FinTech is Empowering the Subprime Borrower

When it comes to consumer loans, a significant portion of the population finds itself cast adrift by traditional banks and lenders. Underserved by institutions that prefer to deal in tidy risk assessments rather than inconvenient complexities of unique spending habits, these individuals are slapped with the “subprime borrower” label due to past financial missteps, low or irregular income, or simply a lack of credit history. As a result, they are often locked out of the very systems that purport to foster economic mobility and empowerment.

The UK’s FinTech industry has recognised this great disparity, and new tools are emerging as a direct challenge to the inertia of conventional underwriting models in consumer lending. What was once a closed circuit of exclusion is beginning to open up through innovation, breaking apart the traditional restrictions on subprime borrowers.

The growing subprime segment

In the UK, subprime borrowers are individuals whose Equifax credit score is typically below 531, corresponding to “Fair” or “Poor” (note that the other two CRAs in the UK, Experian and TransUnion, use different ranges). Not only is this group substantial, but it is a growing segment of the population – rising from 12 million in 2018 to 16.3 million at the end of 2023. This trend is expected to continue after 2025.

As subprime borrowers often find themselves excluded from traditional financial services, banks and conventional lenders, which adhere to stringent credit criteria, view these individuals as high-risk. For example, not paying a parking fine may result in a County Court Judgment (CCJ) that stays on a borrower’s file for six years, severely damaging their credit profile and making borrowing significantly more difficult, if not impossible, with traditional lenders. As a consequence, this limits financial opportunities and perpetuates a cycle of economic exclusion.

Recent data underscores the challenges faced by subprime borrowers in the UK. The Financial Conduct Authority's (FCA) Mortgage Lending Statistics for Q1 2024 reveal a notable decline in high loan-to-income (LTI) lending. Specifically, the proportion of lending to borrowers with high LTI ratios fell by 3.0 percentage points from the previous quarter to 39.7%, marking the lowest level since Q1 2016. 

Challenges for borrowers

The primary challenge for subprime borrowers is access to credit, which often drives them towards illegal, black market lenders. According to recent research by IPSOS for Fair4All Finance, over three million people in Great Britain may have borrowed from an illegal moneylender in the last three years. Traditional lenders, focused on rigid credit metrics, often overlook the broader financial context of these individuals – including those who genuinely deserve a second chance after materially improving their financial standing. 

The consequences of this institutional oversight are both predictable and damaging. When loans are approved for subprime borrowers, they are often burdened with high interest rates, meant to offset perceived risks, which in turn restricts their economic activity. When loans are altogether not available, subprime borrowers are forced to seek out unregulated lenders with predatory lending and collection practices.

The financial products available to subprime borrowers are often limited, rigid in design, and wholly inadequate to meet diverse needs. More significantly, the label of ‘subprime’ carries a social stigma, deterring individuals from even attempting to access credit due to fear of rejection or the often punitive terms attached to such loans.

Perhaps the most glaring failure of all is the refusal of traditional credit underwriting models to consider alternative financial data as a proxy for sound financial standing. This includes factors like timely utility bill payments, rental histories, and other recurring financial commitments that could offer a far more accurate picture of a borrower’s creditworthiness. This data is easily accessible via Open Banking, which also provides a much clearer picture of monthly inflows, especially as more modern consumers engage in various income-generating side hustles.

The FinTech beacon

FinTech is transforming lending by leveraging real-time financial data and alternative assessment models. Instead of relying on traditional underwriting approaches, FinTech lenders evaluate transaction patterns, income stability, recurring expenses, and financial commitments to make more informed decisions.

Open Banking plays a crucial role, providing direct access to verified financial data, allowing lenders to assess affordability and repayment capacity with greater precision. This shift makes credit decisions more reflective of a borrower’s actual financial situation rather than historical records. In turn, it gives subprime borrowers the opportunity for a second chance if they previously misbehaved but have since improved their financial behaviour.

Digital credit marketplaces further improve access by connecting borrowers with multiple lenders, in real time, increasing the chances of securing fair and tailored loan terms. Some FinTechs also provide financial education tools and structured credit-building programs, encouraging borrowers to develop sustainable financial habits.

By adopting Open Banking data-driven underwriting models (sometimes referred to as cash flow-based lending), FinTech is expanding financial access, making borrowing more inclusive, and ensuring lending decisions are based on actual financial behaviour rather than outdated evaluation methods.

The road ahead

The intersection of FinTech and the subprime market signifies a transformative shift towards financial inclusivity. As technology continues to evolve, so will the solutions aimed at empowering underserved borrowers. 

The growing subprime segment presents both a challenge and an opportunity, one that traditional lenders have, for too long, ignored. However, FinTech companies – both lenders and marketplace/digital brokers – are now stepping in to fill the void, leveraging new tools to rethink how credit is assessed and delivered. Through these alternative means, FinTech is not only improving access to credit but also driving financial empowerment and reducing hostility towards subprime borrowers within traditional institutions.