By Tingting Peng, Chief Capital, Strategy, and Impact Officer at Moove
There are around 2.8 billion credit cards in the world – meaning nearly 3 billion people have the means to pay for goods and services and, crucially, build a credit score, by tapping a piece of plastic or inputting some numbers into a website. It seems straightforward because, for the majority of people, it is.
Yet, there are billions of people that are frozen out from building credit, and all the benefits that come with it. Without a credit history, people often can’t borrow money, rent an apartment, buy a house or a car, or even obtain a job. When they can do so, they might have to pay more because they don’t have a history to prove they can pay it back. These people are what is termed ‘credit invisible’.
How do people become credit invisible?
Credit invisibility disproportionately affects lower-economic groups, immigrants and younger people. It’s particularly a problem in regions without a strong banking infrastructure. But even in countries like the UK and the US, there are large sections of the population who are credit invisible – 5 million in the UK and an estimated 26 million in the US. In South Africa, nearly one-fifth of adults are credit invisible whilst across Sub Saharan Africa, only 4% of entrepreneurs have access to credit. Globally, the figure is predicted to be about 1.4 billion people.
Credit invisibility also goes hand in hand with being unbanked or underbanked, where there needs to be more access to financial services. It is both a cause and effect of being unbanked, and can be extremely difficult to build a credit history from an invisible position. This creates a vicious cycle where if you don’t have a reliable history of payments such as credit cards or a mortgage, then institutions won’t be able to provide you with financial products.
It can also hurt people’s future earning potential because if someone doesn’t have access to a basic transaction account, they can’t send or receive payments safely and easily, let alone grow savings, access insurance and other credit services that can help them plan for their futures.
What can be done to prevent it?
By understanding the root causes of credit invisibility – poverty and lack of access to financial education or services – the often impossible task faced by these individuals becomes evident. It therefore must be the responsibility of governments and businesses to give these people the leg-up they need to begin ascending the credit ladder.
So, what can be done by organisations to help the unbanked and underbanked? The solution is two-fold: we must increase access to financial education through information-sharing schemes and programmes, whilst directing investment into developing new and improved financial products and services that enable those without a credit score to begin building one. Thankfully, some startups and companies around the world are now designing innovative solutions to create a more opaque financial system, bringing people into the fold and helping to transform their lives.
Pesto(https://www.getpesto.com/) is a new startup in the US which is taking on the pawnshop industry. Instead of people taking items to a pawnshop in exchange for a loan, Pesto offers customers a secured Mastercard with 0% interest if they pay their loan back in time, helping them to build a credit score in the meantime.
Why gig economy workers are extra-vulnerable
Sadly, credit invisibility is disproportionately rife within the gig economy. An astonishing 76% of gig workers have struggled to access financial products such as loans or mortgages. For mobility entrepreneurs, such as those who work on ride hailing and food delivery platforms, this affects their ability to provide their service and prevents them from taking control of their financial situation. What is clear, is that without adequate support from organisations and governing bodies, nothing will change.
One way to help tackle credit invisibility in this sector is through revenue-based vehicle financing. Through intelligent underwriting powered by innovative financial technology, instant payout loans can be offered to gig workers to purchase new vehicles, which can then be repaid over a flexible period to complement the fluid nature of gig work. With these adjustable repayment plans that adapt around their work activity and revenue, the barriers to entry for gig entrepreneurs to access financing are significantly lowered, giving them the chance to earn a sustainable income whilst working on mobility platforms, such as Uber.
Through increasing accessibility to credit, be it within the gig economy or beyond, it’s clear that businesses are in a fantastic position to help people take those critical steps towards financial independence. However, despite these fantastic efforts being made, more needs to be done to tackle the scale of the credit invisibility problem and ensure more people can access financial freedom. Financial services organisations should be committed to expanding their offerings and investing in product development so that the industry can bring value to an even broader customer base than ever before and end credit invisibility for the billions affected across the world.
