> Why do they refuse to lend if it is profitable?

Good question.

Note I didn't say it is profitable for the banks to lend to those segments. I said those segments can be lent to profitably.

In order to profitably lend to customers who banks turn away (mostly those with a 'bad' credit history based on credit bureau data, or those with little/no data at the credit bureau), you need:

1) Effective credit underwriting (i.e. accurate models/processes to decide whether to accept a particular application, and how much to lend to that applicant at this time), and

2) Efficient processes of acquiring, onboarding and servicing customers.

When a bank lends 10k at 8% for 3 years to a low risk customer, they'll make over 1k in interest over the life of the loan. So they can afford to have inefficient operations/systems.

When you lend 500 to a customer who is likely to pay back, e.g. 600 over the next 6 months, there's only 100 in risk-adjusted margin there, to cover all your costs of underwriting the loan, following up on missed payments etc.

They aren't profitable enough for an organization of that size.

Markets get segmented into tiers. With banks that might create a situation where the easiest lending targets get processed by the highest volume, lowest cost institutions, and the small valuable cases become boutique.

The problem with that is, unlike other boutique areas, the wealthier person can spend a little more for a limited run high quality good. But here the boutique has to sell to the poorest groups, so it's hard to compensate the provider through pricing for the lower efficiencies of being smaller. It might shut down services that the industry would provide if less consolidated.

I'm not defending this, just presenting one possible way this could be playing out even with everyone acting more or less rationally.

Non-bank smaller lenders often have many fewer regulations, allowing them to make more targeted automated algorithms, which means they can serve people banks can't.