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Focusing on Financial Inclusion

How Financial Institutions Can Better Support Financial Inclusion and Wellness

The pandemic has underscored many issues and gaps within the financial services industry. For banks and credit unions, a key concern is how to help ensure that some consumers (and potential customers and members) are not left behind – or ultimately left out – when meeting their financial needs. And while financial institutions may look towards developing these capabilities internally, there are also a host of emerging fintechs and businesses specializing in financial wellness and inclusion that can provide institutions with an effective way to meet demand and address the problem head-on.

The Push for Inclusion

Regarding financial inclusion, banks and credit unions today tend to fall into one of three general categories:

  1. Those that already work directly with underserved and underbanked communities. They have extensive, first-hand experience of these customers and members’ financial issues and needs and are usually actively engaged with them regularly.
  2. Those institutions that recognize the problem and feel compelled to address it but have yet to act in a meaningful way. Often, this group wants to actively seek ways to support and/or create programs to address the problems, and their efforts can sometimes become a more significant driving force behind the FI’s overall mission.
  3. FIs that, while recognizing the problem exists, may only approach the issue in light of public concern or scrutiny, which can then run the risk of being perceived as “virtue signaling” by many.

The challenge for those FIs that want to act is identifying how to better serve the financial needs of underbanked and/or underserved consumers in a risk-responsible way that enhances their experience; effectively meets their needs and establishes and builds trust. Serving these markets best may mean that institutions initially provide more value to the relationship than they are pulling out, but they recognize this as a good investment for the future.

For example, payday lenders often serve this very community, but their rates and fees tend to be very steep, and their practices can sometimes border on unethical. Community financial institutions represent a much better alternative yet may have penalties of their own related to services (i.e., minimum balance requirements, etc.) that prohibit engagement. Regardless of the reasoning, these factors can create a barrier for those who want — and need — a relationship with a bank or credit union, which only exacerbates the underbanked issue.

The Next Generation
The shifting demographics of today’s population are impacting how the industry views this problem. As the years pass and more members from the younger generations become account holders (and bank and credit union employees), this gradual shift brings new perspectives. Many Millennials and Gen Z consumers feel as if they are not entirely set up to be financially successful over time and are generally more empathetic to those who would currently be classified as “underbanked” as a result. Additionally, these younger generations of customers and members have demonstrated a propensity toward choosing providers who demonstrate a clear commitment to corporate social responsibility and contributing to what they view as the social good.

The Rise of CFDIs
In many areas, community development financial institutions (CDFIs) are fulfilling this need. With a focus on social responsibility, these institutions tend to serve more rural, often poorer, communities, offering much-needed opportunities for those communities to have access to banking accounts and loans.

According to data from the Opportunity Finance Network, there are currently over 1,100 CDFIs operating across the country, managing more than $222 billion in assets. While not all these institutions function as banks and credit unions, they all can offer the underbanked better solutions to fit their needs. In addition to the direct consumer services, many CFDIs also support financial literacy and inclusion by acting as sponsor banks for fintechs producing technology to address these issues. Both Sunrise Banks and Central Bank of Kansas are great examples of CDFIs that support fintechs in this way, further helping the underbanked customers in their communities.

Having a tangible presence in the community is a crucial first step. In many of the underbanked markets, options such as check cashers and payday lenders are more common than bank and credit union branches. What’s more, these businesses are often more accessible to the community through extended service hours or providing customers with very clearly defined (albeit often steep) fees for services that are spelled-out right at the counter. For FIs that want to penetrate these banking deserts and operate within these communities, overcoming these factors must be considered and prioritized.

Leveraging AI to Close the Gap on Lending
When it comes to lending, most FIs rely on two fundamental questions – the borrower’s ability to pay (can they afford to pay it back?) and their propensity to pay (is the borrower an acceptable risk?). Traditional credit scoring has been the evaluation standard for generations, but we are increasingly seeing fintechs fill in existing gaps and offer a different path. By utilizing the right technology, banks and credit unions can leverage alternative credit scoring and data analytics to responsibly consider borrowers with lower credit scores and determine who amongst them are reasonable loan risks versus those who are not.

One way to achieve this is through AI and machine learning applications. While these platforms offer powerful tools and capabilities, they also come with inherent risks that should be understood and considered. Built using sophisticated decisioning models, these solutions rely upon their proprietary algorithms’ internal logic, protocols, and judgment. As such, they can be subject to bias, either at the onset or developed over time. Numerous recent examples have shown how these biases can create ongoing issues that compromise the program’s intended purpose.

Thus, it is crucial that FIs know how much they are relying on these models for their programs. As with all external relationships, FIs need to apply the same rigorous standards they would with any vendor risk management, creating consistent, stringent protocols to continuously monitor and assess these platforms to ensure they remain unbiased.

A Question of Compliance and Risk
With a new administration in place at the federal level, many industry experts are signaling an increased focus on consumer rights and protections regarding regulatory changes and updates. The CFPB may very well gain more power and influence in its reach and level of oversight and it may view community financial institutions as necessary partners in addressing the issue of financial inequality and inclusivity.

For banks and credit unions, this boils down to a risk perspective for lending. While there is some level of risk associated with other areas like deposits, most of the risk is front-loaded. Once confirmed and approved, then it is a profitability decision about the account (e.g., account limits/requirements, interest rates, fee and maintenance costs, etc.). However, with every lending decision, the FI takes on additional risk.

So, the question becomes how can FIs be more inclusive without drastically increasing their risk? As suggested, the solution for many is leveraging the right technology.

All lending has inherent risk and serving these underbanked communities often means leading with technology. As with all customers, better, more user-friendly interfaces can help make banking more accessible. Additionally, when leveraged and appropriately monitored, technologies like AI and machine learning platforms can streamline banking and lending processes while assisting FIs to make better, broader lending decisions. These technologies enable banks and credit unions to reach and support a more comprehensive range of borrowers, many of whom may have been traditionally under- (or even un-) banked.

Partnering for Better Financial Wellness

Partnerships between FIs and fintechs have become much more common in recent years. In most cases, the bank or credit union tends to be positioned up front while the fintech remains in the background, often as a white-labeled functionality. With many of these partnerships related to financial wellness//inclusivity, we often see these respective roles reversed. For example, fintech Chime offers its customers a credit builder account, a credit card with initially limited credit capabilities that grow with the account holder over time based on their usage. While the service is branded and provided through Chime, there is an FDIC- or NCUA-insured financial institution behind the account.

In these partnerships, what is the full obligation of the bank or credit union? First, to help put customers into a product, but there is also the obligation to ensure it is the right product, and this is where FIs can leverage their proven expertise. Banks and credit unions clearly understand that even if a borrower can qualify for a particular loan product, a broader view of the borrower’s asset and credit data may indicate that it could also represent too much of a debt burden to manage responsibly.

Additionally, it is the institution’s responsibility to thoroughly vet its fintech partners to ensure they are in line with the FI’s compliance requirements and meet the needs of the established program’s policy. Afterward, they should be monitored and held accountable for the agreed measurements of the program.

To make the most of these partnerships, banks and credit unions should create policies for their financial inclusion and wellness programs with clearly defined, measurable goals – and then stick with them. Too often, institutions commit to programs like these without first defining what success looks like and then implementing the procedures or metrics required to measure the outcomes effectively.

As the push for financial inclusivity continues to grow, banks and credit are presented with a unique opportunity to help close some of the financial inequalities that underbanked and underserved consumers face – and there is a benefit to them doing so. A 2018 workplace benefits report from Bank of America suggested that less than half of employees are offered any sort of financial wellness program through their employer. Granted, this is a long-game strategy, but banks and credit unions that step in to fill the gap for these customers and members stand to position themselves as trusted financial partners over time, leading to longer, deeper relationships and long-term growth opportunities for institutions and consumers alike.

Terry Ammons, CPA, CISA, CTPRP is a partner at Wipfli LLP, a leading national accounting and consulting firm serving clients across a diverse spectrum of industries, including financial institutions, services and technologies.


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