Financial Inclusion through Responsible Bank-Fintech Partnerships, and the Challenges that Remain

Ian P. Moloney, Head of Policy and Regulatory Affairs

July 12, 2023

4 min read

Over the past decade, we have seen significant changes in conversations related to financial inclusion, specifically those focused on banking low and moderate-income (LMI) communities in both urban and rural areas. The public is now witness to the true benefits of banks partnering with fintech companies, which include leveraging data points that show the full financial lives of consumers and rebuilding trust with consumers and communities that have experienced discrimination in financial services. As the responsible bank-fintech partnership model grows, so too does the financial services industry’s ability to serve consumers that have been historically excluded from the banking system.

Recently, the federal government started capitalizing on the benefits that responsible bank-fintech partnerships can bring to the issue of financial inclusion, such as innovative lending platforms and services offered by fintechs. For example, in 2021, the Office of the Comptroller of the Currency established Project REACh to promote financial inclusion by improving access to credit and capital. A significant part of Project REACh focuses on using innovations in credit scoring pioneered by responsible fintech companies to expand credit opportunities to consumers in LMI communities.

Programmatic efforts, such as Project REACh, are also helpful for furthering financial inclusion efforts through the use of innovative technologies offered through responsible bank-fintech partnerships. Furthermore, the COVID-19 pandemic and subsequent higher interest rate environment pushed more industry professionals to question what data comprises their credit models and the possible effects on potential consumers. In turn, this helps to promote the use of data that until a few years ago was largely left excluded from the credit decisioning process.

Regulatory Reform Coming to the Fore

Although we are beginning to witness the financial inclusion benefits from responsible bank-fintech partnerships, regulatory challenges remain.

Innovation deployed through responsible bank-fintech partnerships has proven capable of living up to its promise when deployed responsibly. However, regulatory reform lags in comparison to such innovation. This point is not meant to be a criticism of policymakers or regulators. At times, delays are an important factor in ensuring that regulators ensure the proper level of regulation and oversight so that an emerging market or technology may mature in a responsible manner. In the U.S., the banking regulatory framework is designed to move cautiously to ensure market participants are able to assess and mitigate any and all relevant risks. In fact, policymakers and regulators are now moving forward in providing additional guidance and proposing some regulatory reform to help these historically excluded communities through the use of responsible bank-fintech partnerships.

Key Components to Success

In conversations with industry leaders, policymakers and regulators at a recent American Banker Digital Banking Conference I remain encouraged by efforts such as the recently adopted Interagency Guidance on Third Party Relationships relating to risk management, proposed rulemaking to reform the Community Reinvestment Act, and forthcoming rulemaking on consumers’ data rights. However, both regulators and industry leaders need to keep in mind some important points:

Implementation is key. Each of these efforts have significant potential to foster improved partnerships between banks and fintech companies, align incentives to serve both urban and rural LMI communities, and rekindle LMI consumers’ trust in how their data and money are being used by banks. However, to realize the full benefit of each effort, both industry and regulators—particularly the examination staff—must remain mindful of how these efforts are implemented. All stakeholders need to ensure that they are communicating and collaborating effectively so that financial service providers understand their regulators’ supervisory expectations, and likewise that regulators understand the business models and underlying technology at work.

Optionality. To ensure that economic and risk incentives are aligned with serving LMI communities, particularly as it relates to Community Reinvestment Act reform, regulators must provide banks with the ability to align their particular business models to the policies and programs established to further financial inclusion. This means that further regulatory reform must provide adequate optionality and incentives to ensure proper evaluation of risk models that will ultimately help serve historically excluded consumers.

As noted above, these challenges are not entirely regulatory in nature. Even if regulatory reform occurs in a manner that fosters innovation for the benefit of consumers, industry leaders must continue to work diligently to right past wrongs in how LMI communities have been treated by financial service providers. Ultimately, consumer trust in a fintech or bank partner will come down to how end users are served each time they engage with a product or service. Thus, in addition to the regulatory reform needed to further a responsible bank-fintech partnership model, industry leaders must continue to strive to achieve high standards in serving LMI communities. For its part, Cross River always works to achieve this end with our fintech partners.

It is critical that both financial services industry participants, policymakers, and regulators continue to work together to ensure that historically excluded communities do not suffer the same fate as in the past. In order to ensure this outcome, we must recognize the true benefits that responsible bank-fintech partnerships bring to consumers and continue advocacy for forthcoming regulations that allow for continued development of the bank-fintech model for the benefit of all consumers.