Financial services are getting more accessible and diverse today than ever. These days, it’s easier for consumers to send money, build savings, and invest. Along with better options on financial services, there are also lots of financial management tools and resources that can aid consumers with sound money decisions.
However, despite many options, millions of people still lack access to affordable financial services and tools. Financial technology (fintech), though, has the potential to change that. Let’s explore how fintech is assisting consumers with less-than-ideal credit profiles and how it’s better than traditional financial systems.
Old School vs. New School of Credit Scoring
Consumers are already accustomed to traditional scoring, which relies heavily on bank statements, credit reports, employment history, and other standard requirements. Well, while this has become the standard, those with little to no credit history are helpless with this approach in credit scoring.
With fintech’s use of alternative data, such as rent history, utility payments, and social media activity, consumers with thin credit files now have a better chance at decent financial services. These new means of credit scoring offer a more current view of a consumer’s financial behavior as they capture real-time trends. On the downside, though, it comes with issues like a lack of regulatory standards or privacy concerns.
But if providers can effectively use alternative and traditional data in their assessments, they can create a more efficient and inclusive scoring model. With the traditional data, there’s stability. Meanwhile, the alternative data bridges the gap, offering a more accurate assessment of creditworthiness. Consequently, they can extend credit access to consumers who are left out in traditional scoring models.
These days, while many financial institutions widely leverage alternative data, consumers with bad credit still have a hard time accessing affordable credit products. The good thing, though, is that consumers can browse the web and look for reliable online lenders that offer the best bad credit loans. Borrowers with bad credit scores now have the chance to avail of more accessible terms, which they can’t access through traditional lenders.
Breaking Barriers to Credit Access
For years, high-risk borrowers (those with poor or no credit history) have been systematically excluded from traditional financial approaches. Without access to credit, many high-risk borrowers have been forced to resort to high-cost payday loans or other risky lending practices, resulting in financial turmoil.
With fintech, there are more credit options available for these high-risk borrowers. Falling outside mainstream credit scoring systems, the following alternative lending models disrupt the pattern and benefit the majority of consumers.
Micro-lending and Peer-to-Peer (P2P) Lending
These routes allow high-risk borrowers to secure small loans at reasonable rates. Often bypassing traditional banks, they help borrowers to access small amounts of capital that can be used for everyday expenses. This way, consumers can improve their financial flexibility and build their creditworthiness over time.
Digital Credit-Builder Loans
Designed to help individuals with limited or poor credit histories, these loans can slowly improve consumers’ credit scores by reporting their loan repayments to credit bureaus.
Moreover, these loans help high-risk borrowers demonstrate their financial responsibility. Meanwhile, fintech platforms are supporting them as they transition from high-risk to more standard credit profiles,
Buy Now, Pay Later (BNPL) Platforms
Buy Now, Pay Later (BNPL) is another growing credit model these days. With these platforms, consumers have the option to make purchases and pay for them over time in installments. Traditional credit checks aren’t prerequisites with BNPL, so these platforms are actually accessible to individuals with poor credit histories.
BNPL services can help consumers build their credit slowly, as long as they can manage their payments well. It’s pretty practical for borrowers who may not qualify for traditional credit cards or loans but still need to make purchases, especially big-ticket items.
Expanding Credit Access for Underserved Communities
Today, more than ever, financial services are more accessible to the underserved and low-income population. The number of unbanked people decreased to 1.3 billion in 2024, from half of the adult population lacking such accounts in 2011. Good progress, however, this doesn’t change the fact that many people still struggle to access credit, among other basic financial services. This remains true especially in rural and low-income areas with a limited number of physical bank branches.
The good thing is that there are now mobile technologies and digital platforms. Consumers in remote areas can now access digital banking, invest, save, and make payments, among other services, through their mobile phones. They can open new accounts, make money transfers, apply for and get approved for loans without setting foot on a physical branch.
Partnerships between fintech companies, local agents, and mobile network operators have also improved access in areas with limited internet. These collaborations are helping small businesses and individual consumers gain control of their finances, apply for credit, and expand their financial literacy.
Enhancing Financial Education and Empowering Consumers
Financial literacy helps consumers access credit and manage their finances effectively. If consumers are aware of crucial financial concepts, then they can make informed decisions, make better choices, and create opportunities.
Fintech companies are now front-runners in promoting financial literacy. They are now offering tools and resources that help consumers learn about essential concepts like credit scores, budgeting, and personal finance.
For example, many fintech platforms now integrate user-friendly budgeting tools and spending summaries into their dashboard. As a result, consumers can now track their finances better and make better decisions with these tools and resources.
Some companies are even launching financial education initiatives targeting younger consumers. This aims to help them make responsible choices when using credit products. These initiatives, like producing educational videos and tools that allow users to opt out of credit, help improve financial wellness by promoting financial awareness and self-control.
Additionally, fintech platforms present more transparency compared to traditional financial services. This includes clearer terms and fairer pricing on products like BNPL and digital banking services. Besides making financial products more accessible, these innovations also encourage users to manage their money better.
There are also fintech companies that share data on responsible financial behavior. This includes information like late payment rates, bank account balances, debt-to-income ratios, and savings behavior, helping consumers find credit services that would suit their current needs and financial capacity.
The Future of Credit is Fintech
Fintech is committed to improving the way consumers access credit. It has bridged the gap in financial systems, making it more accessible and inclusive. Beyond better credit options, fintech is also steadfast in pushing financial literacy. There are more innovations underway, and more benefits will be derived from the shifts as long as consumers remain receptive to the upgrades.
