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Shift from a vicious to virtuous cycle: The foundation for a fairer financial system

Pinwheel Team

January 31, 2022

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We talk a lot about building a fairer financial system, but what makes the current one so unfair?

Well for one, approximately 63 million, or 22%, of Americans are either under- or unbanked (i.e. without a checking or savings account at a bank or credit union). On top of that, more than half of Americans are either credit invisible (no credit) or credit damaged (poor credit). It’s also estimated that a substantial majority (67%) of Americans are not financially healthy — meaning if economic conditions worsen, they’d be in trouble.

Who are these financial plights affecting? The dataset sheds a lot of light on this: More often than not, Americans most likely to face significant degrees of financial struggle or lack of access are women, lower income consumers, minorities (in particular black Americans), recent immigrants, or students.

Troublesome as this may be, there’s a clear path forward to a fairer financial system. But first we must learn how to shift from a vicious to virtuous financial cycle.



The complication: A vicious cycle

It’s easier to identify the demographics affected by financial inequality than the drivers behind the imbalance. Often complex and multidimensional, these challenges subject so many Americans to a “vicious cycle” of debt and credit. The cycle looks something like this:

Jamie, like nearly 4 in 5 Americans, lives paycheck to paycheck. Jamie is expecting an important expense (e.g. rent, car payment, medical bill) and will need access to credit. Unfortunately, Jamie joins a majority of Americans whose credit is either damaged (in Jamie’s case) or nonexistent, and by extension will experience higher APR loans. Jamie struggles to make payments and ultimately defaults altogether — further negatively impacting Jamie’s credit score. Thus fuels a ferocious cycle of higher APRs and increased predation by unreputable payday loan services. In one instance, left with no other options, Jamie pays 400% APR — a rate not the least uncommon for consumers this deep in the cycle. Jamie’s financial integrity has been all but erased by a vicious, unilateral cycle.

It’s no wonder, then, that the U.S. payday loan industry reached a staggering $18B market size in 2021. Carrying debt makes consumers 76% more likely to experience stress that interferes with their life and work — and so the cycle churns on. 

Jamie represents so many well-intentioned Americans that have been exploited by an unfair system. What if there was another way?


The solution: A virtuous cycle

At Pinwheel, we’re working to introduce a different type of cycle. It’s our goal to create a “virtuous cycle” (rather than a vicious one) built on a consumer’s income data layer. Income data can tell a lot more about a consumer than typical credit scores aim to. Lenders can easily tell if a consumer is employed and making enough income to be eligible for credit, regardless of their score. As a result, lenders equipped with income data can make smarter lending decisions or offer more innovative lending products (think loan payments linked to consumer paychecks). Let’s revisit Jamie’s case, but this time in a virtuous cycle:

As it turns out, Jamie’s had a steady job for the past five years and consistently spends weekends as a gig worker. With the help of Pinwheel’s income data layer, lenders immediately gain a better understanding of Jamie’s income stability, duration of employment and, ultimately, their ability to pay off a loan. Jamie’s credit score — which kept them from gaining access to affordable financial products in the vicious cycle — is no longer a hindrance. With improved underwriting capabilities, lenders can enable automatic payments through Jamie’s paycheck (known as paycheck-linked lending) and more confidently ensure payments are made in full and on time. As a result, Jamie’s credit score goes up and their default APR goes down. Rinse and repeat — such is the virtuous cycle.

As its name suggests, we view this cycle as one of virtue because over time consumers actually become financially healthier, with increasing access to better financial products and services. We’re serious about building a fairer financial system here at Pinwheel, and enabling a virtuous cycle is one of the ways we’ll get there. 


Get in touch

Want to work with us? Learn more about the exciting use cases for unlocking payroll data (like paycheck-linked lending, direct deposit switching, and more) or get in touch with our sales team. Want to join our journey in building a fairer financial system? Check out our open positions — we’re hiring across the board.