Higher-Income Consumers Flock to Alternative Credit: Median Monthly Net Incomes Surge by 30% in 6 Months

A Quick Overview:

• Users of alternative credit products had a 30% higher net income over the past 6 months
• Half of Americans face liquidity constraints
• Score inflation and risk uncertainty are causing banks to pull back on consumer loans
• This is fueling consumer demand for alternative credit products

In this post, we’ll look at the key drivers of alternative credit usage:

• Higher-income individuals turn to alternative credit amid stringent bank lending criteria.
• Rising inflation and liquidity challenges affect even high-income earners.

Alternative credit products include cash advances, earned wage access, BNPL, credit builder cards, installment loans, etc. Providers of alternative credit products may evaluate creditworthiness using non-traditional data, such as cashflow information, alongside or in place of traditional credit reports.

Higher-income consumers are using alternative credit

We analyzed net income trends in a small subset of our dataset, covering approximately 1 million users of alternative credit products. We define net income as payroll deposits, excluding various other income types like social security checks, unemployment benefits, gig income, etc.

Chart Breakdown

• Net income for alternative credit product users surged from $2,150 (April) to $2,843 (September)
• For the top 25% of earners, net income surged from $3,293 (April) to $4,219 (September)

This means that alternative credit products are attracting higher-income consumers.

But why is this happening?

Half of Americans – including high-income earners – are living paycheck to paycheck

51% of individuals making 6 figures live paycheck-to-paycheck

As of September 2023, 61% of Americans live paycheck-to-paycheck, as per a CNBC poll. Another survey by PYMNTS and LendingClub revealed high-income earners are no exception – 51% of high-income earners (individuals earning more than $100,0000) live paycheck-to-paycheck.

Half of Americans face liquidity challenges

As of May 2023, just 48% of Americans can cover 3 months’ worth of expenses in an emergency, according to a Bankrate survey.

Emergency expenses rise while discretionary income decreases

Auto and medical costs are up 20% and 6%, respectively

Rising emergency expenses in 2023 often surpass individuals’ available savings. According to the Consumer Price Index, car repair costs surged almost 20% in the past year. Medical care costs are also up, with an average growth rate 0.7% higher than other goods and services.

Discretionary spending decreases by 11.3% with the reactivation of student loans

As per a PYMNTS study, resuming student loan payments could lead to an 11.3% decline in individuals’ discretionary spending. Borrowers increasingly turn to alternative credit – particularly BNPL – as they’re reminded of the reactivation of these expenses.

More people including high-earners are getting denied loans from banks

The Fed’s quarterly lending activity report indicates a tightening of loan standards across various consumer loan categories by U.S. banks, driven by a reduced risk appetite. Regulatory changes, including the Dodd-Frank Act, contribute to a sustained decline in bank lending, as highlighted in a study by the Federal Reserve Bank of Philadelphia. Consequently, more individuals are facing loan denials from banks.

Demand surges for alternative credit sources

As traditional bank lending tightens, more individuals are turning to alternative credit sources.

• Only 47% of Gen Z banks with a traditional FI. Limited credit history and tightening standards push them toward alternatives like BNPL
• 44% of US credit card holders consider alternate financing like BNPL over credit cards, attracted by more favorable interest rates and fees
• The U.S. P2P lending market is projected to reach $197.28B by 2032 (valued at $18.88B in 2022), fueled by the growing need for alternative credit sources

Stricter standards and limited access are steering consumers away from traditional credit. This fuels the adoption of alternative credit, particularly in the context of inflation and rising interest rates.

Amidst the tightening of traditional credit, fintechs leverage innovative technology, including cashflow analytics, to broaden financial service accessibility. In our next post, “How Lenders Embrace Cashflow Analytics to Gain a Competitive Edge” we’ll explore how lenders leverage cashflow analytics to get a better understanding of a consumer’s affordability.

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