How To Bring ‘Invisibles’ Into The Credit Fold

How much of the U.S. population is financially vulnerable? That is, how many are walking the razor’s edge of solvency, and how many are on their second chance after a shock to their financial stability — such as job loss, work-related injury or a divorce that removed an income stream?

More than you’d think, said Karen Webster. It’s a full 40 percent, according to a recent survey by PYMNTS. That’s tens of millions of people with limited or no access to credit, either because they don’t want to get it or because they can’t get it — and many of them are unbanked, as well.

“That has ramifications for everybody,” Webster said.

She dug into the topic in a recent interview with Unifund founder, chairman and CEO David Rosenberg and chief strategy officer Michael Schwartz to see what it might take to give that 40 percent better access to credit and financial services — particularly the folks who, voluntarily or involuntarily, have no credit of which to speak — a category she dubbed the “invisibles.”

The Invisibles

“The invisibles” sounds like a slightly dysfunctional family of Disney superheroes. In reality, it’s more like a slightly dysfunctional group of spenders who may be living paycheck-to-paycheck, deep in a financial hole or simply too wary to participate in the credit game — like college-indebted millennials.

According to PYMNTS’ research, fewer than half (49 percent) of those surveyed said they had no issues or concerns around getting credit. Perhaps unsurprisingly, those with higher incomes and education levels had the fewest concerns. Meanwhile, 11 percent were serially delinquent and could not access credit at all. In between were the second-chancers and on-the-edgers, including a 30 percent population of invisibles who either had access to credit but did not want it, or wanted credit but could not access it.

The involuntary invisibles have learned to turn to other sources when they need fast cash — such as pawn shops, payday lenders and family or friends — since they know they will be denied traditional credit.

Those who freely choose to opt out may be working and have a solid credit score, but might also prefer to live within their current means or do not want to get mixed up with the high interest rates on credit loans, Webster said — just a couple of reasons respondents gave in the PYMNTS survey.

Others, noted Rosenberg, have moralistic reasons: a sense of culture or discipline that keeps them from borrowing, for example, because not doing so is seen as diligence and proper behavior. In short, their abstinence is born of pride, not because they are living comfortably within their means and wanting for nothing.

“To them, not needing to borrow the money is a form of success,” Rosenberg said. “Needing to borrow the money is a form of failure or poverty. Even with a very modest lifestyle in poverty incomes, you have balanced budgets and people who put money in an envelope every week, even if it is only $1. Borrowing is the antithesis of the envelope.”

That begs the question: Do invisibles not want credit at all, or do they simply not want credit as they see it today, with high interest rates and other unattractive features? Webster would argue its the latter.

“There are things that are broken, and we need to pay attention to what the implications are in a holistic way,” she said. “If these people were offered something more palatable, what kind of economic opportunity would that open for them? Where could they shop, what could they do? These are lost opportunities.”

A Different Type of Credit

Rosenberg and Schwartz painted a picture of what credit could — and maybe should — look like: tailored to individuals, incentivized and offering a true value proposition that consumers can get behind, no matter the category into which they fall.

Schwartz said the conversation must begin with asking who is saying “no” to credit, what they’re being offered and how it’s being presented.

Are they being presented only the most expensive options? If everybody’s talking about the great offer they got from this or that credit agency, but the option that agency offers you is the worst one on the menu, that’s an automatic pass, Schwartz said.

Triple-A customers are being offered free credit, and agencies are practically begging them to take it, with incentives that encourage them to buy the bigger, better item right there at the point of sale. If those same incentives were offered to subprime customers, they may be more inclined to say “yes.”

The market also fails to capture the notion that people expect to earn more as they progress through their careers, said Rosenberg. He suggested that people are overpaying for financing when they instead could be seen as a long-term bond. In fact, they could become their own payday loans.

The financing, Rosenberg said, would work in the same way as a mortgage — a mortgage on one’s own self, based on one’s future income as projected from current and past work, education and other factors. Why borrow against a depreciating car when you could borrow against a literal lifetime value?

Insurance companies have the data to make that happen, Rosenberg said. Maybe artificial intelligence will be the key to doing the math and extrapolating the data to make a specific offering to each potential customer.

Can It Work?

Pricing and packaging are powerful. There are, however, some additional challenges facing credit today that did not exist years, or even weeks, ago. There are regulatory and compliance hurdles, the Consumer Financial Protection Bureau (CFPB) and a general cultural mood and attitude to overcome — plus a whole lot of negative publicity.

The Equifax data breach is going to have consumers looking for new ways to borrow and credit agencies looking for new ways to lend, Schwartz said. While that may create an opening for a credit ecosystem like the one he and Rosenberg described, Schwartz doesn’t think it’ll happen anytime soon, if at all.

“It’s not worth it for markets and banks,” he said.

That’s because there will always be those who don’t pay back their loans, and the market must compensate for that by charging higher fees to everyone, even the stable and predictable borrowers. If an agency loses 100 percent of the value on one borrower, it’s going to take a lot of predictable ones paying 14 percent interest to make up for that loss.

No matter how good the customers are at the high end, the lower end is not protected well enough to accommodate for losses, Schwartz added. Because of the bad customers, good ones will always be charged more than they deserve.

As for the human mortgage allowing consumers to draw on an institutional line of credit equal to their lifetime worth, that’s not something banks are going to offer cheaply even if it did gain acceptance, Rosenberg said.

Incidents like the Equifax breach may begin to push consumers and banks toward new ways of offering credit, but in a multitrillion-dollar industry, said Schwartz, nothing ever moves fast.

“These are ingrained institutions,” he said. “Maybe the next generation will be ready to think about it.”