Fresh Ideas to Help Cash-Strapped or Underbanked Consumers

The American Express-sponsored documentary "Spent: Looking for Change" had a dramatic debut this June. The film about the plight of Americans who lack access to traditional financial services has garnered over 7 million views since it was posted to YouTube on June 4. But the documentary has also drawn criticism for blurring the line between advertising and art from such outlets as the New York Times.

American Express undoubtedly has a stake in "Spent," and the film should be viewed with the company's involvement in mind. To focus solely on the fact of its sponsorship, however, is to miss out on a more important discussion. While "Spent" largely avoids discussing specific financial services and products that could help people avoid high-cost payday lenders, check cashers and pawn shops, its release offers an opportunity to examine some emerging solutions — many of which are coming from startups and nonprofits.

A number of people featured in "Spent," including a nurse who can only find part-time work and a middle-class family bogged down by medical bills, turn to high-cost title loans and payday loans in order to make ends meet. These forms of credit only put them further in the hole. A better alternative for this demographic might be loans with income-based repayment plans, according to Arjan Schutte, an investor in firms that cater to credit-challenged consumers who appeared in "Spent."

Several crowd-funding companies, including Pave and Upstart, offer loans "based on the promise that you'll repay them with a percentage of your future income," says Schutte, the founder and managing partner of the venture capital firm Core Innovation Capital. While Pave and Upstart primarily target millennial borrowers, Schutte says the model could work for other people who can demonstrate that they are "just in a rough spot right now but otherwise have skills" that will allow them to become financially stable in the future.  

Alternative credit scoring systems are another important area of innovation for people who have poor credit histories or are off the radar entirely, according to Schutte. Neo, a startup that assesses the creditworthiness of car loan applicants, studies borrowers' income along with their credit histories. RentBureau, which was acquired by Experian in 2010, collects rental payment data in order to create a more complete picture of borrowers' risk profiles.

These alternative methods can help borrowers who engage in responsible financial behaviors that are not typically tracked by the financial system, according to Schutte.

"I have great credit," Schutte says, "but even mine would be improved if it included utility and rental payments."

The San Francisco-based Mission Asset Fund, a nonprofit that works largely with immigrant populations, is also tapping into the healthy financial practices in which people already engage in order to help them build credit.

The organization "realized the high incidence of peer lending and saving that happens informally in immigrant communities," says Sarah Gordon, vice president of Innovation Labs at the Center for Financial Services Innovation. "But no one gets credit for paying back their friends or families."

Mission Asset Fund formalizes lending and savings systems such as tandas and susus, which are popular in many Latin American, Caribbean, Asian and African communities.

Participants take an online financial training course and then join a lending circle into which all members make a monthly payment. A rotating member of the circle gets the pot of money of month. Mission Asset Fund reports members' on-time payments to credit bureaus, "turning what was off-the-grid, very responsible behavior onto the grid," Gordon says.

While many of the most groundbreaking efforts to help underserved communities are still operating at a relatively small scale, there are steps available to mainstream financial institutions that would impact a broad swath of struggling Americans, according to Lisa Servon, a professor of urban policy at The New School for Public Engagement in New York City.

"Banks could really shorten the time that they hold onto a check," says Servon, who also appeared in Amex-sponsored film. "Liquidity is one of the really big reasons people go to check cashers — they need the money right away." The U.S. banking system continues to use an outdated electronic payment system despite the fact that speedier technology exists, Servon says.

Banks could also consider crediting deposits to customer accounts seven days a week, just as they do with purchases, according to Servon. "This is a practice that contributes to people's inability to use a bank if they're really living on the edge," she says. "If you don't have a buffer, a day [of wait time] can make a big difference."

But for now, it seems that the most forward-thinking solutions for people on the fringes of the traditional financial system are coming from the little guys. 

"There is a pent-up industry that is quite idealistic and quite consumer-centric, that's not just trying to make a buck at any cost," says Schutte. These newer companies "may be able to transform financial services for the emerging or hard-hit customer in a way that the old industry hasn't been able to."

Sarah Todd is the deputy editor of BankThink.