Alternative credit aids the underbanked

Despite the growing ease for interacting with banks, whether through online portals or mobile apps, there are still a substantial number of Americans considered underbanked. There are a wide range of circumstances leading to this predicament, creating a difficult situation for consumers and missed opportunities for businesses.

With access to alternative credit checks, businesses and retailers who extend credit and lending options to consumers can leverage this untapped market for new growth routes, while also helping these individuals gain greater financial stability. 

Who are the underbanked?

When a consumer has a checking or savings account but nonetheless avoids taking advantage of traditional credit options, they are considered underbanked. There are a variety of reasons why a person might opt to not use these options, from past financial problems or just a personal preference.

The most recent data from the Federal Deposit Insurance Corporation indicates approximately 19.9 percent of U.S. households - equivalent to roughly 24.5 million people - were underbanked as of 2015. Further, an estimated 7 percent of households, or 9 million people, are completely unbanked.

Without a clear history of bank statements, retailers and other businesses are hesitant to extend credit to these underbanked individuals. 

Instead of common banking solutions, these individuals and households rely on alternative services, such as short term or auto-title loans, check-cashing operations and even pawn shops for their credit or cash needs. However, these services include higher interest rates, ultimately charging consumers significantly more for credit than a traditional banking option.

However, just because a person might be underbanked doesn't necessarily mean he or she poses a risk for repayment of credit. In fact, these individuals represent a significant market for retailers and other businesses as they seek out new potential revenue sources.

How alternative credit checks can help

A sizeable portion of the nearly one-fifth of the U.S. population considered underbanked have jobs, pay their bills and leave behind a paper trail of their payment histories. However, despite their financial diligence, these individuals still might not have a credit history that's robust enough to qualify for traditional lending options. Retailers and businesses that extend consumer credit need a means to accurately identify qualified applicants beyond conventional credit reports. 

Alternative credit covers aspects of a person's financial history that fall outside the scope of the three main credit reporting bureaus. The information gathered and provided in an alternative credit report includes factors of a credit applicant, such as:

• Utility and telecommunications companies.
• Public files, such as property ownership, bankruptcies, liens or judgments.
• Rent.
• Employment records.

With this information in hand, retailers and other businesses can more easily and accurately identify viable candidates with steady income and payment histories. 

Auto financers, in particular, can leverage alternative credit checks to expand their client base. As noted by the Center for Financial Services Innovation, at $24.6 billion in 2015, sub-prime auto loans represented the largest product segment for this market. 

Using alternative credit checks allows retailers and businesses to more confidently provide credit to the underbanked and tap into this huge potential market.