Lack of access to financial products—like credit cards, loans and deposit accounts—is an issue plaguing millions in the U.S. Traditional financial institutions, like banks and credit unions, depend on credit reports and Social Security numbers (SSNs) when evaluating applicants. As a result, those who lack access to these requirements are left with no leg to stand on.
In recent years, financial technology (fintech) companies have begun addressing this underserved segment of the population. In many cases, their efforts have attracted a substantial amount of funding and investors. To get better insight into this growing trend, we surveyed startups that have entered the space. During the course of our research, we examined both how much funding these firms attracted as well as the overall quality of the products they offer.
- The companies we tracked drew in a total of $4.08 billion over the last decade.
- Most of that total has gone to personal loan companies. These alone raised almost $4 billion to date. However, some of these loans have annual percentage rates (APRs) in excess of 100% or even 1,000%.
- Companies that offer credit cards and credit scores to immigrants and the credit invisible have raised $92.4 million (excluding LendUp, which offers both credit cards and personal loans). While some offer reasonable interest rates and fees for their services, certain products come with abnormally high charges and provide little transparency.
- Prepaid cards and other basic transactional services for underbanked users draws very little investment relative to other areas—$36.6 million, or less than 1% of the investment dollars we tracked in the study as a whole.
Top 10 Funded Startups Serving Underbanked Consumers
Personal Loans and Installment Loans
Personal loans have become more popular as lending has moved online. Most consumers use personal loans to consolidate high-interest debt, such as that from unpaid credit card balances, or to pay for unforeseen expenses, such as medical bills. Similarly to credit cards, consumers generally need to have at least fair credit and a Social Security number to qualify for a loan. Until recently, consumers who lacked these things were generally out of luck when it came to getting a personal loan.
However, numerous companies have now cropped up to address these issues—in fact, we found more than 10 companies that offer installment or payday-type loans to underbanked or subprime consumers. These companies have also attracted the interest of venture capitalists, raising almost $4 billion in both equity and debt funding to date.
Some of the companies offer vanilla personal loans in the same vein as a bank or credit union would. Others offer loan products that are more similar to payday loans with small-dollar loan amounts, short terms and exorbitant interest rates. LendUp, for instance, advertises APRs as high as 1,300% on its loans of up to $250 for up to 31-day terms. These loans are an online version of a payday loan, and they're no more helpful to consumers than a traditional payday loan. In fact, the Consumer Financial Protection Bureau (CFPB) estimates that 20% of payday borrowers end up defaulting. What's more, the average borrower pays $185 in hidden costs, such as bank overdraft fees resulting from payday lenders debiting their bank accounts. This figure is on top of the fees that the payday lender charges for borrowing.
Borrowers should generally avoid loans with APRs in excess of 36%, which—in many states—is the legally allowed maximum rate on a personal loan. Rates above this are considered unaffordable and unmanageable for borrowers. If you can't qualify for a loan with a rate under 36%, consider these alternatives first: Obtain financial assistance from a nonprofit or religious organization. Add a co-signer or collateral to your loan application. Borrow money from family or friends.
|Total Funding||APRs Over 36%||About|
|Avant||$1.8 billion||No||Provides unsecured personal loans. Most borrowers have credit scores between 600 and 700.|
|Affirm||$720 million||No||Allows users to finance discretionary purchases, such as furniture or clothing. The company only performs a soft credit check to approve borrowers.|
|LendingPoint||$600 million||No||Makes unsecured personal loans to borrowers with fair credit.|
|LendUp||$361.5 million||Yes||Offers small-dollar loans up to $250 with high interest rates.|
|Oportun||$250.3 million||Yes||Provides personal loans up to $8,000.|
|Balance Credit||$100 million||Yes||Makes personal loans up to $5,000.|
|LoanNow||$56 million||Yes||Offers personal loans up to $2,500.|
|PayJoy||$35 million||Yes||Lets users finance the purchase of a new mobile phone.|
|Even||$12 million||N/A||A smartphone app that lets users manage their spending and receive an advance on their paychecks. Charges a subscription fee.|
|Vouch Financial||$9 million||No||Borrowers ask financially established friends or family members to "vouch" for them to get a loan. The company closed in 2016.|
|Peerform||$5.3 million||No||A marketplace lender that offers loans up to $25,000.|
|Puddle||$250,000||Yes||A peer-to-peer lender where users can borrow small-dollar amounts in exchange for contributing money to the platform.|
Credit Cards and Credit Scoring
Credit cards provide the easiest way to build a credit history. However, to get a credit card, consumers must have a Social Security number and either a credit history or money for a security deposit. These requirements cause issues for millions living in the U.S. who might not have access to such things. For example, individuals seeking credit may not have the funds needed for a security deposit, and many immigrants may not have a Social Security number.
We came across four companies that, in recent years, have raised money to expand credit card access to people experiencing these problems. To date, these companies have raised a total of $408.5 million.
The products offered by these companies are a mixed bag when it comes to quality. Some—like Petal and Deserve—are good opportunities and charge few or no fees. However, LendUp—the best funded company on our list—has a few troubling things in its user agreement. Interest rates on its cards can go up to 31.24%, which is more than double that of an average credit card. The card also doesn't provide a straightforward disclosure for the annual fee. Instead, it provides a range of $0 to $75. With standard credit card products, consumers are told what their exact fees are before they submit any personal information.
In our research, we found three companies that aim to expand the data captured for credit scoring, which raised a total of $45.4 million. The CFPB estimates that 26 million people in the U.S. are credit invisible. Traditional credit scoring models rely on past credit accounts, like loans and credit cards, to assess a user's creditworthiness. These new firms all use alternative data, such as utility payments, to create alternative scores. If successful, they have the potential to solve the problem of credit access at its root.
|LendUp||$361.5 million||19.99%–31.24%||Provides both credit cards and personal loans.|
|Deserve||$26.4 million||17.24%–24.24% Variable||Offers credit cards that target millennials and international students. Looks at a wide range of variables to determine credit. Formerly known as SelfScore.|
|Petal||$16.6 million||14.24%–25.24% Variable||Offers no-fee credit cards that don't require a credit score. Currently in beta and available through invite only.|
|CreditStacks||$4 million||16.74% variable||Offers credit cards to immigrants with prime credit but no credit history in the U.S. Helps build credit quickly, and it's usable without an SSN or credit score.|
|eCredable||N/A||Not applicable. Credit Scoring Company||Hasn't raised money. Enables consumers to upload bills paid as a way to improve their credit score.|
|Nova Credit||$3.4 million||Not applicable. Credit Scoring Company||Cross-border credit-reporting agency, focusing on immigrants who may have prime ratings but little credit history in the U.S.|
|FactorTrust||$42 million||Not applicable. Credit Scoring Company||Alternative credit bureau. Acquired by TransUnion in 2017.|
Banking and Prepaid Debit Cards
Many people find it difficult to fulfill the strict requirements for opening a traditional bank account. These underbanked consumers may have lower average balances or lack the documentation needed to take advantage of the banking system. Several of the companies we looked at focus on making critical banking services, like debit cards and electronic transfers, more affordable and accessible to the underbanked.
Based on recent investment trends, prepaid debit cards appeared to be the most popular alternative to traditional banking. While they aren't technically bank accounts, prepaid debit cards can be used exactly like a debit card linked to a checking account. Users can make cash deposits at designated places to reload their prepaid balance, somewhat like a gift card. Other companies—such as the app, Dave—seek to provide tools that help people avoid the excessive penalties associated with overdrawing a traditional account balance.
Among the companies we looked at, five organizations have received a combined $36.6 million in funding for extending banking and prepaid debit services to underbanked users. This accounts for less than 1% of the total funding we tracked in the study, which covered investments going back to 2010. While it has attracted far less investment than the personal loan space, alternative banking services represent a significant area of potential growth—provided it can persuade a diverse set of consumers to adopt a new way of managing their money.
However, users should also be on the alert for companies that charge substantial amounts in service fees. While many of the prepaid debit cards we found charge no monthly fee—a common pain point among underbanked consumers—they do charge lesser fees each time you withdraw cash from an ATM or reload your balance. In the long term, these fees could end up costing prepaid cardholders as much or more than a carefully managed account with a standard bank.
According to the various service agreements we reviewed, the best way to avoid these extra fees was to use direct banking services such as direct deposit. However, such services aren't entirely well-known to consumers who lack a traditional bank account.This results in something of a chicken-and-egg problem when it comes to eliminating the fees on these alternative financial products. And with only a few companies declaring underbanked audiences as their chief focus, it seems less likely that the industry would act to reduce its fee revenues by educating customers on practices like direct deposit.
|Total Funding||Monthly Fee||About|
|Card.com||$18.6 million||$9.95||Reloadable prepaid debit cards with custom card faces and free access to MoneyPass ATMs.|
|Dave||$16.3 million||$1||App that links to bank accounts and sends alerts when users are close to spending more than their available balance. Also provides short-term loans to cover overdrafts.|
|Wipit||$1 million||$0||Prepaid debit Mastercard owned by Sprint. Connects to Sprint app for mobile check deposits, direct deposits, transfers and cash loading.|
|Mobility Capital Finance||$571,000||$0||Prepaid debit Mastercard. Partnering with another card company called Akimbo, MoCaFi aims to provide alternatives for unbanked consumers.|
|Lemando||$130,000||$0||Prepaid debit card for noncitizens; remittances for $4.99 each. Lemando consolidates these features in an app that also helps users budget and track spending|
Using Crunchbase, we compiled a list of active companies that fell under the category of fintech services aimed at unbanked and underbanked audiences. We tallied the amount of investment, loans and all other funding that each company secured, then categorized the companies based on the area that their product or service addresses. Adding up the amount invested in each area—credit cards, lending and banking—yielded a general picture of the way investment in unbanked services was distributed.
Grouping the companies by category allowed us to make comparisons between competitors in the same space. A closer examination of the interest rates and service fees charged by these companies helped determine to what extent these investments are effectively building tools for underserved consumers who have few alternatives. In making these evaluations, we also relied on data gathered by the CFPB.