A new world: Mission Lane on helping the underbanked build credit

There are currently more than 100 million Americans with low or no credit.

This 100 million-strong group includes people such as newly arrived immigrants who haven’t established enough of a financial profile to open a line of credit, college students who haven’t had a credit card yet and people who had good credit but experienced a setback like bankruptcy or health issues.

The underbanked, with poor credit and low access to credit-building services, have been particularly hard hit over the past two years.

While the pandemic has impacted all Americans, inflationary pressures resulting from snarled supply chains and the mismatch between supply and demand have especially affected the underbanked population.

For consumers who are rebuilding their credit, paying off debt or simply trying to manage their finances, inflation has become a massive roadblock to financial stability.

And soaring prices have caused many of these individuals to burn through savings more quickly than anticipated.

To combat this, Mission Lane is a US fintech that provides financial products for underbanked customers left behind by legacy institutions who are looking to improve their financial lives, mainly through building credit.

“Many members of our team spent portions of their careers at legacy financial institutions, so they have witnessed first-hand the challenges that exist in serving this segment,” says Mission Lane CEO Shane Holdaway.

Headwinds and tailwinds

Pandemic notwithstanding, Holdaway, who used to run businesses for large traditional financial institutions, doesn’t believe that most legacy financial institutions set out to perpetuate financial inclusivity issues.

“But there are some pretty strong forces — internal and macroeconomic — that lead them to ignore underserved customers,” he adds.

Firstly, legacy financial institutions’ cost structures make it prohibitive to serve customers with low balances and low borrowing capacity.

“When you are carrying the cost of physical branches and legacy technology, the unit economics are difficult to make go around,” Holdaway says.

Secondly, serving higher-risk customers requires substantial technological capability. Deep data modelling and other risk management capabilities are required to mitigate the risk and are often out of the reach of smaller institutions.

Lastly, reputation. Some banks are worried that customers and regulators will look down on institutions that seek to help the low or no credit customer.

“In the end, these forces combine to limit access to quality financial products for credit-challenged consumers,” Holdaway concludes.

But there are solutions.

Holdaway thinks regulators could be more inclusive and partner more often with fintechs to encourage them to innovate on behalf of underserved consumers.

A ‘light’ banking charter, which the UK has successfully implemented, “and has seen a lot more competition on behalf of consumers as a result”, could be one option.

And legislation that creates incentives to get more and more data into the hands of responsible market players would encourage financial inclusivity.

“We need to be very careful with customer data, but the more customer-level data available to fintechs, the better they will be able to serve the underserved.”

Moderation in all things

More customer data will be extremely handy in the future as cutting-edge technologies continue to ebb into the mainstream.

“In the coming years, I expect to see continued advances in machine learning and causal inference techniques that make processes in the banking world more accurate, reliable, explainable and fair,” Holdaway predicts.

Reliable and plentiful data is essential to ensure many of these artificial intelligence applications and processes do not simply repeat and propagate the biases and prejudices of the past — and present.

And ensuring institutions and firms can look under the hood of these ‘black box’ technologies is “vital”, Holdaway says, “as they allow us to provide more transparency to customers and regulators, on credit approval or declines, for example”.

Ultimately, these technologies will help eliminate many of the biases in processes like credit underwriting and make the overall financial landscape a more inclusive place.

Technology is essentially neutral. While a new piece of tech can bring untold benefits to society, the same tech can also be used in a way that harms others.

While automation is a positive trend overall, financial services companies need to avoid the trap of automation for automation’s sake, Holdaway says, and consider the customer experience.

For example, many Mission Lane customers want to stay in control of their finances, and often keep a closer eye on their inflows and outflows than individuals with higher credit scores.

“So, if a bill is paid automatically or if an algorithm funnels money into investments or savings for someone living paycheque to paycheque, the customer may not have the wherewithal to handle an unexpected expense,” Holdaway says.

These customers need a personalised experience and to work with companies that understand their specific situations.

The dust settles

There are bleeding-edge technologies on the horizon that, if they fulfil their promises, look set to disrupt financial services even more than AI, big data and open banking.

Holdaway says today’s climate and next-generation technologies such as Web3, crypto and blockchain reminds him of the dot-com bubble in the late 90s and early 00s.

“Tons of capital fuelling hundreds of ideas and experiments, most of which evaporated or consolidated, but in the end, the world did change forever.

“Figuring out exactly which of all the experiments will matter most in the end is the number one question in this space,” he says.

But it’s important not to become hypnotised by technological advances. Financial services must keep their eye on the human factor – what Holdaway calls the “personal connection”.

“As technology advances at breakneck speeds, individual humans can feel increasingly disconnected from each other, their communities and the institutions that should be helping them lead fuller lives and with whom they have trusted their finances.”

Fintechs who find ways to leverage technology to lower costs and stresses for consumers while also creating a sense of connection with them will be the biggest disruptors — and success stories — in the new post-Covid world.