Author | Vinay Bhaskar
The two-day conference on consumer lending optimization was held on June 7th and June 8th in NY this year, which bought together some of the leading practitioners from banking, fintech, and regulatory institutes. The Global Financial Market Institute (GFMI) organizes this conference annually and Scienaptic represented by me and my colleague Aditya Khandekar, had the opportunity to co-lead a panel discussion on ‘Driving Financial Inclusion’. The theme of the discussion was to examine strategies that can create a win-win situation for both financial institutions (FIs) and consumers, especially for the underbanked/unbanked consumer segments. We had a strong panel of industry experts, Ray Duggins, CRO of Octane Lending, Richard Murphy, Senior Bank Examiner with the Federal Reserve, Ruthann Redmon, senior vice president at BBVA and member of the CBA’s Fair and Responsible Banking Committee and Justin Whitener, senior pricing, analytics and MI professional with Ally Financials. I want to highlight some of my personal reflections from this rich discussion:
The Need for Financial Inclusion in the US is real: The discussion was timely, as the latest survey results published by Federal Reserve Board (FRB) on the “Economic Well being of US households in 2017” showed that around 20% of working age adults in US are underbanked, more than half of whom are women. Further the report states that every 1 in 9 adults from the underbanked segment put off their credit application in the fear of denial. The results published by FRB reflect the clear opportunities for FIs to do better in including society at large under a regulated financial system and provide them with adequate security.
Structuring products for underbanked customers: There was a general consensus that a focused effort is required to develop products for underbanked if financial inclusion is to be delivered in a meaningful way. For example, standard products with specific terms and tenures may not serve every customer’s requirements. There is a need to structure the product around customer’s needs, such as for customer demanding Personal Loans for a period of 9 months as a bridge or working capital loan with fixed payment schedule. While this may disrupt the returns that FIs expect, there is a larger scope for FIs to manage costs and hence continue to profitably extend loans for shorter terms.
Using alternate data to make smarter credit decision for underbanked: In the US approximately 25% of the population have “thin file” at the bureau with fewer than five items in their traditional credit histories. Furthermore, legacy data sources are inherently geared biased against unbanked and underbanked segments. Consumers in these segments often prefer alternative credit data sources such as utility bill payment history (48%), savings/checking account transactions (39%) and mobile phone payment history (38%) for evaluation of their credit history. An important need is to expand the lens through which FIs evaluate the credit application of the underserved segments. Such expansion would be a win-win for both applicants and FIs.
What role can regulation play to accelerate Financial Inclusion: To make it effective, regulations would have to play a critical role in defining what is and is not a fair inclusion of information as FIs assess credit worthiness based on such information. The US Congress is considering bipartisan legislation on the Credit Access and Inclusion Act, which would amend the Fair Credit Reporting Act (FCRA). With this amendment companies in utility and telecommunications sectors may need to report positive credit data such as on-time payments. The legislation was unanimously passed the House of Representatives on Feb. 27, 2018, and is currently being debated by the Senate.
Driving Financial Literacy: One of the other hurdles to accessing credit is the lack of “Financial Literacy”. If 1 in 9 working-age adults in US do not apply for credit due to the fear that it will get declined, there is need to educate the masses on how to build and effectively manage credit. Panelists opined that while most of the FIs/Co-operatives have programs /products geared towards educating such segments of population, there is a need for greater push for these programs to come to the fore.
Leveraging digital to drive footprint: Panelists also noted that branchless banking forms (mobile/e-banking) can accelerate financial inclusion as has been witnessed in emerging economies. However, such modes present a unique challenge to the regulators as they protect consumers from unsafe financial products and frauds. In the US, CFPB plans to experiment with “Fintech Sandbox” to balance growth and innovation vs protecting consumers. Only when initiatives are taken at both banks and regulators ends can the agenda of Financial Inclusion be effectively facilitated.
As we were concluding the discussion, one of the members from the audience opined that while all the above are necessary elements for Financial Inclusion, the essential component is for the FIs to change their mindsets and adjust their risk appetite towards slightly lower returns and a broader goal of serving the society at large. I guess his comments sealed the discussion!