How startups are trying to fix consumer debt

Consumer debt remains one of the biggest challenges with the American economy. The average household has $132,086 in debt, and debt interest payments represent 9 percent of the average household income. Consumer debt has skyrocketed recently, primarily because the rise in the cost of living has outpaced income growth over the past 12 years. While median household income has grown 26 percent since 2003, household expenses have outpaced income growth significantly, with medical costs growing by 51 percent and food and beverage prices increasing by 37 percent in the same time period.

When you dissect consumer debt even further, you start to realize some sad realities. Medical bills are the No. 1 source of bankruptcies in America, and 63 percent of Americans don’t have enough savings to cover a $500 emergency.

The silver lining is that with tough, sizeable problems comes the opportunity for tech companies and investors to build solutions to address them. Here are some of the startups helping Americans get out of debt.

Mortgage: SoFi

Mortgages are the highest consumer debt category at a staggering $8.25 trillion. SoFi actually started its business in the student loan space with a very simple premise: Your educational background is highly correlated with your creditworthiness over time.

Not only have they become a leader in the mortgage space, they’ve also started to leverage the wealth of consumer data that is available today to improve underwriting accuracy and lower total borrowing costs. In addition to their ability to offer better rates, they now provide additional credit options to “qualified” buyers by offering mortgages up to $3 million for as little as 10 percent down without requiring private mortgage interest, which has traditionally been a huge cost to borrowers who cannot come up with the 20 percent down payment.

Medical bills: Remedy

As mentioned, medical bills are the No. 1 source of bankruptcies in America. While healthcare costs have increased by 51 percent since 2003, patients pay $120 billion each year as a result of medical billing errors and overcharges — usually unbeknownst to them. The reality is that patients are disproportionately bearing the brunt of a broken medical billing industry.

Enter Remedy. Remedy has developed a proprietary technology platform that combines powerful error detection algorithms with a network of medical billing specialists to eliminate unnecessary medical errors and overcharges. As a result, Remedy identifies errors and overcharges on 70 percent of the bills it reviews, saving the average American family $1,000 a year on their medical bills. Remedy even goes back through your last 12 months of claims and corrects any inaccuracies, reviews prescriptions and provides automatic reimbursements for FSAs and HSAs.

Credit card debt: Lending Club

The average household has a whopping $15,310 in credit card debt. Despite its recent fall from fame in the public markets, the innovation that Lending Club brought to the consumer lending market has been truly revolutionary.

Technology has definitely brought huge efficiencies to the financial services industry.

Gone are the days of >30 percent APR loans from banks being your only option, and the opacity around the underwriting process and fees has gone away. Lending Club gives personal loans based on you as an individual person and your future earning potential (factors beyond your credit score such as education, hobbies, etc.), and lowers your interest rate by an average of 32 percent.

Student loans: Earnest

Student loan debt is now at $1.3 trillion, the second highest of any consumer debt category. The average student leaves college with $25,000 worth of student loans and ends up having to service these loans till they are well into their thirties. Earnest allows students to refinance and consolidate their loans, and, more importantly, to figure out a monthly payment plan that grows in tandem with their career trajectory. To date, Earnest has saved clients an average of $17,936. Interestingly, credit scores are not even taken into consideration in their underwriting process.

So what will the next batch of startups in this space go after?

AI to manage consumer debt and spending

Mint was great at laying the foundation here and acting as a consumer’s spending advisor, but my prediction is that the next wave of startups will take this one step further to help consumers stay on track to manage their debt obligation and scale back their lifestyle (when necessary) to avoid getting into a tough financial situation.

One such startup that has a lot of promise is Trim. It currently helps consumers analyze unnecessary subscriptions on their credit card bills, and this could easily be extended to help consumers scale back on big “spending buckets” or find cheaper capital sources for existing debt.

Cheaper credit card debt

There are more than 36 million “revolvers” in the U.S. carrying >$320 billion in balances with an average APR of ~20 percent. One of the reasons why credit card companies continue to charge these exorbitant rates is because the supply side of the equation functions like an oligopoly, where only a few banks have access to underwriting this debt.

The primary reason consumers are riddled with debt is because the interest accumulation almost negates any repayment on the loan.

While peer-to-peer platforms like Lending Club have certainly provided more liquidity, the bigger challenge is building shared data underwriting platforms. Smaller regional banks that actually hold the majority of deposits in America have not had access to these high-yield assets, as they do not have the infrastructure to underwrite these loans on their own. But if there was a service that could run the analysis and package credit card debt to these smaller banks, credit card debt would become more affordable.

Leveraging future income streams

The primary reason consumers are riddled with debt is because the interest accumulation almost negates any repayment on the loan. This might be idealistic, but if there’s some way consumers could trade future income in return for a current debt reduction, that would solve much of the problem. Many would say this solution has been suggested before, so why would it work now?

Again, the wealth of data on consumers that is available today allows lenders to accurately predict future earning potential and their associated cash flows. I love what Upstart has done for fresh graduates and aspiring entrepreneurs. Take my friend Ian Shakil for example — he raised $55,000 through Upstart, and now he’s the CEO of a super-successful company, Augmedix, that has raised more than $36 million to date. Investors in Ian now get a percentage of his income that will add up to well more than $55,000. I call that a win-win situation for everyone.

Technology has definitely brought huge efficiencies to the financial services industry, especially in relation to the distribution of personal financial products. But taking a concerted effort to tackle consumer debt is something new. We need to continue supporting entrepreneurs who seek innovation in this space. If we succeed, we would alleviate one of the largest stressors on the American economy.