Payment Tech Offers an Alternative to Payday Lending
Any way you slice it, 2015 was the year of fintech. From Bitcoin to marketplace lending and everything in between, fintech was a venture capital honey trap and a cocktail party buzzword.
This shows no signs of abating in 2016. Blockchain and alternative lenders seem poised to carry the segment further than ever with a dizzying array of technologies and applications. However, for the nation’s financially underserved and those in poor financial health, the promise of fintech has so far remain fulfilled. But new payments technology can deliver alternatives to payday lending to underserved consumers.
Alternative lenders were named for their very potential to offer payday customers a more viable loan alternative. But something happened on the way to the promised land. These first generation alternative lenders realized serving those with thin, damaged or no file credit history was expensive.
As a result, many of these lenders have begun to creep up the credit spectrum to serve more profitable near prime customers. At the same time, regulatory changes and marketplace pressures have severely limited the reach of traditional payday lenders, leaving many underserved customers searching for sources of credit.
Fortunately, a new generation of technology-based offerings seem committed to building scalable, sustainable businesses in service to deep subprime customers. These innovations demonstrate the potential to innovate payday out of existence, and provide hope that fintech will indeed meet its potential to create access and empowerment for all.
It’s no secret that our financial system operates on outdated technology infrastructure. In the U.S., payments can take 3-5 days to fully settle – leaving many people with uneven income spike or cash flow issues out in the cold when it’s time to pay bills or cover emergencies.
Fortunately, the U.S. is following the lead of other countries like the U.K. in pushing for same day or even instant payment systems. In the interim, private enterprise has jumped into the fray with new technology solutions like Ripple and blockchain that can deliver real time settlement. With adoption of these new payment technologies, banks and others can help bridge cash gaps for many individuals and eliminate the need for onerous short-term credit.
For those doubtful about the ability of the Federal Reserve to actually deliver an instant payment network, another technology offers a workaround to real time payments.
With trillions of dollars a year still issued via paper check (person-to-person, payroll, government benefits), millions of Americans face check deposit delays and the risk of returned checks or fees for insufficient funds. These check deposit challenges further exacerbate cash flow issues for the underbanked, contract workers and even small businesses. There are new services that have developed an underwriting system that allows instant, irreversible check funds for a small fee. Essentially, they take on the risk of check delays and insufficient funds for a few dollars – meaning consumers can instantly unlock their checks just by snapping a photo with their smartphone.
For those that do not simply need to bridge a 3-5 day window for a check deposit or money transfer, short-term credit can be necessary.
With many alternative lenders retreating to near prime customers, those customers with thin files or subprime scores are often forced to patronize payday loan stores or pawnshops. However, a number of mission-driven lenders are using innovative and proprietary underwriting platforms that leverage big data and 'ability to pay' formulas to effectively score this population and offer affordable credit
An interesting development in the short-term credit space that goes beyond the front end underwriting system is the introduction of dynamic loan pricing platforms. These algorithms can actively monitor loan repayment or other factors to credit borrowers and reduce the cost of their loan over time.
Harry Langenberg is co-founder of SuperMoney,