In This Newsletter
Alternative Credit Criteria
Early Direct Deposit
IFC–Milken Fellows and FinTech
Call for Papers on Digital Assets
Alternative Credit Criteria
The cost of living and interest rates have risen worldwide in the past few months. CNBC reports that mortgage application rates have fallen to the lowest level since 1997. And the Wall Street Journal reports that despite a tight labor market, some companies like Goldman Sachs, Black and Decker, and Corteva have begun to lay off employees. This month, the FinTech team wants to highlight some recent innovations in alternative credit criteria that expand access to consumer credit and make the American dream of home ownership more attainable in turbulent times.
According to a 2019 report, The Use of Cash-Flow Data in Underwriting Credit, by FinRegLab and the Milken Institute, an estimated 45 million to 60 million consumers lack sufficient history to generate reliable credit scores that lenders can use to predict repayment risk. The report examines how some financial service providers have been leveraging their consumer cash flow data as an alternative measure of creditworthiness. Banks, credit unions, community development financial institutions, and minority depository institutions have records of transactions with deposit and card accounts, which lenders can use to approximate how applicants manage their finances on an ongoing basis. The report found that cash flow data in credit underwriting holds substantial promise for improving credit risk prediction, expanding access to credit, and spurring market innovation.
This September, Ashely Bell and Bernice King launched Ready Life, a Black-owned FinTech platform, at the Orange Blossom Classic. The company’s flagship service, Ready Pay, uses cash flow data from regular rent and utility payments through the platform to establish a consumer’s credit risk. The data can show a consumer’s ability to qualify for Ready Life’s mortgage program in as little as six months. The platform also offers direct deposit with access to a user’s paycheck up to two days early, a Ready Pay Visa debit card, and peer-to-peer transactions through its mobile app.
The FinTech firm Esusu Financial has taken a different approach to cash flow data. The company partners with renters and landlords to report regular rent payments to credit rating agencies. In September, Esusu announced a new partnership with Fannie Mae to help renters build credit by reporting on-time rent payments. Fannie Mae will incentivize its borrowers to report on-time rental payments to the three major credit-reporting bureaus through Esusu's rent reporting platform. The platform will automatically unenroll renters when missed payments occur, preventing harm to those who struggle financially. Historically, rental data are underrepresented in traditional credit scores. Credit building programs like those offered by Ready Life and Esusu can help expand access to credit for America’s 44 million renters.
Early Direct Deposit
Another innovation that is helping Americans navigate today’s economy is early direct deposit. Online banks and FinTech platforms like Varo Bank, Aspiration, Chime, and Acorns offer account holders the ability to access their paychecks two days early. This innovation allows consumers to pay monthly bills ahead of time and reduces the chance of overdrafting their accounts. Consumer Financial Protection Bureau (CFPB) Chairman Rohit Chopra has emphasized that overdraft fees fall disproportionately on consumers with the least ability to pay them. This September, the CFPB fined Regions Bank $191 million for charging surprise overdraft fees to customers. Innovations like early direct deposit help Americans living paycheck to paycheck confidently participate in the financial system.
IFC–Milken Fellows and FinTech
The FinTech team was delighted to attend the graduation of the eighth cohort of IFC–Milken Institute Capital Markets fellows. The IFC–Milken Institute Capital Markets Program is a graduate-level certificate program for international capital markets professionals. The International Finance Corporation (IFC), the Milken Institute, and the George Washington University School of Business organize the initiative. The program blends academic rigor with hands-on work experience in the US financial industry, exclusive interaction with private-sector players and market regulators, and networking opportunities with the next generation of leaders across developing and emerging economies.
Many of the distinguished IFC–Milken Capital Markets fellows have led major innovations in FinTech in their home countries. Kieran St. Omer of the Eastern Caribbean Central Bank (ECCB) launched her region’s central bank digital currency (CBDC) as part of the ECCB FinTech working group. The digital Caribbean dollar was the first CBDC to go live in 2021. Only the ECCB, the Bahamas, Jamaica, and Nigeria have CBDC in circulation, while several other countries have launched pilot programs.
In Kenya, IFC–Milken Capital Markets alums have been instrumental in establishing the Capital Markets Authority’s FinTech regulatory sandbox. The program enables live testing of innovations under a less onerous regulatory regime to attract FinTech companies with innovative technology and business models. The Kenyan Wall Street reports that, since 2019, nine firms have been admitted to the program.
Call for Papers on Digital Assets
The Milken Institute FinTech program is partnering with the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill and the Fuqua Business School at Duke University to host the Second Annual DeFi Academic Research Conference. Authors interested in presenting their work at the academic conference should submit their paper before November 30, 2022, to [email protected]. The topics of interest include decentralized exchange (DEX), decentralized stablecoins, DAOs, NFTs, Web3 applications, lending, derivatives, payments, insurance, prediction, tokenization, identity, oracles, and other protocols.