Individuals who spend time in prison can experience devastating financial consequences at every turn.
They may struggle with the cost of posting bail, lose wages while incarcerated and watch debt snowball with legal fees and fines. The challenges build on each other through reentry, when people may need to secure employment and housing. In a survey of 573 people who had been in the U.S. justice system or had a household member who had been in prison, more than one in three said incarceration had a negative impact on household finances. The research was conducted by the Financial Health Network for its June 2021 Financial Health and Criminal Justice report.
Fintech solutions, which often overlap with legaltech and govtech, are springing up to address these needs.
“I’ve been deep in this work for the last two years in particular,” said Elizabeth Nguyen, economic opportunity practice lead at Village Capital, an organization that supports startups that center on sustainability, financial health and the future of work, through accelerators, workshops, forums and an affiliated investment fund. “The whole conversation around supporting previously incarcerated people is strengthening.”
Nguyen has seen more investments in startups that focus on this population. Moreover, “even publicly, the conversation about justice tech isn’t just about artificial intelligence or predictive policing. It’s not just the bad side,” she said. “It’s about improving lives and supporting a community that has always been overlooked.”
Such products include challenger bank Stretch, which welcomes customers who are formerly incarcerated; digital-forward tools that help repair financial health, such as those from the nonprofit finequity; R3 Score, which finesses alternative credit scores; and Frsh, which plans to launch a banking app, embed a search engine for social services on its website, and build or partner with businesses that may, for instance, connect users with attorneys or find companies that hire people with criminal backgrounds. These services complement outreach programs from
R3 Score uses a range of data to evaluate people with criminal histories in a more nuanced light than traditional credit scores.
Laurin Leonard, R3 Score's chief executive, learned about the challenges this population experiences first hand after her mother was incarcerated for a 70-month period. The two of them co-founded Mission: Launch, a nonprofit that helps those with criminal records improve their financial wellbeing, a year after she was released. They were subsequently inspired to launch R3 Score after realizing how difficult it is for people with records to find capital and start a business.
“We modernize legacy risk models,” Leonard said.
A low credit score can impact a returning citizen’s ability to own a home or qualify for a loan to start a business. The Financial Health Network found that 46% of respondents reported having “fair” or “poor” credit scores prior to incarceration, with the percentage having bad scores rising immediately afterward.
R3 Score calculates two unique scores. One uses criminal justice-related data to assess a person’s “risk” on a scale of zero to 10. This lets companies adjust their loan amounts and types, or the potential jobs they are hiring for, to their risk tolerance. Another rates people on a scale of 300 to 850 and measures their economic stability (for instance, the strength of their support network) in relation to their peer group. These scores combine credit report data, other forms of data and a qualitative interview that covers how they served their time and what their experience has been like coming home.
R3 Score is piloting its scores with several community development financial institutions and other organizations. Lenders use it as a supplementary screening tool, or “second look,” to review applicants with low FICO scores. These CDFIs have made loans of up to $50,000 to entrepreneurs with arrest or conviction records. The company is also working with financial institutions on the human resources side to supplement conventional background checks for job applicants. Ally Financial in Detroit is its first major bank partner.
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Beyond banking, the founders of Stretch have sought partners that help users restart their life in other ways, such as Honest Jobs, a marketplace that helps people affected by the criminal justice system find work.
“That's the unique differentiator,” Yasaman Hadjibashi, co-founder of Stretch, said in a February podcast interview. “We care about solving problems for individuals upon reentry. The first one is, you need to start making money.”
Some more traditional institutions are taking highly digital approaches to serving this population.
Diverge is a proposed federal credit union in Fort Lee, New Jersey, whose request to move forward with a new charter application was recently approved by the National Credit Union Administration. Its mission is to serve historically marginalized and unbanked communities, and it will initially target formerly incarcerated individuals and members of the LGBTQ community. Organizers expect the credit union to open its doors within a year.
“One of the cornerstone features is financial education and creating a path to long-term financial well-being,” said Nancy Eiden, founder of First Step Alliance, a nonprofit that helps returning individuals achieve financial independence and one of the organizing members of Diverge. First Step Alliance’s existing resources will be made available to members of Diverge. They are customized to the needs of this audience, who may need to get a driver’s license reinstated, learn how to build credit or resolve identity theft that took place while they were in prison.
The proposed credit union intends to accept alternative forms of photo identification when driver’s licenses are not available and develop alternative credit scoring metrics so more people can qualify for credit products. Because of the light planned branch presence, it will make many services available digitally.
Before Diverge officially launches, First Step Alliance plans to make a Bank On-certified banking app backed by several large credit unions available to potential credit union members (and others), likely within a month. The app will allow alternate forms of ID when opening a checking account. It will offer a debit card and early access to paychecks. When Diverge is up and running, Eiden expects that users of this app will be able to migrate their accounts over to Diverge if they choose.
