'Emerging' Credit Scores May Leave Banks Behind

NEW YORK (TheStreet) -- A number of companies are contributing to the cause to get unbanked or underbanked consumers access to credit and may be outflanking traditional banks efforts expand their customer base.

Roughly 50 million consumers in the U.S. are so-called underbanked. The group includes immigrants and low-income individuals to teenagers and those who are just generally credit risks to more traditional banks and thrifts.

Progreso Financiero's CEO James Gutierrez

Banks are having a hard time serving the lower end customers, particularly as new consumer protection laws have banks scrambling to find future retail profits.

And while some banks are looking to attract these customers by offering prepaid debit cards, far more banks are looking upmarket for customers, effectively leaving the underbanked market in the dark. The demographic is finding it particularly troublesome to obtain a loan, since banks in general are unlikely to offer secured loans without collateral and unsecured loans (excluding credit cards) without at least seeing a credit score. A large portion of underbanked individuals do not have credit scores.

As a result, alternative financial services providers are seeing large demand from consumers. The potential for growth has spurred many firms from technology firms to risk analytics to microlenders to develop ways to cater to this growing population.

Arjan Schutte, senior advisor to the Center for Financial Services Innovation, an organization dedicated to providing access to financial services to the unbanked and underbanked communities describes companies like Atlanta-based L2C Inc. as "part of the plumbing that makes it possible to make more credit available to more people," he says.

Schutte is also managing partner to CFSI's investment arm, Core Innovation Capital, which invests money into companies focused on reducing inefficiencies in the underbanked market.

The group is looking to invest in infrastructure and internet companies that will help reduce what Schutte says is "inefficiencies" in the unbanked financial services market.

L2C specializes in assigning credit risk to consumers with so-called thin files -- those who have little or no credit history -- by using nontraditional data.