‘Spent’ – Finding Change in the U.S. Financial System

> Posted by Allyse McGrath, Senior Associate, FI2020, CFI

[youtube https://www.youtube.com/watch?v=YAxL4TB6pmQ?rel=0&w=600&h=338]

Once in a while, we in the Accion D.C. office gather in our state-of-the-art movie theater (a.k.a. conference room) for some collective viewing. Now that the World Cup has ended, this viewing has a lot less to do with fútbol and more to do with our day jobs. Last Friday’s feature was a recently-released documentary that highlights those who are left behind by the U.S. financial system. Spent: Looking For Change follows four households who represent the quarter of American households that are underserved and held back by the current financial system.

The film focuses on how families with precarious financial and economic lives end up using services like check cashers, title loans, and payday loans – the tools that those without bank accounts or with poor credit must rely on in the absence of affordable and accessible financial services. In one example, a former nurse and single mother had to stop working to care for an incapacitated family member. She turned to title loans to pay the bills and when she couldn’t keep up the loan repayments, the title company repossessed her car. Another family, which took out one $450 payday loan, is now stuck in a cycle of high interest rates and hidden fees because the family’s income is not high enough to pay off the debt altogether. Each narrative helps us understand why, in 2012, underserved Americans spent an estimated $89 billion on interest and fees.

While Spent shines the spotlight on Americans who are excluded from the formal financial sector, it only briefly highlights the innovators who are working to fill the gaps in this system. Since we at the Center for Financial Inclusion like to focus on solutions, we wanted to provide a few examples of innovation in the domestic sphere.

Recognizing the business incentives of addressing America’s commonly underserved segments, many businesses are developing both new financial products and new ways for people to access existing financial services. There are many innovations aiming to use alternative data to assess creditworthiness, a key element identified in the Roadmap to Financial Inclusion. The Center for Financial Services Innovation (CFSI) found that 42 percent of underserved Americans had a thin or no credit file and 33 percent were considered subprime – both a cause and effect of their exclusion from traditional financial products at commercial banks.

DemystData, one of Accion Venture Lab’s portfolio companies, is tapping into social media data in order to assess customers’ creditworthiness, utilizing the “big data” that widespread internet use has built. Link-2-Credit (L2C) is a credit scoring company which has provided companies the tools to better reach underbanked customers since 2000. L2C uses 16 sources of alternative data, including telco, rental, and real estate data, to provide a more accurate credit score for customers with prime, subprime, or no credit at all. Today, L2C has scored over 220 million customers. Over 60 percent of large banks in the United States use their services, proving the demand for such innovative ways to incorporate the financially excluded.

Progresso Financiero targets the estimated 23 million Hispanic individuals and entrepreneurs with little or no credit history. The platform provides small, credit-building loans to customers in California, Texas, and Illinois, which can act as an on-ramp to the formal financial system. A typical borrower at Progresso Financiero is able to establish a median Vantagescore credit score of 672 after three successful loans. (Vantagescores range from 300 to 850 with scores 700 and over often qualifying individuals for products with the best interest rates.) The organization estimates that its services have helped customers avoid $170 million in high interest rates and charges associated with alternative informal lending options.

CFSI found that of the 70 million American consumers with little or no credit history, nearly half could be reasonable candidates for loans. The only way to include these 35 million Americans is to continue to innovate. New products that are designed to better meet underserved customers’ needs are key to such improvements. New customers, profits, and most importantly, the financial stability of millions of families could be within reach.

From an outreach standpoint, Spent is a significant step in the right direction – a documentary devoted to the importance of financial inclusion. Pass it on!

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