Fintech Can't Target Financial Inclusion Issue Fast Enough
The pandemic helped shine a bright light on financially underserved populations vulnerable to economic shocks. But it's not like exclusionary industry practices haven't been a problem for decades.
Could financial technology finally help turn the tide?
The past several years have brought a bumper crop of Fintech startups. These demonstrate the potential surrounding new forms of technology paired with new business models aimed at improving the overall state of accessibility to financial services, according to the Inclusive Fintech 50 (IF50) Investors' Network.
Early stage Fintechs are taking on the status quo while seeking to positively impact financially underserved people. We’re talking about things such as digital loan products for small businesses and alternative-data-driven credit scoring engines to assess loan risk.
There are even now mobile apps that enable refugees and migrant laborers to access loans, insurance and remittance services.
New York Fed Prioritizes Inclusionary Fintech
Meanwhile, the Federal Reserve Bank of New York’s Community Development Unit is tackling with renewed vigor what it sees as a sharp decline in mobility over the past half-century — largely because of widening inequalities — putting the issue at the fore, labeling it "ripe for disruption."
One area that has gained traction at the crossroads of financial inclusion and Fintech is unsecured consumer lending to low- and moderate-income households. Companies such as Oportun now combine artificial intelligence and alternative data to figure out ways to extend credit to consumers otherwise excluded from the financial mainstream.
The challenges and opportunities that such models present will be discussed later this month when the New York Fed hosts a virtual event to explore existing and emerging models of unsecured Fintech consumer lending.
New Incentives Needed
“America’s current financial system is essentially broken for the many working Americans who live on the edge financially,” said Todd Baker, senior fellow, Richman Center for Business, Law & Public Policy at Columbia Business School, and one of the keynote speakers at the New York Fed event which is set for Thursday, Sept. 29. Baker is also a consultant.
Writing in the American Banker in 2020, Baker blasted the industry for mismatched incentives and wrongheaded, even dubious, approaches targeting lower-income segments of the population.
“One has only to look at the sad history of payday and car title loans, subprime mortgages or bank overdraft protection schemes for examples of financial products and practices that are profitable for providers but damaging for vulnerable populations,” Baker said.
These days, Baker is doing strategic business consulting to leaders of banks and Fintech companies, specializing in issues arising from the digital transformation of financial services.
Joining Baker at the New York Fed event is Jason Rosen, co-founder of Petal which touts itself as an easy-access, no-fee credit card that doesn't require a credit score.
Banking Data Boom
Petal, infused five years ago with $3.6 million in seed capital from Brooklyn Bridge Ventures, has honed in on what could be considered the banking sector’s most precious commodity: customer data.
“Until recently banks owned their customer's banking history,” Petal’s team explains in website material. “If you switched banks, your history wouldn't come with you. Not anymore. Thanks to modern technology and new regulations, your banking history belongs to you.”
This has created new possibilities for how people manage their money and apply for credit.
One of the panels at the New York Fed event will examine the role of alternative data in Fintech lending. It has opened up new channels, ways and means to reach borrowers who may otherwise never be approved for loans.
New forms of technology can bring new sets of regulatory questions, and upstarts are not immune to some of the same old questionable practices.
Last month, the Consumer Financial Protection Bureau (CFPB) took action against Fintech Company Hello Digit, a subsidiary of Oportun; Hello Digit offers a personal-finance-management app that promotes automated savings by way of a proprietary algorithm to make automatic transfers from the consumer’s checking account, called “auto-saves,” to an account held in Hello Digit’s name for the benefit of the consumers.
The CFPB found that Hello Digit engaged in deceptive acts or practices, including pocketing interest that should have gone to consumers.
Nevertheless, new forms of Fintech could help bring about a paradigm shift to increase economic mobility for low- and moderate-income Americans, said the New York Fed’s Community Development Unit, “especially those facing poverty or structural disparities related to race or ethnicity.”