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October 17, 2018

The FED Governor Lael Brainard spoke at a conference in Boston about the search for full-stack financial inclusion, driven by fintech innovations. She examined lessons learned form the first wave of fintech while discussing the metrics used to gauge financial inclusion, including access to a bank account, adoption of mobile phones and the resulting data, and access to credit via fintech lending. She emphasized the importance of learning how to assess financial health more effectively, along with the development of tools that are designed to address the challenges underlying financial inclusion. She added that these tools can be built on a new generation of platforms and other basic building blocks, which can be used in combination to develop more effective full-stack solutions.

According to Ms. Brainard, a sustainable solution is likely to require a comprehensive understanding of the needs of financially underserved families and small businesses. Policymakers and financial services providers are beginning to assess financial inclusion in more nuanced ways. Moreover, new technological building blocks can be increasingly used to build more full-stack approaches to financial inclusion. He also discussed the role of faster payment systems in solving the issues faced by the underserved categories, such as individuals living from paycheck to paycheck and the small businesses with immediate working capital needs. New platforms like faster payment systems have the potential to combine with other technological improvements, such as cheap access to cloud computing and an open-source approach to artificial intelligence, to create more full-stack approaches to financial inclusion. Mobile apps are also using faster payments and cheap accounts to offer consumers the tools to smooth volatility in their incomes. 

She added that a new generation of offerings experiments with using machine-learning tools and data aggregation to study consumers' expense and income flows to offer credit to consumers with little to no traditional credit histories. While access to accounts and to credit may be beneficial, they are by no means sufficient to ensure financial resilience on their own, said Ms. Brainard. She highlighted that the market penetration of fintech lending (often in conjunction with bank partners) has increased over the years, although it is unclear how much of this fintech lending is making a significant dent in financial inclusion, as opposed to serving prime and near-prime consumers in the United States. A 2017 study by TransUnion found that fintech lenders focused 59% of their originations in the near prime and prime risk tiers by the end of 2016. Researchers at the Federal Reserve Banks of Philadelphia and Chicago found that at least some fintech lenders were able to slot "some borrowers who would be classified as subprime by traditional criteria" into better loan grades. However, the differences from existing channels may not be large: TransUnion found that nearly 10% of loans originated by fintech lenders were to subprime consumers, compared to 14% for the overall market for personal loans.

The FED Governor also offered evidence that the new technologies are lowering transaction costs by automating the customer interface and underwriting processes. A recent analysis by staff at the Federal Reserve Bank of Atlanta notes that automated fintech platforms have lower operating costs relative to storefront payday lenders. A recent study by staff at the Federal Reserve Bank of New York found that fintech lenders process mortgages on average 20% faster than traditional lenders. However, alongside these promising developments, there have also been some cautionary tales from the early wave of fintech. While financial innovation may hold great promise, a lot of work is needed to ensure it will be able to reach communities that lack infrastructure for digital service delivery.

Finally, she emphasized that financial literacy and consumer protection are critically important, regardless of whether financial services are delivered through traditional means or smartphone apps. Digital delivery can expand the reach of traditional financial education systems by providing consumers with online and mobile education, just-in-time information, and interactive financial tools to evaluate their options. Data show that a quarter of all accounts worldwide are "inactive" and customers that are provided financial accounts quickly return to the cash economy. The Findex database, at an international level, shows that roughly a fifth of adults without a financial account cited a lack of trust in the financial system. Ms. Brainard concluded that a challenge for regulators is "to ensure trust in financial products and services by maintaining the focus on consumer protection, while supporting responsible innovation that provides social benefits."


Related Link: Speech

Keywords: Americas, US, Banking, Financial Inclusion, Fintech, Fintech Lending, FED

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