In the wake of the pandemic last year, many Americans faced uncertainty around employment and finances. This uncertainty pushed consumers to look for credit products that provide them some flexibility. Most lenders, however, slashed credit limits during this time, limiting consumer's access to credit products. Fintech start-up Neon, which provides credit for essential bills such as rent, utilities, and insurance, didn't shy away from helping people when they needed it the most. Megha Agarwal, CEO & Co-founder, shares how Neon is building a more inclusive financial product and leveling the playing field by providing credit at 0% interest for essential bill payments.
The Credit Problem
The cost of credit has gone down significantly for e-commerce purchases, with companies like Klarna, Affirm, and Afterpay offering loans at 0% interest. However, when it comes to essential monthly bill payments, millions of Americans struggle to access credit products at fair terms due to lack of credit history or low credit scores. Even more concerning is that minorities, people of color, and low-income households are typically the worst hit.
People who have poor or no credit history face a chicken-and-egg problem. Lack of a good credit score means that people don't get approved for credit cards or loans or get those at high interest rates. Unable to pay back high-interest installments in shorter periods, these people ultimately end up with a lower credit score, and the cycle continues.
"There has been some progress in the last decade as data aggregators like Plaid have made it feasible to access users' bank account data. Fintech startups have started using such alternative data sources to assess creditworthiness to approve credit cards and loans. But 40% of attempts to access data using aggregators such as Plaid fail today. While things are headed in the right direction, there is a lot of room for innovation to expand access to people who are left out by the financial systems today", Megha points out.
Dealing with the Problem Firsthand
Megha grew up in India and moved to the US in 2014. She had no credit score when she first arrived in the US. As a result, she faced problems that are all too familiar with immigrants - she couldn't qualify for credit cards or loans despite being financially responsible. Lenders refer to consumers like her as thin-file customers, indicating a lack of historical data on file for any lender or bank to approve them for credit cards or loans.
When she received her MBA admission offer from Chicago Booth, she quickly realized how limited her options were. "I had an offer and a scholarship from a top-tier MBA school in the US, but it was unbelievably hard to get a student loan or even to complete an application for a student loan because my credit history was effectively negligible", recalls Megha. Her husband, who had been in the U.S. for longer and had started building his credit history, couldn't help her either because most lenders required a U.S. citizen as a co-signer. Finally, after many stressful weeks of searching for alternatives, she was able to secure a student loan from a UK-based lender but at an above-average interest rate. She is still paying off that loan at higher rates in the absence of refinancing options within the U.S.
"Had I not received a scholarship from Booth, my dreams of pursuing an MBA would have come to a halt. I was grateful for the opportunity but also determined to fix the broken systems, and that for me started with developing strong fundamentals in entrepreneurship and a deep understanding of the financial services landscape," Megha said.
At Chicago Booth, Megha worked with early-stage startups and participated in the popular New Venture Challenge accelerator program that brings together midwest founders and investors. Over the next few years, she ventured into financial services as she worked with Fiserv and Avant. There she managed a wide range of complex financial products, from consumer loans and credit cards to B2B payment processing technologies. As a result, she gained an insider's perspective on the workings of the U.S. financial system.
Taking Neon from Idea to Reality
In early 2020, Megha took the first step to turn her bold vision into a reality.
She interviewed dozens of people - friends, coworkers, uber drivers, baristas, and people making payments at walk-in locations across Walmart and 7-Eleven - to uncover problems that make monthly bill payments a stressful experience for millions of Americans. Two things stood out from those conversations - the frustration of using outdated and dingy utility portals for bill payments and the shortage of funds to cover these bill payments on time.
"While every consumer in the US pays essential bills for a lifetime, there is no simple way to pay for these bills. If you want to make an online purchase today, you just go to Amazon and buy whatever you need. When it comes to making rent, utilities, or other monthly bill payments, you are stuck with multiple online portals that were built decades ago, each one with its problems. People are stressed and wasting too much time making sure they do not miss out on their bills. That's crazy because everyone pays these bills for a lifetime, and it should have been a no-brainer to design a better way to track, manage, borrow for, and pay these bills from a central hub. The modern consumer needs an Amazon-like smooth experience for bill payments, and we're building it from the ground-up", says Megha.
Neon is the first Buy Now Pay Later (BNPL) for essential recurring bill payments in the US.
Bill categories currently covered include Rent, Electricity, Gas, Water, Telecom, Internet, Insurance, and Parking. Neon's BNPL model allows customers to get a virtual, interest-free monthly credit line for their essential expenses and pay back evenly over time. Once a customer is onboard, Neon does everything for the customer, from extracting bill details, such as payment amount and due date, to paying the bills when they are due. Customers just need to pay Neon back in four equal payments spread across six weeks from the end of the month. It is a simple, convenient, and predictable way for customers to make payments.
Megha launched Neon amidst the pandemic last year, bootstrapping it from an idea and building the entire lending product from scratch, including its core technology that has evolved today into a fully featured product. She successfully ran a beta to demonstrate Neon's value proposition to customers and prove the business model to investors. As a result, Neon received backing from 500 Startups, a global venture capital firm based in San Francisco (California) that has backed more than 2,500 companies across 77 countries since its inception in 2010. Since launching, Neon has seen explosive demand and received several million dollars in credit applications already.
According to Megha, "Neon is rooted in the simple belief that people at the center of our economy should not have to live with persistent financial stress. Since our credit decision process doesn't depend on credit scores, anyone in the US who can pay their bills online and has a bank account can apply for Neon's credit line. Neon is the first-in-the-industry to utilize an entirely different dataset to underwrite customers. We can essentially reach a much larger number of people and provide them with much fairer financial products than they would get anywhere else."