Chicago, IL – December 8, 2015 – Today, the Financial Health Network and Core Innovation Capital (Core) released their fifth annual Underserved Market Size Study. The report, which benefitted from the financial support and strategic input of Morgan Stanley and with additional financial support from the Financial Health Network’s Founding Partner the Ford Foundation, reveals that underserved American consumers spent $138 billion in fees and interest in 2014, generated from a volume of $1.6 trillion in financial activity. Overdraft represents the single largest revenue category of all 26 products sized at $23.4 billion.
“Underserved consumers make up a large portion of financially unhealthy Americans, and represent a tremendous opportunity for financial institutions and innovators,” said Jennifer Tescher, President and CEO of the Financial Health Network. “This annual study explores the complex makeup of the marketplace so that providers are better able to develop and launch safe, affordable, high-quality financial products and services to improve consumer financial health.”
Findings indicate a continually growing marketplace that expanded at a rate of 7.6% during 2014, demonstrating significant opportunities for financial institutions and investors to develop high-quality, affordable solutions that improve the financial health of underserved consumers. The market is projected to grow by 6.8% from 2014 to 2015, reaching total revenue of $147 billion.
“Americans’ financial lives are becoming more complex and more volatile – financial vulnerability is the new normal, and ongoing growth in alternative products and services reflects this pressure,” said Core Innovation Capital’s Vice President Colleen Poynton. “While advancements in technology and new entrants are driving increased efficiency in certain product verticals, massive opportunity remains to reduce costs and enhance access, efficiency, and experience across financial services by innovating at the level of infrastructure, risk, product design, and distribution.”
The Market Size Study identified three key trends driving the growth of 26 different products and services used by underserved Americans to borrow, spend, save and plan in 2014, including subprime auto loans, prepaid cards, and checking accounts.
Short-term credit continues to grow faster than single-payment credit Consumer are spending more on short-term credit products – including installment loans and subprime credit cards. The category has grown 15% to $29 billion since 2013, while spending on single-payment credit — such as payday loans and overdraft — has declined by 0.6% to $38 billion over that same period. The Financial Health Network projects that short term credit products will soon overtake single payment credit in total revenue. Major factors driving this shift in credit revenue from loans due in one lump sum to loans due in installments or offered on a revolving basis include:
- Anticipated regulatory changes likely to slow the revenue growth of single-payment products further;
- Continued innovation from online installment and marketplace lenders;
- Marketing of credit cards to a wide range of subprime consumers.
Subprime auto and student loans drive steep growth in long-term credit At $48 billion in total, long-term credit products make up the largest percentage of interest and fees paid by consumers within this study. Subprime auto constitutes the largest product segment among Long Term Credit products with more than $22 billion in total fees and interest. The availability of cheap credit for subprime auto loans and sustained high consumer demand for student loan products drive the bulk of lending in this category.
Explosion of growth for marketplace lending Marketplace lending, typically offered by online, nonbank institutions that match sources of capital with applicants for personal installment loans, is a recent entrant into the consumer finance market, but is growing faster than any other segment with 310% expansion of revenue during 2014. It remains relatively small in terms of total revenue at $0.6 billion, but the Financial Health Network anticipates that it may play an increasing role in the expansion on installment and line-of-credit loan models currently drawing a growing number of consumers — and will maintain a high growth rate into next year.
”As the market for high quality products for the financially underserved continues to grow, there are significant investment opportunities to support innovative solutions that can help low-income Americans improve their financial security and address the nation’s growing economic inequality,” said Audrey Choi, Head of Global Sustainable Finance at Morgan Stanley. “At Morgan Stanley, we are committed to harnessing the capital markets to bring these kinds of solutions to scale.”
This annual report sizes the market opportunity to improve the financial health of undeserved consumers. At a minimum, this market includes the 68 million adults that lack bank accounts or use alternative financial services, according to the FDIC. In addition, the Financial Health Network and Core measure marketplace revenue generated by consumers who are underserved due to subprime credit scores, unscorable credit information, or low-to-moderate or volatile incomes.
The report is not intended as a commentary on the appropriateness, safety, or quality of any specific product, nor should it be construed as an endorsement of, or investment advice on, any product or service included.
About the Financial Health Network:
The Financial Health Network is the nation’s authority on consumer financial health. The Financial Health Network leads a network of financial services innovators committed to building a more robust financial services marketplace with higher quality products and services, specifically for those who are struggling. Through its Compass Principles and a lineup of proprietary research, insights and events, the Financial Health Network informs, advises, and connects members of its network to seed the innovation that will transform the financial services landscape. For more on the Financial Health Network, go to finhealthnetwork.org and follow on Twitter at @finhealthnet.
About Core Innovation Capital:
Core Innovation Capital is a leading investor in financial services that empower everyday Americans. With offices in San Francisco and Los Angeles, Core leverages its deep financial services, technology and regulatory expertise to help entrepreneurs and other investors build disruptive, high growth businesses. Core portfolio companies save over ten million customers more than four billion dollars every year. Investments include Oportun, Ripple Labs, CoverHound, NerdWallet, and TIO Networks. Follow Core at @CoreEMC and online at www.corevc.com.
About Morgan Stanley:
Morgan Stanley is a leading global financial services firm providing a wide range of investment banking, securities, investment management and wealth management services. With offices in more than 43 countries, the Firm’s employees serve clients worldwide including corporations, governments, institutions and individuals. Since 2006, Morgan Stanley has committed more than $9.6 billion to strengthen underserved communities. For further information about Morgan Stanley, please visit www.morganstanley.com.