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Financial inclusion is no longer optional
Regulatory changes are rewriting the rules for responsible banking
As new regulatory changes place a renewed focus on responsible banking, financial institutions have an opportunity to make meaningful strides in advancing financial inclusion by providing better support to underserved communities through innovation in products and services. Learn why financial inclusion is important, and find key offering considerations for banks as they prepare to keep up with changes in the market.
Increased public consciousness plus new regulations underscore why financial inclusion is important
Across the financial services industry, the rules of financial inclusion are being rewritten. In the last few years, the global pandemic, looming economic challenges, a rapidly changing and competitive labor market, and calls for racial and social equality have brought the need for financial inclusion to the forefront of public consciousness. While fair lending has long been kept top of mind by financial institutions, organizations need to focus on the benefits of financial inclusion.
Financial inclusion is the ability for individuals and businesses to have access to both useful and affordable financial products and services that meet their needs and have those products delivered in a responsible and sustainable way. One of the most significant drivers for financial inclusion is recently proposed consumer protection regulatory changes. Several regulators—including the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation—are continuing to push forward an approach that embraces the spirit of regulatory requirements versus only the letter of the law.
Financial inclusion strategies
Financial inclusion at the forefront of regulatory changes
Recent regulatory changes have demonstrated the broader industry movement of not only strengthening the enforcement of fair and responsible banking issues but also enhancing financial inclusion practices.
This revised approach to both supervisory expectations and regulatory requirements, as well as embracing the spirit of regulatory requirements versus the letter of the law, is evident in recent proposed changes to foundational regulations, including UDAAP, CRA, and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
As part of preparing to adhere to these regulatory expectations, financial institutions should begin to evaluate their products and services through the perspective of advancing financial inclusion.
These are a few key areas of focus for financial institutions to consider:
Financial institutions should begin to assess and innovate their marketing and advertising to consider how products and services are being marketed to different customer bases. Financial institutions should review existing processes related to advertising and promotional materials, including conducting testing of any products targeted to a particular population and evaluating any technology-driven marketing programs and related algorithms to identify potential unintended consequences or disparate treatment. For example, financial institutions may identify that a certain product is being marketed only in a specific demographic or that marketing materials clearly do not communicate the potential costs associated with a product or service, creating potentially limited consumer access to the product or service. They many want to consider a strategic partnership with community-based organizations within low- and moderate-income (LMI) communities as part of marketing not only awareness but also accessibility of products or services.
The use of mobile banking has continued to increase.
According to the Global Findex 2021 database, more than 40% of adults who made in-store or online merchant payments using a card, phone, or the internet or paid a utility bill directly from a formal account did so for the first time since the start of the pandemic.
Financial institutions should begin to take steps to identify and implement more innovative opportunities to engage with consumers in LMI communities. For example, financial institutions should work to ensure that online and mobile banking services can be accessed on different device types and in more rural areas.
As part of the CFPB taking a more holistic view of fair lending and anti-discrimination practices, organizations should be prepared for products and services—including special-purpose programs—to be in scope for upcoming examinations. Financial institutions should consider potential barriers to access related to the product or services as well as reasons for households being unbanked, including underwriting practices, fee structures, balance thresholds, and credit history evaluations that could act as systemic obstacles to some customers. By integrating this step into the product or services evaluation process, financial institutions can make applicable adjustments to the product or service to better dismantle potential barriers to access. For example, several financial institutions have begun to implement low-cost features, such as no overdraft or insufficient-funds fees, the ability to open accounts with no or low monthly maintenance fees, etc., to increase accessibility to products or services.
Regulators are also continuing to prepare for the use of alternative data in credit underwriting by both banks and non-banks and encouraging responsible use of such data.
Underwriting determinations are highly dependent on available credit history, but not all consumers have credit history; one in 10 adults in the United States are “credit invisible” (i.e., have no credit history).
Financial institutions should consider exploring alternative credit data options to inform lending decisions, such as financial transaction data within bank accounts; payment history from recurring bills; and even other information, such as education and occupation details, to develop a more comprehensive understanding of a borrower’s credit profile. By considering alternative credit data options, many financial institutions are utilizing more innovative techniques—such as machine learning and artificial intelligence—to evaluate customer applications and elevate financial access for those who may have been denied the opportunity in the previous credit history-dependent approach.
Benefits of a more inclusive financial services industry
While organizations have made strides to advance financial inclusion and embrace meaningful and sustainable changes, the continued increase in social, economic, and political drivers—notably several proposed regulatory changes—have made financial inclusion a business imperative. To truly embrace and implement the required changes, both financial institutions and regulators should work together to develop an understanding and alignment of financial inclusion priorities and how to implement the recently enhanced regulatory changes through an established financial inclusion framework. Pursuing creative options, such as regulatory sandboxes to test new products and services, is one option.
The recent regulatory developments and growing industry demand for more accessible financial products and services will continue to drive fair and responsible banking programs to evaluate and innovate to meet the expectations and objectives of a more inclusive financial services industry.
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