When faced with an unexpected bill or a sudden drop in income, many consumers with minimal savings and a low or nonexistent credit score have few good options to choose from. Some are forced to take on a high-cost loan. Others rely on a tenuous patchwork of support from friends and family, or try to earn extra income by taking on odd jobs or selling whatever assets they have left.
For years, many financial services providers ignored these consumers, assuming the only way to make money off them was to charge high fees and APRs or design financial products that trapped them into bigger payments. As a result, the few options available to consumers who don’t have much to fall back on — such as payday loans and subprime credit cards — are notoriously overpriced.
But as new technology and the Internet continue to make it cheaper to provide alternative financial services, a growing chorus of banks, investors, entrepreneurs and nonprofits are now making the case that building an affordable financial product that improves people’s lives is not only possible, it’s profitable.
“Underserved Americans represent a $138 billion market,” said the Center for Financial Services Innovation’s Laura Cummings in a recent webinar on the topic. “The savings, insurance and credit options available today are far from perfect.”
“There’s a huge opportunity for providers of all types to chip away at this market by offering products that help consumers build resilience and withstand life surprises and financial shocks. The big opportunity we see is to create financial products that support financial health,” added Cummings.
Buoyed by a $30 million contribution from J.P. Morgan Chase, the nonprofit is now offering to mentor and partially support new financial startups that come up with innovative financial products to help consumers improve their financial situations and deal with sudden emergencies. Last year, it awarded a combined $3 million to nine financial technology creators who presented solutions for consumers struggling with volatile incomes.
The “fintech” winners included the financial app Even, which helps people smooth out fluctuations in income by providing short-term, savings-funded advances when their incomes temporarily decline, and Puddle, which helps potential borrowers connect with and support one another with small-dollar loans.
This year, it’s offering another $3 million to “innovators providing solutions that help Americans prepare for – and weather – financial shocks.”
“The opportunity for technology to create meaningful change in consumers’ financial lives has never been greater,” said the center’s Susan Ehrlich in a news release about the initiative.
Meanwhile, other financial groups and nonprofits are also pouring money into researching and developing products sponsors claim will improve people’s financial situations rather than harm them. In 2014, American Express announced it was creating a financial solutions lab to help connect researchers with financial technology creators and come up with new, more affordable financial products for consumers who’ve been excluded from traditional financial products.
“Technology is rapidly changing the face of financial services, yet tens of millions of Americans are relying on check cashers, pawnshops, money orders and other outdated ways to manage and move their money,” said American Express’ Dan Schulman in a news release. “It’s time for change. It’s not a silver bullet, but technology should be used to close the gap, not widen it. We want to help modernize traditional banking and advance the next generation of products.”
The U.S. government has also joined the movement. The U.S. Treasury created the “Financial Empowerment Innovation Fund” in 2014 to help fund research on new products and services that can help low-income consumers improve their finances and join the financial mainstream.
Meanwhile, private donors, such as the MetLife Foundation and the Ford Foundation, are also pouring money into nonprofits such as Doorways to Dreams that promise to develop new products and solutions for financially vulnerable consumers. Major banks, including Capital One and Wells Fargo, are sponsoring more general “innovation labs” to help spur the creation of new financial products.
But will it work?
The recent outpouring of interest in creating new technologies to help consumers better manage their finances is inspiring, but it’s still too soon to tell if all this money and activity will actually translate into more affordable products.
Most initiatives are only a few years old, so it could be a while before we see more nationwide, scalable products. Until then, here’s hoping that developers and financial services providers will come up with an out-of-the-box solution to help consumers with their finances without gouging them with fees.