Credit scores are one of the most important factors in a person's financial life. Good credit can get you lower insurance rates, lower credit card interest, utility services like electricity and Internet, and even make you look better on job applications. However, credit scores are far from a perfect metric. 26 million Americans are "credit invisible" - meaning they have no credit history with any existing agency, and they, therefore, have no credit score and are unable to reap the benefits of good credit. Added to that are the 15 million "thin-file" Americans, who have such little credit history that they're denied qualification for credit products.
While there are many credit-scoring models, FICO is the primary, used by over 90% of lenders. But FICO scoring uses credit history to determine a credit score, which leaves many people out, like immigrants and younger adults. Also, whether or not someone has a credit history is heavily dependent on privilege. Children of families that have had a chance to build up generational wealth are more likely to have had the support of their parents in creating credit history, where their parents may have helped them get a credit card and make the payments for it. Children in poverty, on the other hand, only get into the credit system later on, if at all; and often they inherit debt from their parents.
Not only does FICO make it difficult for those without a credit history, but it also makes it difficult to gain credit history. For example, it doesn't factor renters' rental payments into credit scores; only the payments of homeowners. There's a lot of data that FICO simply doesn't take into account: rental payments, as mentioned, and other utility bills like phone, Internet, and electricity. This only exacerbates financial inequality, creating a chicken-and-the-egg problem for many people. They're unable to pay bills, so they get bad credit, and their bad credit in turn makes them unable to pay bills.
Why Now?
This financial inequality is also split among racial lines. Because Black and Hispanic people have had less opportunity to build generational wealth, a disproportionate amount is in poverty compared to non-Hispanic white people, and problems with credit only make breaking the cycle of poverty more difficult. Also, the COVID-19 pandemic has exacerbated these problems with credit scores. The economic downturn that has accompanied the pandemic has led to an increase in defaults and late payments, which has, in turn, led to a decrease in credit scores. This has made it even harder for people to obtain credit and has put many people at risk of financial hardship.
This is especially concerning at a time when many Americans are already struggling financially. A study from the National Bureau of Economic Research found that nearly half of Americans struggled to pay at least one bill in the past year and that one in four adults had trouble paying for basic necessities like food and housing. And 23% of Americans cite basic essentials as the main contributors to credit card debt. Now, when inflation is increasing at rapid rates, the amount of Americans that are unable to make ends meet is ever-increasing.
These are prime examples of how the financial technology industry fails consumers. There is other data that could be used to make it a more equitable system, but it goes unused; companies like FICO are unwilling to spend so much effort changing their systems. Newer fintech companies are tackling this problem using Buy Now, Pay Later, or BNPL, a service that allows customers to pay for a product in instalments rather than all at once. These companies typically don't require the same hard credit check as most other credit products, making them much easier to qualify for, which is why they've seen a rise in usage recently. But while BNPL is gaining rapidly in popularity, it is still primarily used for e-commerce products, like electronics.
This is where Neon comes in. Neon is a Chicago-based startup that provides a convenient platform for aggregating all essential bills and offers BNPL for those bills. And unlike other BNPLs, it uses its own, more equitable, credit decisioning processes, instead of not doing any credit checks at all. Neon offers a fresh solution to the problems that trouble our financial systems.
Neon's Solution
The founders of Neon Financial Inc., CEO Megha Agarwal, and CTO Aveedibya Dey, have experienced the above problems firsthand. Both are immigrants, and so when they came to the US they had no credit. Ms Agarwal describes finding it incredibly difficult to find a lender for a student loan. And even once she finally was able to, seven years later, she was still paying it off. Mr Dey, too, mentions how difficult it was to pay regular, monthly bills, especially when added to the challenge of being approved for a credit card and a car loan when he didn't have a lot of credit history. They also add expertise to their empathy. Ms Agarwal received an MBA from the Chicago Booth School of Business, where she worked with startups. She went on to work with Fiserv and Avant, where she gained experience on financial products like credit cards, loans, and payment processing technologies, and overall gained insight into the US financial system. Mr Dey holds a Master's degree from Purdue University and has worked for companies like Capital One and Discover, building models for credit risk.
The founders' experience on the inside and the outside of the financial technology industry led to the many innovations that make up Neon. It offers Buy Now, Pay Later for essential bills, letting users pay in four equal instalments and taking a financial burden off their shoulders. Neon also offers a line of credit at a 0% interest rate, and to qualify for it, it's not necessary to have a credit score. That's because Neon has its own credit decision process, using far more data than FICO. The company takes into account utility bill payments and bank account data to determine credit risk at a far more accurate rate since they're using much more data. Neon also consolidates all of a person's bills—including electricity, gas, water, telecom, internet, insurance, and parking—onto one centralized hub, where it's possible to see all bills at once. This makes bill-paying much more convenient since everything is all in one place. In order to take as much stress away from users' finances as possible, they can put their bills on autopay. That way, Neon takes care of everything for them, and they need to worry far less about their expenses.
Expenses are a huge stressor in people's lives, but Neon believes they don't need to be. The founders of Neon have seen the broken system from all angles, and understand well how it can be, and needs to be, fixed.
