initiatives that accelerate easier access to low-cost banking and affordable loans. While no technology can replace traditional credit systems overnight, the fintech community presents an opportunity to have a lasting, positive impact. By providing access to financial services to people that were invisible in the traditional credit system, the fintech community is helping drive financial inclusion and adding fairness to financial services.
About Einat Steklov
Einat is an accomplished executive with P&L accountability at the confluence of law and finance. She is results-oriented with proven success in financing companies with responsibility for strategic market positioning and demonstrated track record in increasing sales and building brand recognition in highly competitive markets. She combines business acumen with innate leadership abilities to recruit, build and retain top-performing professionals and excels in dynamic, challenging environments while remaining pragmatic and attentive.
Einat is founder of Kashable, a financial wellness company that offers socially responsible financing to employees as an employer-sponsored voluntary benefit. It was created to transform the way working America accesses credit by providing financing solutions that empower employees to take charge of their health, wealth and financial wellness. Kashable works with employers to provide employees with access to low-cost credit to help bridge the financial gap caused by personal emergencies and other times of hardship. Kashable’s financial wellness program offers an intelligent alternative to 401(k) loans, credit cards, and pay advances.
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