FinTech companies attracted unprecedented interest at this year's SXSW event? The debates perfectly highlighted the social impact that technologies designed for financial services can have in the United States.

2016 was a record year for FinTech companies, with close to $30 billion in investment raised and overall growth of more than 50% on the previous year. The SXSW event on 10-19 March echoed this rising power and highlighted the growing importance of the social exclusion issues that some FinTech companies are now addressing. Sessions on technologies serving financial services, such as the blockchain, attracted crowds of digital technology buffs to SXSW, which meant that the substantial number of virtual reality (VR) demonstrations on offer tended to be somewhat neglected. “Some years ago, FinTech at SXSW was a topic in decline, of interest only to an initiated audience,” pointed out Thibaut Schlaeppi, Head of Startup Relations & Investments at BNP Paribas Cardif, the Group’s insurance arm, stressing: “This year we can safely say it has topped the agenda in terms of getting people to think about civic aspects of technology. It has led many attendees to start thinking about the dynamics of the innovations that are taking place in the financial industry.”

Central to the discussions was the potential for FinTech companies, working perhaps in partnership with banks, to better serve people who are excluded from the traditional banking system. From there it is but a short step to ‘FinTech for Good’ and ‘FinTech with Banks’, as session signs displayed at the event underlined. So far, the most successful FinTech companies have been firms working in the payments field, such as Paypal, Venmo and Square, but other avenues have been explored as well. The Crowdfunding trend for instance, which has emerged in less than ten years, has been relatively successful. The total global crowdfunding volume – which has a distinct ‘social’ dimension – was estimated at $34 billion in 2015. However, the rest of the financial services industry – which in the US alone is worth an annual $1,293 billion – has not yet really been much affected by digital technology.

FinTech and banks, a solution to the Unbanking of America

The town of Austin actually hosts a number of financial startups, some of whom are, interestingly, trying to tackle the issue of financial exclusion, particularly of minorities, but also of the Millennial generation. This should come as no surprise as FinTechs’ added value is often to be found in their attention to detail as regards the user experience, i.e. they seek to do more to meet the needs and expectations of digital natives. Meanwhile, in order to differentiate themselves, some FinTech startups are now striving to address the problems of people who are unable to make use of the traditional banking system.
The unbanking of America - Lisa Servon

Lisa Servon, author of ‘The Unbanking of America’ says that 20% of Afro-American households and 18% of Latino households in the United States do not have a bank account. The banking system’s tendency to exclude minorities on the one hand and the lack of suitable interfaces for people used to working efficiently online on the other offers FinTech companies a front-line role in an economy where financial disintermediation is growing and the numbers of the unbanked rising. “Between 2009 and 2013, the percentage of Americans having a current account dropped from 92% to 88% and the percentage of Americans with a savings account fell from 72% to 68%,” explains Lisa Servon.

So the idea of FinTech as a solution to ‘unbanking’ is by no means confined to emerging markets and developing countries and representatives of some US banks came to SXSW to make this point. James Patterson, co-founder and head of Capital One Labs, the experimental product and technology arm of US bank holding company Capital One, pulled no punches, providing his audience with some telling figures: two thirds of all US Americans would not be able to cope with an unexpected expense of $1,000 and 60% of all bankruptcies arise from having to make a payment for medical care. But who are these startups that are addressing the issues of financial exclusion and what solutions are they proposing?

Addressing the credit score – Holy Grail for US borrowers

When we arrived in Austin, we went to see Self-Lender a locally-based startup. The company offers Americans a way of improving their credit score, a much-prized indicator that is supposed to represent the level of creditworthiness of a person making a loan application. The credit score is basically derived from your credit card use and loan repayment record. The problem is that it takes a long time to establish a good credit score, which is the Holy Grail for all those wishing to take out a loan or even obtain a credit card, or in order to be able to find accommodation without having to pay three months’ rent in advance.  However, the smallest failure – such as a late payment – could could cause your credit score to plummet disastrously. Given that the entire credit system is based on this demanding prerequisite, a large percentage of the population now find themselves excluded from most financial services, first and foremost immigrants who by definition have never used a credit card in the United States and can rarely call on local guarantors, but they are not the only ones being sidelined by the banks.
 

Asked why this issue interests him so much, James Garvey, the US-born founder of Self-Lender, has a clear answer: “Having sold my first startup in Silicon Valley, I went off on a world tour with my wife. Unfortunately, I forgot about one of my student loans and when I got back to the United States I had a nasty surprise. My credit score had dropped through the floor. When I couldn’t find any satisfactory way to restore my credit score fast, that gave me the idea for Self Lender.”

The solution he came up with is that his startup acts as an intermediary for its users, enabling them to lend money to themselves! They repay the loan on a monthly basis, which steadily improves their credit score. The loan carries no risk for the startup, and costs the user around a hundred-dollar fee, but as this process enables users to once again obtain traditional financial services at much more reasonable rates, this basic investment in their own credit score assessment looks to be a pretty good one.

Garvey’s startup has developed its technology in conjunction with more traditional financial service providers. It provides an online interface, making use of the banking licence of a partnering bank. Self Lender is thus positioning itself as an ally both of people otherwise unable to obtain a viable credit score and of the banks. Garvey encourages banks to send Self Lender the loan applications they have rejected due to an unsatisfactory credit score. Once the startup’s service has enabled the would-be borrower to improve his/her credit score, Self Lender will re-direct these customers back to their own banks.

An algorithm which corrects credit history errors

Meanwhile Nicole Sanchez, founder of New York-based eCreditHero, supported by the Finlab of CFSI, is also trying to tackle the problems arising from the banks’ close focus on the credit score. The entrepreneur was at SXSW to showcase her eCreditHero solution, an app which enables users to send in their credit reports. The eCreditHero algorithm then detects any errors in the credit report – which records the user’s credit history and is thus the basis for calculating his/her credit score. “Eight out of ten credit reports contain errors!” she revealed. Her free-of-charge mobile-first solution helps users to significantly improve their credit score in under a month, having spent just five minutes on the app. In this way her company helps users to gain access to the banking services for which they ought to be eligible.

Nicole Sanchez also pointed out that African-Americans are “twice as likely to be sued (…) for the same collection [default on a payment] as a white American.‟ In addition, she provides a lot of online education on financial services and fully embraces the YouTube culture through the eCreditHero channel.

 

 

Enabling employers to reimburse the student loans of talented recruits

Another FinTech represented at SXSW was Student Loan Genius, the brainchild of Tony Aguilar. The Austin-based startup has set out to enable Millennials to repay their student loans easier and faster. “The average StudentLoanGenius user has $61,000 worth of debt. This debt is going to impact their entire life, their career choices, their ability to achieve a certain level of financial security, in the longer term to buy a house… and even prepare for their retirement,” Aguilar told the audience.

Starting out from the observation that many young people do not take up retirement plans offered by their employer companies because they want to reimburse their student loans faster, the startup has come up with a way for firms to help their employees repay student loans in the same way that they help staff to save for their retirement. This assistance can actually help firms to attract and retain their high-flyers. According to Student Loan Genius, 83% of all young working people in the United States say that getting assistance to pay off their student loans is a decisive criterion in their choice of employer.

However, Student Loan Genius does not stop at enabling employers to reimburse part of their employees’ monthly payments. Tony Aguilar’s startup also offers reimbursement plans that enable users to pay back loans in their chosen way, e.g. more quickly or in very small instalments. On average, users are able to reduce their overall debt payments by 38%. Here is another telling illustration of how a financial startup can work in partnership with banks to promote the financial inclusion of minorities. Aguilar was even invited to the White House by Barack Obama, who took a close personal interest in what Student Loan Genius was doing. The then US President only finished paying off his own student loan at the age of 43, just five years before becoming President of the country boasting the world’s largest economy.

‘Fintech for Good’ companies definitely took pride of place at SXSW 2017. The winner of the SXSW Super Accelerator Pitch Competition – which covers all categories, including healthcare and VR – was CNote, voted 2017 Best Startup Pitch Company. CNote offers an interest-bearing savings account where all the funds you deposit are invested in ventures which have social impact. ‘Fintech for Good’ is not a new idea, but now that the ‘unbanking’ phenomenon is speeding up – with the number of ‘unbanked ‘people in the United States increasing by 70% between 2002 and 2012 –  and banks are showing greater willingness to cooperate with FinTech companies, new innovative solutions designed to ensure financial inclusion for more American citizens are now emerging.

Meanwhile, these financial startups have the potential to serve, in ingenious and agile ways, as intermediaries to the banks, which are themselves straitjacketed by such financial system constraints as the infamous credit score. US banks seem to have got the message and are now getting involved in financing – or even taking over – FinTech startups. Banks spent close to $90 billion on startup acquisitions in 2016. Terri Prince, VP for Customer Success at CRMNEXT, a Customer Relationship Management solution provider for financial institutions, told the SXSW audience: “The only future for banks is to work in partnership with FinTech companies or to become FinTech specialists themselves.‟  One session at SXSW was actually entitled ‘The Future of banking is already here: Fintegration’. So, integrating FinTech companies into the banking system so as to promote financial inclusiveness appears to be a key solution to the current ‘Unbanking of America’.

 

By Arnaud AUGER
Senior Strategic Analyst, Head of Media Atelier North America