What is consumer financial health, and how can fintech startups help make it a reality? This was the central question at a recent public lecture held by the Richard Paul Richman Center for Business, Law, and Public Policy at Columbia University. Moderated by Todd H. Baker, Richman Center Senior Fellow, the event drew representatives from four startups tackling issues like credit, cash flow, and money management: Jeff Kaiser, COO of Propel; Majd Maksad, founder and CEO of Status Money; Ariana Poursartip, vice-president of product at Petal; and Shuo Zheng, head of product at Brigit.
In the consumer health space, there is no shortage of challenges to address. According to the Center for Financial Services Innovation (CFSI), a nonprofit devoted to improving financial health in the United States, only 28 percent of Americans can be classified as financially healthy. In a CFSI survey published in 2018, 47 percent of Americans reported spending more than their income, 36 percent reported being unable to pay their bills on time, and 45 percent said that they did not have savings to cover three months of living expenses. (To see the CFSI’s full report, which includes data on eight financial health indicators, click here.)
Meanwhile, the rising cost of living and workplace instability increasingly challenge Americans’ ability to strive for financial health. “With so many people living close to the edge, things like a large medical copay or not getting an expected bonus can make a significant difference,” explained Baker. Moreover, many of the common avenues in such situations—from credit to payday loans—may be inaccessible or lead to a greater financial burden.
Some fintech companies are stepping up to offer solutions.
Propel gives food stamp recipients control and transparency
Propel’s mission, in the company’s own words, is to “build software for low-income Americans who are often overlooked by traditional tech innovation.” The company’s current focus is on its FreshEBT app, which adds transparency and control to the food stamp system.
Approximately 40 million people in the United States receive food stamps, and they spend roughly $70 billion a year through electronic benefit transfer (EBT) cards. “For those of you in business school, that’s a decent market,” Kaiser noted, adding that it is a very underserved one.
The shortcomings of the EBT card system have long been clear to users. To check a card balance, a consumer has to call a specific number or find a workaround—for example, making a minor purchase to generate a receipt, which will reflect the current card balance. Propel noticed these pain points while conducting research—or, as Kaiser explained, “spending a lot of time in grocery stores talking to people.” They also observed that most EBT recipients had smart phones. The company designed FreshEBT as a mobile banking app for the EBT card, giving consumers the control and transparency that the system previously lacked. Users can check balances, view spending histories, and build budgets, among other things.
Today, the app has more than 2 million active users—approximately 10 percent of US households that receive food stamps. Propel relies on advertisements and referrals on the app for revenue, though Kaiser stressed that all advertisers must offer users a way to save or earn money. In the future, the company plans to focus on serving other areas of their customers’ finances.
Petal helps the “credit invisible”
Petal, on the other hand, is focusing on problems in the credit card industry. For those with no credit history, access to a credit card can be very difficult. And yet without credit, one cannot build a history. Immigrants and those with limited credit history also face significant impediments in accessing credit, as do those who are mis-scored by credit bureaus.
With the launch of its eponymous Petal card in 2018, the company aims to help the “credit invisible” access credit and build a history. The application process for a Petal card involves a thorough review of bank accounts, as the company vets income, expenses, and spending trends in order to determine the appropriate credit line and interest rate. The traditional credit score, Poursartip stated, can often be “a bad, incomplete, and very slow proxy for the underlying financial data. And if you can get straight to that data, you can actually get a better sense of what’s going on in somebody’s financial life.” Petal’s reliance on continuous real-time data helps the company keep up with the increasingly fast pace of change in people’s financial lives.
“This is an exciting opportunity to build a credit card experience from the ground up,” Poursartip noted, “and we are taking a really digitally new approach to that.” This includes understanding behaviors and encouraging financial responsibility. The company has built money-management features into the Petal app, which accompanies the card. These include showing account balances, visual representations of spending, and transparent dollar-cost calculations of interest payments.
Data access and security are major pillars for Petal, and Poursartip stated that the company believes that customers should own their data. She added that customers have started advocating for data access themselves, based on the value they see in data-enabled financial services like the Petal card.
Status Money encourages better financial decisions
Status Money, which Maksad co-founded in 2016, uses behavioral economics and psychology to improve financial outcomes for customers.
“We started the company with the idea that if you give people information, they will be better off,” Maksad explained. Status Money began by working with data aggregators to gather anonymous information about millions of individuals around the United States. When customers create a profile with Status Money, they are able to compare their finances—from spending to interest rates to debt—to those of their peers. The result? More responsible financial decisions. In a study published in 2018 by economists from the University of Chicago and University of Maryland, analysis of the spending habits of roughly 6,000 Status Money users led to a major revelation — customers who found their spending habits to exceed those of their peers reduced their spending by an average of 23 percent.
Building on this foundation, Status Money launched a cash rewards feature in late 2018. The company finds ways for customers to make better financial decisions—for example, a better savings account or a refinancing opportunity—and gives cash rewards for taking steps to do so. Status Money also works with pre-screened advertisers, primarily banks, that reward customers for choosing their products.
Building on the panel’s discussion about consumer ownership of data, Maksad said, “Anytime there is a company that is interacting with you, and in some cases using your data to provide you with a targeted and personalized message, I think they should give thanks for that. I am going to go one step beyond ‘consumers should own the data.’ I think consumers should get paid for it.”
Brigit serves as a financial safety net
Brigit aims to solve a common problem for low-income Americans—access to small amounts of cash at critical times. For people living paycheck to paycheck, and especially for those without credit, “there are times when your expenses just overwhelm your last paycheck,” said Zheng. These instances of what Zheng called “financial shock” can in turn lead to significant additional burdens—overdraft fees charged by banks and high interest payments on payday loans. Brigit, which describes itself as a financial safety net, offers an alternative to these pathways.
Brigit underwrites customers based on the transactional history in their checking accounts, and essentially provides padding to keep them from overdrafting. The company monitors users’ accounts in real time and issues advances of up to $250 when balances approach the negative. Brigit then automatically withdraws repayment, without interest, after the deposit of the user’s next paycheck. Users can also request an advance based on their anticipated needs, and have access to Brigit’s services for a monthly subscription, rather than fees per transaction.
Adding to the panel’s discussion of the traditional credit system, Zheng said that skepticism about the utility of credit scores underpins the way Brigit evaluates customers. One of the fundamental beliefs of the company is that the credit score is “too static,” Zheng noted, adding that the mechanism used for determining mortgage loans should not be used for lending small sums for everyday expenses.
Q&A led by Todd H. Baker
In conversation with Baker, the panelists discussed questions about the venture capital community’s involvement in the financial health space, skepticism about common business models, and what the government and regulators can do to help startups succeed at improving consumer financial health.
The panelists also fielded questions from the audience about consumer protection, growth hacking strategies, and opportunities offered by artificial intelligence, among other topics.