In June of 2021, Congress revoked a set of lending regulations enacted during the Trump administration that effectively allowed certain lenders to bypass state interest rate caps. The repeal underscores broader concerns about the high interest rates many consumers pay to borrow money – particularly for small-dollar and short-term loans.
The Financial Health Network’s latest FinHealth Spend Report confirms that Financially Coping and Vulnerable households are struggling with the costs of borrowing. In 2020, Financially Coping and Vulnerable households accounted for 84% of total U.S. spending on fees and interest related to everyday financial services like credit cards, auto loans, remittances, and overdraft charges, despite comprising just 64% of the population. Black, Latinx, and low- to moderate-income (LMI) households all spent a greater share of their income on interest and fees for financial services compared with other groups. These troubling disparities are top of mind for the Financial Solutions Lab (FSL), where we work to identify and amplify impactful solutions that serve LMI consumers, and should serve as a call to action for fintechs, policymakers, and other stakeholders in the financial health field.
Opportunities for Fintechs
The high spending on interest and fees revealed in the FinHealth Spend Report highlights the importance of connecting more consumers with affordable products and services. A clear market need exists for financial health-enabling products and services, and FSL is proud to work with fintechs addressing that need.
Fintechs can leverage many opportunities to address the challenges and expenses of Financially Coping and Vulnerable consumers in their solutions design, including:
- Providing users with customized guidance and information based on their transaction history.
- Connecting users to financial health services, such as financial coaching.
- Helping consumers reach their goals more efficiently with behavioral science.
- Expanding access to credit by using consumer data in innovative ways.
For example, FSL portfolio company Petal offers a no-fee credit card with underwriting based on a consumer’s cash flow – providing credit access and management tools to individuals without established credit histories.
The Role of Other Financial Health Stakeholders
Incumbent financial institutions can address disparities through examination and transparency about their own practices, especially those that may be contributing to high spending on interest and fees among Financially Coping and Vulnerable consumers. For example, several banks have recently announced reforms to their overdraft practices – instituting proactive customer alerts, limiting overdraft charges to one per day, and eliminating the charges altogether.
To build on the potential for fintechs to improve outcomes for Financially Coping and Vulnerable consumers, financial health stakeholders can come together in a collaborative environment to share best practices, and ensure fintechs don’t operate in silos disconnected from the nonprofits and researchers who understand the financial pain points of LMI consumers. Through our Financial Solutions Lab Exchange and Collaborative programs, we facilitate this type of cross-sector collaboration and knowledge sharing.
Despite the promise for fintechs to empower LMI consumers, we must remain aware of potential pitfalls for users engaging with their products, which can vary widely. For even a well-designed fintech tool, an individual consumer’s financial circumstances can affect the quality of their experience. Rigorous measurement of financial product usage and outcomes, including data disaggregation by race, ethnicity, gender, and other characteristics, is critical to providing transparency about the financial health and equity impacts of fintech.
Policymakers must also play a role in supporting Financially Coping and Vulnerable consumers, and advocating for consumer-friendly policies that support LMI individuals should be central to their interests. Such actions include encouraging financial health innovation and curbing high-interest products and services that we know disproportionately hurt Financially Coping and Vulnerable consumers.
As we recover from the pandemic, we see opportunities for fintechs to support an equitable recovery by
- Offering customized and behaviorally informed financial guidance.
- Expanding access to affordable credit.
- Providing affordable alternatives to the high-cost financial products and services currently draining the resources of too many Financially Coping and Vulnerable consumers.
Fintechs, incumbents, nonprofits, researchers, policymakers, and other financial health stakeholders all have a role to play in helping Financially Coping and Vulnerable consumers transact safely and affordably, curbing regressive fee and interest charges, and promoting financial health for all.