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How financial institutions can support financial inclusion

Oct 26, 2021

More financial institutions are focusing on improving financial inclusion as the pandemic continues to expose inequalities in access to services.  

Some institutions that already worked underserved and under-banked communities are actively engaged in solving the issue, but others might be wondering how to get started.

The challenge is identifying how to best serve under-banked and underserved consumers in a way that effectively meets their needs and builds trust in a risk-responsible manner.

Serving these markets often means filling a crucial role and providing a better alternative to existing services. 

In many under-banked markets, there is an accessibility issue. Many consumers do not have access to financial institutions’ branches and instead using check cashing and payday lender storefronts, which may be more common in their communities.

And while their rates and fees are often exorbitant, these companies thrive by providing extended service hours and displaying clearly defined fee structures right at the counter or window.

Financial institutions that can find ways to offer their services, while avoiding barriers like extreme minimum-balance requirements and traditional banking hours, will be much better positioned to connect with those who want — and need — equal access to financial institutions.

Partnering for financial inclusion

One strategy that many financial institutions are now employing is partnering with fintech companies that specialize in financial wellness and inclusion.

In recent years, partnerships have been on the rise, with the financial institution placed in the forefront and the fintech company operating more behind the scenes

However, with many of the partnerships related to financial inclusivity or wellness, the roles are often reversed. A good example of this is the credit builder accounts offered by fintech company Chime. These accounts provide a credit card with initial limited capabilities that grow over time with the account holder, based on usage. Though there is an FDIC- or NCUA-insured financial institution behind each of these accounts, the service and card is provided — and branded — through Chime.

While these partnerships can prove beneficial for both , there are obligations for each to consider, such as whether a product or service is the right fit for a particular customer or member.

Most financial institutions have the expertise (and the data) to understand that even if a borrower is qualified for a loan or credit product, a wider view of other factors like asset and credit data could indicate that it may be too much of a debt burden for the applicant to handle responsibly. 

If not, fintech companies are only creating more of a burden on these underserved communities.

Before considering a partnership with a fintech, it is important that financial intuitions have a very clear vision and understanding of their financial inclusion and wellness programs and what they hope to achieve. This means creating policies with well-defined, measurable goals and sticking to them.

Financial institutions sometimes commit to a program without first defining goals or even what success looks like and then attempt to implement procedures afterward.

This often leads to a suboptimal outcome before it even starts, and the institution runs the risk of being accused of simply “virtue signaling” when it comes to its financial inclusion initiatives.

Compliance, risk and regulatory concerns

Financial institutions operate under specific regulatory standards, and fintechs working with them, must understand and appreciate these requirements because regulators can — and will — come for either of them if a problem occurs.

Both should thoroughly vet potential partners to ensure they are in line with visions, expectations and compliance requirements needed for any program’s policy. This will make ongoing reporting and monitoring much easier for both sides because everyone will be aware of agreed-upon measurements (and who is accountable for what).

For financial institutions, risk is always the major factor when it comes to loan and credit products. While all areas of banking have some level of inherent risk, most tend to be more frontloaded.

For example, once a deposit account is confirmed and approved, it becomes only a profitability decision or concern (e.g., account limits/requirements, interest rates, fee and maintenance costs). This is not the case with lending or credit since the supporting financial institution will take on more risk with each new loan decision.

Leveraging AI/ML technology

Technology may be the answer for financial institutions that want to be more inclusive in their decisioning without drastically increasing their risk.

Often, the best way to reach and serve today’s under-banked communities is through the right app or platform. Solutions that are quick with user-friendly interfaces and available anywhere, anytime can make banking much easier and much more accessible.

When leveraged and monitored appropriately, technologies like artificial intelligence (AI) and machine learning (ML) solutions can further enhance banking experiences. These technologies can streamline lending processes for consumers while helping financial intuitions make better informed, more inclusive lending decisions

In most cases, the two fundamental questions when it comes to lending are “Can the borrower afford to pay it back?” and “Is this borrower an acceptable risk for the institution?”

While traditional credit scoring has been the standard for years, fintech companies are increasingly helping to enhance and fill in the gaps often left open by this method. AI/ML technology that augments credit decisioning can help financial intuitions incorporate new, alternative credit data into these processes, allowing them to responsibly consider borrowers who may have lower credit scores but are still reasonable loan risks versus those who are not.

However, these solutions do come with some inherent risks that should be carefully considered prior to implementing them. They are designed from sophisticated decisioning models, leveraging proprietary algorithms, protocols and judgment to function.

Unfortunately, this means they can be subject to bias, which could create problems — compromising a program’s intended purpose and/or function. It is vital that fintech companies offering these technologies are aware of the inherent risks and possible weak points for bias to creep in, while financial institutions must understand where and how much they are relying on these models for their financial inclusion programs.

To ensure these platforms remain unbiased, financial institutions need to create comprehensive, stringent monitoring procedures to continuously assess these technologies.

The scrutiny and demand for increased financial inclusivity is growing. Financial institutions and fintech companies are perfectly positioned to help close many of the financial inequality gaps that under-banked and underserved communities have faced for years.

Financial institutions and their fintech partners that can step up and step in to reach out and meet the needs of these customers and members can establish themselves as trusted partners, creating deeper relationships and long-term opportunities for all sides.

Author(s)

Terry Ammons, CPA, CISA, CTPRP
Partner
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