“How much cash you have and how you use your cash is really an important data point that can be used to assess someone’s creditworthiness.”
In an age where half of the transactions are done with debit cards — and, importantly, where a majority of people live paycheck to paycheck and may lack access to credit — Adrian Nazari, CEO of Credit Sesame, told Karen Webster that the “cash economy” demands a new approach to credit scoring.
To that end, Credit Sesame last week debuted a new credit building program through its digital banking service, Sesame Cash. The program allows consumers to use their debit cards linked to their Sesame Cash transactions to establish and build credit quickly.
The service is now in beta mode, said Nazari and has helped consumers boost their credit score by as much as 71 points in just two months.
Nazari said that the stage was set for Credit Sesame to develop the program after the firm completed the acquisition of the Canadian challenger bank STACK in 2020, thus creating Sesame Cash and expanding its digital infrastructure.
“This has been in the works for two years,” he said of the credit building banking service.
In terms of the mechanics of the new credit building product, consumers allocate a portion of their funds in their Sesame Cash accounts to be used in much the same way that a line of credit attached to a credit card would be used.
As Sesame Cash customers spend against that account, they get cash rewards as they build up credit in a virtuous cycle. Thus, the cash economy becomes a way to build the credit economy.
Such a data-driven approach, he said, would open up auto loans, mortgages and credit cards to tens of millions of thin-credit and no-file individuals — by his estimation, 44 million strong here in the U.S. alone.
As Nazari said, these “credit invisibles” run the gamut of individuals and families — immigrants or younger consumers (18+) who are spending money on a day-to-day basis, buying goods and services with cash or debit cards. They fly underneath the radar of the traditional credit scoring system and get locked into a vicious cycle.
Because the credit bureaus don’t track cash usage, cash payments do not factor into how they track consumers. In turn, those consumers cannot get the loans that would build credit — and they cannot build credit without getting the loans.
Paycheck To Paycheck
Ours is a paycheck-to-paycheck economy. PYMNTS’ data shows that more than half of all consumers take in cash and lay out cash as paydays come and go, struggling to make ends meet. In fact, about 53 percent of consumers earning between $50,000 to $100,000 annually also live paycheck to paycheck, as do nearly 40 percent of consumers earning more than $100,000.
Those stats run counter to the conventional wisdom that only lower-income demographics scramble to juggle the demands of daily financial life, from housing to utilities to car payments.
Life is, indeed, expensive.
Nazari said that among Credit Sesame’s own 16 million customers (80 percent of whom, he said, live paycheck to paycheck), a significant percentage experience at least two financial emergencies annually.
All too often, in emergencies, borrowers might tap into expensive payday loans or other offerings, which in turn hampers later efforts to gain access to more affordable credit lines or refinancing options.
Against that backdrop, said Nazari, traditional credit can ideally act as a lifeline of sorts, a resource to tap when unforeseen expenses emerge.
With expenses rising, and the paycheck to paycheck juggling act in place, he likened credit building under traditional conduits as a bit of a “chicken or egg problem.”
As many as 72 percent of those without credit or with thin files cannot tap the traditional financial products that build credit — such as mortgages or auto loans — and cannot build credit profiles. Conversely, they cannot build credit profiles without tapping into those traditional financial products.
Borrowing From Themselves
Credit Sesame’s Sesame Cash debit card establishes a credit line (tradeline) with Credit Sesame. Credit Sesame reports the amount of cash that the consumers have on hand for credit building, offers detail on aggregated purchases and on-time payment records (bill payments and rent payments among them, where Credit Sesame had acquired the rent reporting platform Zingo) to the major credit bureaus — which, in turn, builds credit and improves their credit score.
Nazari noted that consumers choose how much cash they want to contribute to credit building (as he told Webster, there is no limit; a user could commit $50 or as much as $5 million). Whatever amount is chosen is made visible within the credit report and to all three credit bureaus, established as a tradeline (a form of credit account with Credit Sesame). The user then goes about their everyday purchases, reflecting the percentage utilization of that tradeline, which is drawn down and repaid from funds available in their Sesame Cash account.
Paying the Netflix bill counts toward credit building, as does paying for the daily Starbucks triple-foam, no-whip latte. In effect, he said, the consumer is borrowing from themselves at zero interest rates.
“Now cash is available and visible, for the first time in history as part of the credit report,” said Nazari.
AI Helps Inform
Credit Sesame helps consumers decide how much of the credit-building banking service should be leveraged, when it should be repaid and how credit scores can be increased significantly over the span of months.
Nazari noted that artificial intelligence (AI) and machine learning models (which he said have been built by Credit Sesame over a decade), with different scenarios, can establish hypotheticals as to how $300 or $1,000 in a tradeline — with 40 percent utilization and paybacks — can boost credit scores (and creditworthiness). Along the way, as these borrowers gain more insight and education into building credit — and build up their borrowing power, so to speak — Credit Sesame can offer credit products that fit the profile of that potential customer.
While beta tests are focusing on only a few thousand customers, Nazari said, the banking service will eventually be expanded to all users, many of whom want to boost their creditworthiness. Those consumers find value in the premise that, as he told Webster, “the money in their bank account is working for them and building credit.”
He added: “for someone who is living paycheck to paycheck, having access to credit is a safety net — it’s not a luxury.”
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