The financial technology sector is huge and growing – in 2016, $12.7 billion was invested in fintech according to CB Insights. Whether they are disruptors of the traditional banking system, working with robo-advisors to help consumers invest smarter easier, or making credit-building easier, many new startups are focused on young, technically-literate millennials, who are now the largest living generation.
But many startups are overlooking one of the largest demographic trends in the US: people of color.
Forty-three percent of millennials are people of color, and they will be the majority of the U.S. population by 2044. In particular, by 2020, the spending power of the Latinx* population is expected to reach $1.7 trillion, driving much of the growth in the U.S. consumer market, and Black consumers’ buying power will reach $1.4 trillion. What’s more, the digital divide has narrowed as these groups depend heavily on their smartphones to access the internet.
These trends become even more significant as you consider the existing racial wealth gap in the U.S. and the huge market opportunity that the financial services industry is largely missing. While overall un- and under-banked rates have declined over time, those rates among Black and Latinx households remain significantly higher than among their counterparts. More importantly, only 23% of Black and 22% of Latinx populations are financially healthy compared to 50% of White individuals, showing that these consumers still have unmet needs in their day-to-day financial systems that build resilience and opportunity.
Improving the Financial Services System
Historically, Black and Latinx consumers have lacked access to high-quality lending solutions and credit-building opportunities. As a result, they have a higher likelihood of being credit invisible, unscorable, having lower scores (when they do have them), and dealing with debt issues.
These groups are far more likely to be targets of predatory lending – a recent study showed that even after controlling for numerous variables, Latinx populations were 78% more likely to be given a high-cost mortgage, and Black populations were 105% more likely. This is not just prevalent in their attempts to create opportunity by building wealth through homeownership, but also in dealing with resilience against shocks and volatility; for example, Black households are twice as likely to use payday loans, which can harm financial health as people struggle to repay their debt and their credit histories are worsened.
These population are also less likely to be able to cover an emergency expense,have retirement savings, and have lower amounts saved for retirement. What’s more, Black and Latinx students face challenges in accessing a college education and paying for it compared to their counterparts.
“Social impact fintech companies”, Benjamin Jealous, Partner at Kapor Capital and former President of the NAACP, says, “are our best hope to disrupt financial services from the bottom up on behalf of the underserved, under-banked, and unheard!”
Several startups have done just that to address these areas of opportunity, building products and services that serve consumers’ unmet financial needs with features and distributions channels that are culturally relevant. This means understanding the context within which users can successfully engage with these tools and building around that, instead of adding one-off features and expecting those to drive adoption. This includes building solutions on the right platforms, considering that the use of Android is more prevalent in Black communities compared to iPhones (42% compared to 16%).
Oportun, a company in which CFSI has a minor equity stake, is one such company that provides high-quality small-dollar loans to Latinx consumers, among others, with little or no credit history. They do so using an underwriting methodology that enables them to score individuals and report payments to credit bureaus to help customers build their credit histories. To ensure they are using culturally-relevant language for their customers, they employ Spanish-speaking staff – an important feature since one in five consumers in the U.S. speaks a foreign language at home, many of whom are not immigrants. Among these, 41% say they speak English “less than very well”. Since many consumers lack social security numbers, Oportun allows for the use of alternatives such as individual tax identification numbers (ITINs) to allow access to its product.
LendUp, a Kapor Capital portfolio company, offers payday loan alternatives that helps create better credit histories while improving the customer’s financial knowledge. Showing customers how to build better savings and how to continue improving their credit history is as important as obtaining the loan, as the consumer can then develop better credit habits moving forward. eMoneyPool has taken traditional concept of rotating credit and savings associations that communities around the world have historically practiced, and created a digital marketplace for people to save their money, particularly for short-term goals.
LendStreet, a FinLab challenge winner and Kapor Capital portfolio company, helps borrowers restructure and refinance debt so they can rebuild their credit scores. eCreditHero, another challenge winner, makes it easy for people to fix errors on their credit reports and provides guidance on repairing credit. eCreditHero leverages the power of social media to communicate through a community forum and was featured on targeted television and magazine sources.
There are numerous other opportunities to tackle difficult challenges for these populations:
- Innovative business models for loan providers that decrease origination and interest rate fees for the consumer as they build credit, perhaps through adtech or content creation
- Long-term bank or savings accounts for populations who otherwise can’t maintain a minimum balance, and thus see inflation erode their savings
- Financing options for college education with tools that support repayment and education
- Novel financial products that include people outside of the formal financial system, be they unbanked, or those who get paid through informal payment arrangements
Fintech prides itself on its ability to come up with tech-based solutions to real-world problems, and the sector is ripe for disruption when it comes to addressing the needs of Black and Latinx communities. It’s time to get serious about making lending, borrowing, and saving equitable for people of all backgrounds.
If you are a startup or nonprofit solving for consumer financial health, apply to the Financial Solutions Lab here! Applications for the Lab’s third challenge opened February 7. The first deadline is March 16, and the program will kick off in June.
*Note: To be as inclusive as possible, the authors use the term “Latinx” to refer to Hispanic and Latino/a terms used by the sources we cite (to learn more about the history of the term see here). We have used the term “Black” versus “African American” for similar reasons. We acknowledge these terms can be imperfect, and understanding the evolution of these terms and community identities is important.