Together Is Better: Banks And FinTechs Crack The Code On Financial Inclusion

The favored narrative about banks and FinTech startups is generally not a love story. Usually, it is more of an all-out war story. Banks represent the old way of handling financial services – and in fairness, they carry a lot of responsibilities that deposit-taking institutions don’t necessarily have. Of course, banks have to be run with safety and soundness to protect those deposits, but they also have myriad public mandates, like fair lending, anti-money laundering and customer privacy. Whereas FinTechs are undoubtedly newer and faster – risen from the digital age to put banks out of business – they aren’t always able to take deposits or keep some of those associated warranties.

The teams at FinTech startup LendUp and Oakland-based Beneficial State Bank think very differently about that relationship. As LendUp CEO Sasha Orloff and Beneficial State Bank Co-CEO Kat Taylor told PYMNTS in a recent interview, banks and FinTechs need each other, and a very large segment of the population living on the margins of financial services in the United States need these two groups to work together as well.

“I love good banks, and I love good bankers, but we are not the likely source of innovation in financial services,” Taylor noted. “It is very hard to innovate when you have that many responsibilities and warranties to uphold. FinTechs are brilliant at data collection, analytics, reinventing and rethinking, and we need them to do that so we can provide ever better services for the constituencies we care most about: those who [are] unbanked or underbanked.”

That constituency, Orloff noted, isn’t always easy to serve – or to serve profitably – without relying on a business model that counts on its customers to fail and then charging sky-high fees for those failures. LendUp and Beneficial State Bank have a different approach: They want to invest and make money on their customers who are succeeding financially and are able to participate in the full spectrum of the financial system.

And that, he said, is hard and time-consuming work. According to Orloff, LendUp and Beneficial State came up with the idea to offer a socially responsible credit card product several years ago, but it only came to market this spring. Both firms were dedicated to not just building products to serve the underserved, but building them in a way that helps customers gain access to all the benefits of credit cards – credit building, interest-free credit when paid on time, fraud protections and convenience – while at the same time teaching them financial literacy and providing the opportunity to improve their credit scores and overall financial health.

“It takes a partnership to make it work,” Orloff said. “The mission-driven business vision that we share motivates starting the project. When you take a bank and their expertise in risk management, compliance and low-cost funds and match it with great technology – and start from the ground up to build something customer-focused – you can build something really powerful to serve consumers.”

Only through this partnership, Orloff and Taylor emphasized, can services be built that are sorely lacking in the current marketplace.

A Broken System

When it comes to how well financial services are serving the public, the numbers are less than encouraging, noted Orloff. Fifty-six percent of Americans have a sub-prime credit score, meaning mainstream banks likely can’t approve them for their products; more than half of all Americans could not find $400 in the event of an emergency; and two-thirds of millennials have not started building any kind of credit score, in a system in which having no score or a poor score can cost a person $250,000 over their lifetime.

“Banking is not working for a lot of people, and there is not a lot of trust there,” said Orloff. “That means the system [is] not … relevant to a growing part of our country. The products that exist today aren’t going to work for nearly an entire generation of new consumers.”

The problem, Taylor noted, is that while one can eke out an existence on the edges of the financial services landscape, at some point almost everyone is going to need credit to “even out a lumpy life, like buying an abode or paying for someone’s education.” And for low-resource individuals and households, the costs of banking can be punishing – it’s not surprising that those transactors choose to stay out of the banking system entirely. But dealing in all cash exposes those consumers to predatory practices and leaves them out of wealth building possibilities.

“When you enter the system and you have no track record or a poor one, you are going to get the highest price and lowest-term credit in the system,” said Taylor. “That isn’t just expensive for the individual consumer; it’s bad for society.”

Millennials, she noted, tend to enter the credit system with a bang once they start having families. Unfortunately, it is a particularly bad and economically unproductive time to be hit with waves of expensive debt when you want to buy a home, purchase a car or start a business.

“We have to get more people into the tent, and we have to make the tent a better fit … that is where FinTech comes in,” Tailor said. “We have to change this entire system.”

Creating the Right Conditions

Good credit isn’t built overnight, and neither are underwriting systems that help consumers build it. But, Orloff said, mission alignment between partners is helpful, as is a robust commitment to listening to what customers want and being dynamic enough to incorporate it in real time.

“We’re also committed to embedding education into the experience,” Orloff noted. “We teach people to be low-risk consumers and that helps them learn about how the system works. How to save better, how to improve a credit score, how to protect identity online, what your right are as a consumer … it’s designed to teach people long-term success.”

Equally important, Taylor noted, is being realistic and pragmatic about the fact that everyone needs credit but not everyone can handle debt at any given time – or at least more than a certain amount. Lending money beyond what people can bear is the hallmark of predatory lending, she emphasized, and that’s not going to help the customer.

“Everybody needs credit, but not everyone can handle debt in their circumstances. We have to be really careful [about] how it is offered, because debt can be as addictive as drugs and alcohol. A debt trap is not good for anyone. It is not a good deal to pay $1,400 for a $300 loan.”

At the same time, she said, “just say no” isn’t a workable solution when it comes to smaller dollar loans from financially disenfranchised consumers.

“We can’t just say payday lending is bad, even though it is a debt trap,” says Taylor. “We have to provide a competitive alternative, because people need access to credit while we regulate out the worst abuses.”

That alternative – the L Card, issued by Beneficial State Bank in partnership with LendUp – is a low annual fee card (starting at $0 and capped at $5 per month or $60 per year) that offers consumers a grace period for payments and even caps late fees (at $7). It has a higher interest rate – 19.99 percent to 29.99 percent – for a credit card than the national average, but according to The PEW Charitable Trusts, is a fraction of the payday lending rate, which is around 400%. Credit limits range from $300 to $1,000 based on credit score, and a year of timely payments and responsible behavior allow customers to double the limits.

“This is one of the higher-rated cards for our customer segment, with an average customer rating of 4.7 out of 5 stars, as opposed to the industry average of 2 stars,” Orloff said.

Being up-front about their fees and goals helps the companies work with customers over time and, more importantly, enables both firms to pursue their mission of moving people toward greater financial health.

Banks and FinTechs can do great things together, Orloff said, and a near-perfect set of customer reviews for this joint project offers some evidence of that. In a world where more than half of all Americans don’t have reliable access to credit, LendUp and Beneficial State Bank can offer something unique: A solution that is profitable for the firms that offer it, and offers real benefit to consumers.