The Evolution of Consumer Credit

Introduction

At Fiat Ventures, we’re provided with a unique vantage point given our hands-on role as operators, advisors and investors at the center of fintech innovation.  Our market leading growth consultancy, Fiat Growth, has worked with 200+ clients over the past 5 years helping them drive $1.5bn+ in revenues.  We’ve also launched our marketplace of 150+ advisors, Fiat Advisors, who have helped dozens of companies at the earliest stages.  

Both these groups give us access to information and founder relationships prior to writing an investment.  Our ability to work and invest across stages and sectors provides us with insights on where the market is heading over the next decade.  

The evolution of consumer credit is a space we’ve been able to witness at the ground level since working at early fintech companies like SoFi, CreditKarma and Self Lender.  While many solutions to date have stayed relatively the same, we’re seeing the emergence of a new wave of innovation shaping how consumers have access to and can improve their credit.

This is one of the 10+ macro and micro trends shaping the future of financial technology and innovation; read more in our 2024 Market Trends Report.

The Evolution of Consumer Credit

One of the quickest changing sub-verticals in fintech is the continued evolution of credit for consumers across evolving demographics.  Historically, credit was a tool available to few with the introduction of the Diners Club card in 1950, then ATMs in 1967 providing access to cash and credit to more and more Americans.  

Fast forward to today, and as of 2023, approximately 82% of US adults in the US owned at least one credit card. In addition, the use of credit cards account for 31% of all transactions in the US.  Younger and younger generations are becoming more comfortable using credit cards for their daily transactions with Gen Z leading the next wave of regular use.

Source: Credit card usage and ownership statistics; ValuePenguin, Lendingtree

Despite broader adoption of credit and credit products, over 28 million Americans have no mainstream credit file at the credit bureaus and are considered credit invisible.  An additional 21 million Americans are considered unscorable, and a final 57 million Americans have scores that classify them as subprime. 

To dive even deeper, the challenges to consumer credit are impacting the most at risk populations. Lower credit scores align to lower median household incomes, and access to credit and credit scores impact different demographics in the US with black americans with an average score of 677, hispanics at 701 and white americans at 734.  This leaves large swaths of Americans without access to a broader financial system that relies on credit and credit reporting to assess financial risk. 

The good news: America is in the middle of a credit revolution. 

Companies like Credit Karma were fintech pioneers who allowed consumers to have more visibility into their credit profile and factors that impacted that score.   Currently, some of the best founders in the  fintech space are working to solve America's credit challenges.  

These companies provide both visibility into credit scores and are taking an active role in helping users to improve them.  The emergence of alternative lending structures also allows consumers with limited to no credit history to better borrow outside of traditional “pay day” and predatory lending practices. 

Emerging Fintechs Leading the Charge

Given the rapid change in consumers' relationship with spending and credit, there is a wave of founders who are focused on tackling every aspect of inefficiencies within the credit space in America.  The following are a few examples of early stage (Seed, Series A) companies that are leading the charge.

StellarFi is a company focused on helping build credit for underrepresented communities. They allow users to connect weekly bills like rent, utilities, Netflix and Spotify, and report the payments to the three credit bureaus. This can help raise credit scores and provide competitive product offerings over time by pre-qualifying their consumers for more competitive financial products.  The team also offers an embedded offering allowing other financial institutions to provide these benefits to their consumer base.

Lamine Zarrad, StellarFi’s Founder & CEO recalls that “after building a few FinTech companies, I realized that credit and bills were the crux of a lot of people's financial problems. I also knew the credit paradox, that people have to have credit to build credit, often making financial success inequitable and unattainable. That's where the idea of StellarFi came from – a financial tool that helps pay bills on time and builds credit.”

Upside is another startup that focuses on turning debt into savings through their “self-collateralized debt” product, a first in the market.  The company is leading the way by offering loans that automatically build a consumer's net worth with every payment. This isn't a simple round up either as the products can help consumers accumulate thousands of dollars in wealth. As a consumer’s wealth builds they become less risky as a borrower, allowing Upside to offer better interest rates.

Kamran Hameed, Upside Co-Founder & CEO, share’s that “FinTech has improved access to traditional financial services, increasing awareness of credit scores, helping to build credit scores and simplifying comparisons of lending products -- but these efforts have played on the edges of credit.” 

He goes on to share that “the next generation of FinTechs will need to make it easy for consumers to meaningfully lower their costs or increase their savings.  "Good" financial behavior will be automated to continually improve the financial health of consumers -- even when they're not looking.”

Possible Finance is another fintech that provides better alternatives to predatory payday lenders by offering deep subprime consumers micro-loans and cash advance services.  With difficulty accessing credit and with so many predatory products in the market, 25% of payday loan users had to borrow an average of 9 times to get out of debt traps. Possible’s products don’t just help users get out of debt but they also  build dedicated services to keep them from getting back in it.

Tony Huang, Possible Finance’s Co-Founder & CEO, shared that “consumers are applying for small dollar credit products at record rates as the cost of living continues to be on the rise. Lenders, like Possible Finance, with deep history and a proven ability to correlate cash flow and other underwriting data sources and performance outcomes are well positioned to take advantage of the demand while maintaining a healthy balance sheet.”

For mission-driven organizations, like Possible Finance, this performance is critical to meet more consumers where they are no matter their past relationship with credit.  It also provides competitive credit products to a much larger swath of Americans who have no real alternatives to predatory “payday” lending offerings.

Grain Technologies is another company that allows consumers to access credit through their existing debit cards. By tapping into debt facilities in community and regional banks, Grain is helping underserved groups not only access credit, but to build a better score without having to take on additional credit risk.  The team has also launched a product called Velex that allows other financial institutions to utilize Grain’s risk model and origination algorithm within their own underwriting systems.

SAWA Money is another early stage fintech that enables individuals in underrepresented communities by allowing them to save and build credit as a community.  The company offers a secure card with no risk to the consumer and a novell savings mechanism to help them fund their account, connecting all the dots on the path to a positive consumer credit experience.

Andrew Henry, SAWA’s Co-Founder & CFO shares that “with the advent of the bureaus continuing to pursue growth around credit score boosting products, the secure card has emerged as a hot category. SAWA views this credit building tool as an excellent means for consumers to help themselves navigate their way into the world of credit responsibly.”

Conclusion

Each of these services provide an advantage to large swaths of Americans who traditionally haven’t had access to credit or the means to pull themselves out of debt. 

Complexities within credit and lending in the US aren’t new and unfortunately aren’t an easy fix.  However, these fintechs are examples of founders who understand that performing well and doing good are not mutually exclusive and as a result, they have found large TAMs and areas for disruption within the existing system. 

Like any newly digitized vertical, the opportunity to further embed financial products becomes a reality as well.  Startups and incumbents are finding ways to offer better products and services at the right time to their consumers.

For consumers like you and I, this is a “win” because we’ll have more transparency and competitive pricing for their lending needs despite their credit history.  Fintechs are both helping improve their credit and providing better alternatives to traditional “payday” and predatory lending practices.

This is also a “win” for founders who are able to look around corners and build companies that drive new waves of innovation.  If you’re one of these founders, we’d love to get in touch.

You can share more on what you’re building by sending us a note to hello@fiat.vc.  You can also keep up to date on this and other emerging sub-verticals across fintech by subscribing to our newsletter via this link.