CFSI Study Finds $23.4 Billion in Overdraft Fees for Underserved Consumers in 2014

New Market Sizing Report from CFSI and Core Innovation Capital
Reveals Financially Underserved Market Grew More than Seven Percent in
2014 to Estimated $138 Billion

CHICAGO–(BUSINESS WIRE)–Today, the Center for Financial Services Innovation (CFSI) and Core
Innovation Capital (Core) released their fifth annual Underserved
Market Size Study
. The report, which benefitted from the financial
support and strategic input of Morgan Stanley and with additional
financial support from CFSI’S Founding Partner the Ford Foundation,
reveals that underserved American consumers spent $138 billion in fees
and interest in 2014, generated from a volume of $1.6 trillion in
financial activity. Overdraft represents the single largest revenue
category of all 26 products sized at $23.4 billion.

“Underserved consumers make up a large portion of financially unhealthy
Americans, and represent a tremendous opportunity for financial
institutions and innovators,” said Jennifer Tescher, President and CEO
of CFSI. “This annual study explores the complex makeup of the
marketplace so that providers are better able to develop and launch
safe, affordable, high-quality financial products and services to
improve consumer financial health.”

Findings indicate a continually growing marketplace that expanded at a
rate of 7.6% during 2014, demonstrating significant opportunities for
financial institutions and investors to develop high-quality, affordable
solutions that improve the financial health of underserved consumers.
The market is projected to grow by 6.8% from 2014 to 2015, reaching
total revenue of $147 billion.

“Americans’ financial lives are becoming more complex and more volatile
– financial vulnerability is the new normal, and ongoing growth in
alternative products and services reflects this pressure,” said Core
Innovation Capital’s Vice President Colleen Poynton. “While advancements
in technology and new entrants are driving increased efficiency in
certain product verticals, massive opportunity remains to reduce costs
and enhance access, efficiency, and experience across financial services
by innovating at the level of infrastructure, risk, product design, and
distribution.”

The Market Size Study identified three key trends driving the growth of
26 different products and services used by underserved Americans to
borrow, spend, save and plan in 2014, including subprime auto loans,
prepaid cards, and checking accounts.

  • Short-term credit continues to grow faster than single-payment
    credit

    Consumer are spending more on short-term credit
    products – including installment loans and subprime credit cards. The
    category has grown 15% to $29 billion since 2013, while spending on
    single-payment credit — such as payday loans and overdraft — has
    declined by 0.6% to $38 billion over that same period. CFSI projects
    that short term credit products will soon overtake single payment
    credit in total revenue. Major factors driving this shift in credit
    revenue from loans due in one lump sum to loans due in installments or
    offered on a revolving basis include:

    • Anticipated regulatory changes likely to slow the revenue growth
      of single-payment products further;
    • Continued innovation from online installment and marketplace
      lenders;
    • Marketing of credit cards to a wide range of subprime consumers.
  • Subprime auto and student loans drive steep growth in long-term
    credit

    At $48 billion in total, long-term credit products
    make up the largest percentage of interest and fees paid by consumers
    within this study. Subprime auto constitutes the largest product
    segment among Long Term Credit products with more than $22 billion in
    total fees and interest. The availability of cheap credit for subprime
    auto loans and sustained high consumer demand for student loan
    products drive the bulk of lending in this category.
  • Explosion of growth for marketplace lending
    Marketplace
    lending, typically offered by online, nonbank institutions that match
    sources of capital with applicants for personal installment loans, is
    a recent entrant into the consumer finance market, but is growing
    faster than any other segment with 310% expansion of revenue during
    2014. It remains relatively small in terms of total revenue at $0.6
    billion, but CFSI anticipates that it may play an increasing role in
    the expansion on installment and line-of-credit loan models currently
    drawing a growing number of consumers — and will maintain a high
    growth rate into next year.

“As the market for high quality products for the financially underserved
continues to grow, there are significant investment opportunities to
support innovative solutions that can help low-income Americans improve
their financial security and address the nation’s growing economic
inequality,” said Audrey Choi, Head of Global Sustainable Finance at
Morgan Stanley. “At Morgan Stanley, we are committed to harnessing the
capital markets to bring these kinds of solutions to scale.”

This annual report sizes the market opportunity to improve the financial
health of underserved consumers. At a minimum, this market includes the
68 million adults that lack bank accounts or use alternative financial
services, according to the FDIC. In addition, CFSI and Core measure
marketplace revenue generated by consumers who are underserved due to
subprime credit scores, unscorable credit information, or
low-to-moderate or volatile incomes.

The report is not intended as a commentary on the appropriateness,
safety, or quality of any specific product, nor should it be construed
as an endorsement of, or investment advice on, any product or service
included.

About CFSI:

The Center for Financial Services Innovation (CFSI) is the nation’s
authority on consumer financial health. CFSI leads a network of
financial services innovators committed to building a more robust
financial services marketplace with higher quality products and
services, specifically for those who are struggling. Through its Compass
Principles and a lineup of proprietary research, insights and events,
CFSI informs, advises, and connects members of its network to seed the
innovation that will transform the financial services landscape. For
more on CFSI, go to http://www.cfsinnovation.com
and follow on Twitter at @CFSInnovation.

About Core Innovation Capital

Core Innovation Capital is a leading investor in financial services that
empower everyday Americans. With offices in San Francisco and Los
Angeles, Core leverages its deep financial services, technology and
regulatory expertise to help entrepreneurs and other investors build
disruptive, high growth businesses. Core portfolio companies save over
ten million customers more than four billion dollars every year.
Investments include Oportun, Ripple Labs, CoverHound, NerdWallet, and
TIO Networks. Follow Core at @CoreEMC and online at www.corevc.com.

About Morgan Stanley

Morgan Stanley is a leading global financial services firm providing a
wide range of investment banking, securities, investment management and
wealth management services. With offices in more than 43 countries, the
Firm’s employees serve clients worldwide including corporations,
governments, institutions and individuals. Since 2006, Morgan Stanley
has committed more than $9.6 billion to strengthen underserved
communities. For further information about Morgan Stanley, please visit www.morganstanley.com.

Contacts

Media Contact:
CFSI
Shannon Austin, 703.338.8813
saustin@cfsinnovation.com