The news on consumer debt is bad and getting worse. As I detailed in my article in February, almost all Americans are dipping into credit to cover relentless cash flow gaps, with consumer debt hitting a near historic high of $17.7T in Q1 of this year. Clearly, large groups of Americans are accessing consumer credit, but for many it remains startlingly expensive and poorly-attuned to their needs: 47M of Americans have Subprime credit scores, and 9% of credit is currently in arrears. Close to 80% of all small business credit applications are rejected outright.
A rash of startups have stepped in to begin the important work of improving credit access for people who need it, and many are starting with the credit score itself. But the spectrum of solutions ranges from helpful to outright manipulative; in fact, the CFPB recently announced that it was suing SoLo Funds, a consumer lending fintech, in part because it created a “social credit score without safeguards.” This is due to an approach that tries to generate synthetic improvements in scores, rather addressing ability, stability and willingness to pay, which could result in negative outcomes for consumers.
Luckily, there is a new generation of fintech startups that is moving beyond score manipulation, and into sincere score improvement via genuine new credit lines, superior analysis, found money for credit, and better application and rejection modes, to make credit more available at a better price at the right time. By thinking outside the score, these startups are approaching credit with resilience in mind.
Creating genuine new credit lines
Companies like Livble and Arro are creating new lines of credit based on rent payments and advances in financial literacy, respectively. Their borrowers take real, appropriate risk, by borrowing to pay the rent or borrowing small dollars, which are new, and genuine, indicators of willingness and ability to pay, as opposed to score manipulation.
Improving analysis with alternative data
Other startups are opening our definition of creditworthiness to alternative data sources such as Cash Flow Analysis and Trade Finance. Companies like Foresight are transforming small business lending and improving underwriting efficiency through proprietary credit engines that leverage accurate transactional data, while Credit Pulse monitors data like bankruptcies, liens, layoffs, revenue, spend and credit changes to determine small business credit eligibility.
Misha Esipov, Co-founder & CEO of Nova Credit, which leverages unique data sources to plug the gaps in the traditional consumer credit bureaus, says “We have upgraded an antiquated credit bureau system with real-time connectivity, credit analytics and compliance built on top of cash flow, payroll, and other much needed data sources. This data paints a far more complete picture of a borrower’s financial health, especially for misunderstood segments.”
Leveraging Found Money for Credit
Some fintech startups are moving even further beyond the score by innovating around what we call Found Money for Credit: the de-risking of credit access through enabling previously hidden or unused collateral or down payment funds. Featured in more depth in our previous article, Found Money for Credit can help connect borrowers to eligible assistance or unlock existing sources of funds by sharing fees with service providers.
For instance, in the mortgage industry, we have seen companies like Foyer connect future homeowners to tax benefits through First Time Homebuyer Savings Accounts (FHSAs), increasing downpayments while providing a concierge service for anyone who wants to eventually buy a home. Stairs is similarly helping borrowers get access to government-backed down payment assistance programs, and Upside is coupling debt repayment with collateral development through investments. In the small business credit space, companies like Mark III are providing credit insurance to help credit unions and banks expand lending to small businesses.
Reimagining application and rejection processes
Even further out from the score are companies that are rethinking the most basic elements of the credit application process while offering transparency to prospective borrowers to drive better outcomes. Parlay, for example, helps commercial credit applicants create accurate and complete loan requests while guiding them through a personalized path to improve their creditworthiness. Credit Mountain helps financial institutions provide declined consumer loan applicants with an empathetic path forward, helping these future potential borrowers take corrective steps and ultimately remain in the pipeline.
All of these companies are thinking beyond the credit score to meaningfully and sustainably improve appropriate credit access for the people who need it most. They are not manipulating scores, but figuring out how to fundamentally improve them, or in some cases work beyond them, to improve Americans’ financial lives.
