Sizing up the financially underserved market

The Financial Health Network’s 2019 ‘Financially Underserved Market Study’ shows that spending on financial product fees and interest among underserved consumers continues to climb, reaching $189 billion in 2018 and a projected $196 billion in 2019.

There may be an even bigger opportunity for innovators to provide higher-quality financial products and services that would benefit the larger group of financially struggling Americans.

However, many of the current offerings in the largest and fastest growing product categories may be hurting rather than improving these consumers’ financial health. The substantial revenue opportunity and levels of unmet consumer needs highlight the opportunity for stakeholders across the financial health ecosystem from fintechs to established financial institutions and even regulators to support development of innovative, high-quality credit products and services to improve the financial health of underserved consumers.

Who are financially underserved consumers?  

They are consumers who struggle to access mainstream financial products because of low-to-moderate or volatile incomes, credit challenges and/or being unbanked or underbanked. With the most acute unmet needs, financially underserved consumers are, in fact, only a subset of the 178 million adults in the US who are not financially healthy, according to our 2019 US Financial Health Pulse study. This implies that the market figures are likely a conservative estimate of consumer demand for products that support financial health. There may be an even bigger opportunity for innovators to provide higher-quality financial products and services that would benefit the larger group of financially struggling Americans.

Credit products dominate the size and growth of the financially underserved market

Credit products represent 87 cents per dollar spent by underserved consumers on financial product fees and interest in 2018. Beyond representing the largest market shares, credit categories also fueled overall market growth. A closer look at the credit categories and trends:

• Short-term credit was the largest product category with underserved consumer spending at $66.1 billion, including for fees and interest on subprime credit cards, installment loans, and others such as rent-to-own and title loans. Installment loans experienced particularly high growth, likely supported by a broader transition away from payday loans, but not necessarily a reflection of higher quality.
• Long-term credit spending of $59 billion, including on Subprime Auto Loans, Buy Here, Pay Here Auto Loans, Subprime Auto Leases and Private Student Loans, also experienced growth across the board.
• Overdraft generated $25.4 billion in fees and interest among underserved consumers as the largest slice of the $39.9 billion Single Payment Credit category.

Opportunities in high quality credit innovation

Given the substantial revenue pools and levels of unmet consumer needs, these credit areas remain ripe for innovation. Fintechs, large financial institutions and policymakers/regulators all have a role to play in supporting higher quality credit product and service innovation that meets the needs of underserved consumers.

In alignment with the Financial Health Network’s Compass Principles, high-quality credit products share several characteristics: They are made with high confidence in the borrower’s ability to repay, are structured to support repayment, and are priced to align profitability of the provider with success of the borrower. They should be transparent, accessible and support the rights of borrowers. Ultimately, they should create opportunities for upward mobility and greater financial health.

In fact, we see several promising areas of innovation. A few notable areas include:

• Alternative measurements of borrower risk

A variety of non-bank lenders are pioneering the use of consumers’ deposit and spending patterns to assess creditworthiness. This offers the potential to develop more nuanced underwriting and credit-building techniques for the millions of consumers who remain unscorable through traditional credit risk assessment.

•  More affordable, transparent alternatives to overdraft

Some providers, mainly fintechs, are experimenting with subscription services that advance small amounts of credit specifically to enable users to avoid overdrawing their accounts. Loan offers are automatically triggered when checking account balances fall below a pre-set threshold. Savings to consumers appear substantial as the monthly subscription fees and voluntary payments received by these innovators are far less than what users would otherwise pay in overdraft fees.

• Advanced cash management/savings tools

Some of the most promising offerings for meeting smaller credit needs are actually tools that help consumers better manage their day-to-day spending and thereby help avoid cash shortfalls. These can effectively reduce demand for credit while addressing the daily challenges of managing limited or volatile incomes and spending budgets. These tools have been introduced as both stand-alone fintech tools and as account features by a growing number of banks.

The potential has never been greater for fintechs and financial institutions to introduce new ways for consumers to better manage their cash and borrowing needs through better forms of credit and improved spending management and savings tools. Regulators also have a role to play in promoting innovation in such products and services that measurably improve the financial health of consumers.

The size, growth and unmet consumer needs in this market continues to highlight the opportunity to develop innovative, high-quality products and services to improve the lives of the underserved consumer and all people living in the US who struggle with financial health.