THE LEGISLATOR – WINTER 2022
Fintech Improves Credit Access And Financial Inclusion
By Andrew Duke – Online Lenders Alliance
A wealth of government data says that minority communities disproportionately experience greater challenges in banking and financial services. The Federal Reserve, for example, found that Black adults are more than four times more likely to be unbanked (have no bank account whatsoever) than White adults and are nearly three times more likely to be underbanked (have bank accounts but rely on alternative financial services, like short-term loans).
Federal Reserve data shows that Black adults at all income levels are also significantly more likely to face difficulty paying their current month’s bills. In fact, 40 percent of Black adults had, or were close to having, difficulty paying their bills, compared with 19 percent of White adults. For short term, small-dollar needs, banks and credit unions are largely absent from this space. A recent Government Accountability Office (GAO) report noted, “…[B]anks do not want to offer small-dollar products because they are expensive to develop, and the regulations or supervisory expectations may change.”
Federal credit union data shows that the volume of small dollar loans they issued in 2021 represented less than 0.5% of the actual short-term, small dollar market demand. This lack of availability is especially true for those with lower credit scores.
And making matters worse, certain urban and rural communities experience a distinct lack of conventional credit options coupled with higher rates of credit invisibility. This further heightens the need for credit options, particularly small- dollar and short-term ones.
Since the advent of the internet, and especially over the last few years, fintech companies have increasingly provided the solutions that consumers have been seeking in banking and financial services access, including digital payments, banking, check depositing, loan applications, and other services. From 2020 to 2021, fintech usage rose dramatically across all demographics, reaching 81% among Black adults —a 22% increase.
That level of growth is not surprising given that a 2021 survey found that Black and Hispanic consumers are significantly less confident than other consumers in their ability to get credit from traditional financial institutions and often do not apply. In this same survey, all adults (but particularly Black respondents) felt that online lenders were the least discriminatory against applicants due to race or ethnicity, compared to traditional financial institutions. It’s not surprising, that fintech-powered online lending has become a popular offering, providing an array of choices for consumers of all races, credit tiers, and income levels.
Still, some have sought to limit and even eliminate popular product offerings from the marketplace, despite a number of studies finding that capping permissible annual percentage rates (APR) leads to undesired outcomes stemming from diminished access to credit.
We see a stark example of this in Illinois, where the legislature passed, and the governor signed into law, a bill capping the maximum allowable annual interest rate at 36 percent. After the rate cap went into effect in March 2021, a survey of borrowers who previously met their credit needs through short-term, small-dollar loans found that these consumers’ financial situation actually declined in many instances after the rate cap took effect. Consumers reported that, with the financial products they relied on no longer available in their state, they struggled to pay their bills, were unable to access credit, or were forced into worse alternatives like late bill payments, skipping urgent appointments or vital expenses, or pawning valuables. When asked if they would like the option to return to their previous lender if they had a funding need, 79% of survey respondents answered in the affirmative and an additional 12% were not sure.
While there are more options than ever to help Americans manage their finances, consumers of all races, ethnicities, and income levels increasingly rely on online credit products to make ends meet. Restricting access to these options does not make loans cheaper, it only makes them less available.
Andrew Duke is Executive Director of the Online Lenders Alliance, the first and largest trade association representing the growing industry of fintech companies that harness technology to deliver safe, convenient, private, and reliable credit options for consumers. Andrew’s 27 years in public policy includes two decades on Capitol Hill as well as leading the Consumer Financial Protection Bureau’s Consumer Education and External Affairs Division.