Grovetta Gardineer Reflects upon Inclusion Challenges in the United States

This is Pacific Exchanges, a podcast from the Federal Reserve Bank of San Francisco. I’m Linda True.

And I’m Cindy Li. Welcome back to Financial Inclusion and Beyond, an ongoing exploration of what we can learn from efforts around the world to improve financial inclusion and wellbeing. In today’s episode, we sat down with Grovetta Gardineer, a veteran bank regulator, and the Senior Deputy Comptroller for Bank Supervision Policy at the Office of the Comptroller of the Currency.

Retail credit, in this country, is a foundation that many people need in order to have a path for success. a home that you provide for your family, the stability that people need in order to function in our society. The sad reality is that so many people in our country today don’t have that same access. And that’s something that the financial system in the United States, can work to bridge that gap, to try to ensure that people have an opportunity to enjoy and rely on financial inclusion so that they can better their lives and the lives of their family.

In this interview, Grovetta took a look back at the COVID-19 pandemic and the ensuing economic crisis. She also reflected upon the century-old problem that the US financial system has failed to provide equitable access for minorities and people of color. The barriers to financial access have prevented the excluded population, African Americans in particular, to achieve a healthy financial life and to build generational wealth.

That’s right. Grovetta also shared with us some of the work the OCC and other regulatory agencies have been doing, by engaging in a collaborative effort to address the challenge of bringing the vast number of credit invisibles back into an inclusive financial system that is built upon trust. Grovetta pointed out that it is crucial to leverage the strength of various stakeholders, including all types of financial institutions, businesses, and community groups.

We are excited to have Grovetta as our guest to talk about financial inclusion challenges that we face today. Now let’s get to the discussion!

Grovetta, thanks for joining us. We’re really excited to have you today.

Oh, thank you. I’m really honored to be here.

So maybe I will start off with a question about your experience as a regulator. Grovetta, you have more than three decades of experience in banking supervision, policy and regulation. And you are a known leader and expert in the space of compliance and community programs. So, maybe tell us a little about your role at the OCC and some of the works you’re overseeing today.

So I’d be happy to. I’m actually beginning my 11th year here at the OCC. in my current role, I direct the formulation of policies and procedures for supervision and the examination of our national banks and federal savings associations. I have several units in the policy area that report up to me to make that possible. And those include credit risk, market risk, operational risk and compliance risk. I also supervise the units responsible for international banking and capital policy, accounting policy, and Community Affairs.

Can you talk a little bit about how financial inclusion intersects with your responsibilities? And how do you look at some of the supervision issues from an inclusion angle?

That’s a great question because all of these risk areas are interrelated. many years ago, there may have been a thought that consumer compliance was the separate risk standing alone all by itself. I think very recent history has shown us the interrelation between safety and soundness and consumer protection and compliance with regard to ensuring that everyone in this country has access to financial services.

Retail credit, in this country, is a foundation that many people need in order to have a path for success. a home that you provide for your family, the stability that people need in order to function in our society. The sad reality is that so many people in our country today don’t have that same access. And that’s something that the financial system in the United States, can work to bridge that gap, to try to ensure that people have an opportunity to enjoy and rely on financial inclusion so that they can better their lives and the lives of their family.

The safety and soundness pieces of a bank’s program are intricately tied to financial inclusion. You really cannot be a safe and sound financial institution, if you don’t treat your customers fairly, and you don’t provide them fair access to financial services.

2020, and now 2021 are unusual and exceedingly difficult times for many. The COVID-19 pandemic, and this ensuing economic crisis has had an exacerbated impact on minorities on multiple levels, and spotlighted the need for racial equity. In particular, African Americans have been excluded from equitable access to the economy and financial system throughout US history. Nearly half of African American households are unbanked or underbanked. Can you talk about how racial inequity factors into the challenges in promoting financial inclusion?

You’re exactly right. And this is a centuries-old problem, that minorities, people of color in this country do not have equitable treatment. it is rooted in the history of the country, and I think we all just have to acknowledge that. for most people, the biggest investment that they made in their lives, for example, is home ownership. Owning your home will be the biggest investment, and it is the beginning of establishing generational wealth.

Unfortunately, African Americans have not had the history of being able to develop and build that same type of wealth. The issues are ones we have traditionally tried to address in the banking system. For example, redlining historically has created a disadvantage for African Americans and people of color in this country. Telling people where they can live, and what type of home they can have, based on their race, is something that we recognized in the 1970s. We determined that we could address that through the Community Reinvestment Act.

Try to provide some equitable treatment, so that there would be an opportunity to build some generational wealth through home ownership. What is the sad reality for me today, however, what we’ve recognized in 2020 and 2021. I looked at some statistics, African American home ownership in this country is at the same level in 2020, that it was in 1968. That is an astounding statistic, and something that we need to focus on, because CRA, was put in place to address this.

So what’s happening? we really have to begin to, in earnest, look for what is the root cause of the problem. And I think we’ve stumbled on it. it is the decades and centuries of inequitable treatment.

Now that you know what the root problem is, how do you address it? at the OCC, after the murder of George Floyd, acting comptroller Brian Brooks came up with an idea that he brought to our executive committee, and it was the creation of project REACh. And REACh stands for the Roundtable for Economic Access and Change.

And through that, we have been a convener of bringing together leaders from banking and business and technology, national civil rights organizations. All of these incredibly smart people coming together for the sole purpose of trying to reduce specific barriers that prevent full, equal and fair participation in this nation’s economy. it does take a village in order to really address problems of this magnitude.

So for project REACh, I’m glad to read that it was launched last October, in Los Angeles, where I live, so I would really be interested to know a little bit about how it works. So, in terms of addressing structural barriers, and providing affordable financial products, could you share some of the specific thoughts and ideas that have emerged from that process?

Oh, absolutely. So the overarching approach that project REACh really has is to identify and reduce barriers to that full fair participation.  we tried to really focus on three broad areas. The first one is a recognition that there are nearly 50 million people in the United States that have no usable credit scores. We put this demographic of individuals under the umbrella that we call credit invisible. You’ve got either very few trade lines that can result in a credit score, or you have none.

And if you have nothing in a system of credit availability in the United States, that at its foundation has a score that measures your credit worthiness, and is utilized by all credit grantors, then you’ve got some part of that 50 million people who are outside of the system. That’s the barrier. we need to really address and understand why are you outside of the system.

What do we do to bring them into what we all recognize is a safe and sound financial system that will create a significant advantage and help them propel their lives much farther? That’s the first one.

The second one is what I referenced a few minutes ago, and that is a barrier to affordable housing, because affordable housing in this country really remains an intractable problem. But home ownership helps families build wealth. Project REACh is really looking for the potential for converting, and finding out what is that barrier, and how can we help more people of color be in a position to purchase a home, and from purchasing that home, building generational wealth?

And the third is the importance and the role that minority depository institutions play in this country. It’s critical. This is a group of financial institutions that serve communities that look like them. But They face challenges in accessing capital, growing technology, modernizing their infrastructure, retaining talent, all of these things. These are generally our smaller community banks, but they have a niche community that depends on them, we need to figure out a way to help the MBIs survive and thrive, so they can provide financial services to their communities.

And how do all these three things kind of come together? Because they’re distinct, but they’re interrelated. Why are people credit invisible? What drives someone to make a choice, or by circumstance be outside of the financial system? And there are a lot of reasons that we’ve come to identify as root causes of this. Some are based on bad experience with a financial institution. Some is based on a lack of financial education, before you get your first credit card line of credit. And if there’s no education that comes along with that, how many of us have seen someone get into financial trouble because of a lack of appreciation for paying bills on time, or an inability?

There’s also a trust factor. For many, There’s just a lack of trust in the financial system at its core. Minority depository institutions service the community and establish trust. People will trust the people who look like them. We need to make sure that these institutions are able to provide the financial services and bridge the gap between credit invisibles in their communities. Where they can help build that level of trust and establish those types of financial stepping stones, if you will, through a variety of product offerings that can help people begin and be on a successful journey to managing finances.

Because when you’re on the journey, and you get different types of products, and you learn the value, and the education associated with how you manage money, that can easily turn into the savings account for the down payment on that affordable home. Perhaps with a little bit of help. But we’ll talk about that, too.

Those are the big three things that project REACh has really tried to address. if we can utilize all of these incredible organizations and leaders coming together, I think that really puts us on an incredible path towards financial inclusion.

So you have walked us through the scope of Project REACh, which clearly involves a lot of collaboration, requires public engagement and education, and as you said, takes a village. What about mindset? Can you talk about how the digital economy has changed the mindset of financial institutions in how they look at financial services and products?

Absolutely, . So one thing that we’ve come to recognize, and I think our financial institutions are also coming to a real acknowledgement: not everyone in this country works your traditional 9:00 to 5:00, has a 40 hour work week, that results in a direct deposit into a bank account, that allows just another data point, if you will, for determining credit worthiness. In this day and time, gig economy is a real thing. Having multiple jobs is a real thing. Being paid in cash is a real thing. What we’re doing in that particular work group is looking to see how you take that type of information, and put it into something that can be modeled by a financial institution to create additional products.

OCC is not trying to create a new credit score, and we’re not trying to create new products for banks, that’s what they do. But when you bring the banks together with technology firms, and fintech companies, and community advocacy, national civil rights organizations, who work with credit invisibles every day and know these individuals better than anyone. And they can share that experience with larger institutions, and we can understand more about data aggregators and the kind of information that they take, and put it together so that you can expand the score, or create a model, and therefore create different types of products that acknowledged that very responsible, very credit worthy behavior.

Will you be able to bring everybody into the financial system? I don’t think so. I think that’s a reality. But if there are some significant percentage of that population that can be brought into a safe and sound financial system, where we can begin to really build and establish equitable treatment for people who are paid differently, work differently, and help them establish trust.

I think those things are important. It’s a lot to think about. But at some point, we have to bring our collective selves together to really address this, because the gap will only get wider. We can do better.

So, sitting here in San Francisco Fed, we are part of fintech team. And we have heard a lot of our podcast guests in this series discussing use of financial technology in breaking down some of the barriers to financial access.

So my question for you, if you are looking at United States, what the industry has been doing so far, have you seen ways that financial technology can make a real difference here?

So, I absolutely see that the expanding fintech influence here in the United States, which will really allow us to include those who have been underserved by the traditional financial system. And this century, this year, this is our opportunity to really expand this for the greater good.

Fintechs have increasingly been vocal about alternative credit scoring. The use of alternative data that has an understandable relationship to credit worthiness can create tangible benefit of improving the accessibility and affordability of credit option. For example, some fintechs are offering expanded credit scoring options by using rental data, utility payments, property records. Those are things that lenders can consider when assessing that consumer credit worthiness.

We have something like the project REACh that brings fintechs together with banks, so that they can share. these fintechs are sharing with what some could see as their competitor. Because the problem is so deep, that we have to do it together.

And individuals have choices. They can use mobile applications, P2P, any other technology to enable really near real time and more cost efficient ways to transfer funds, make payments most often just requiring a mobile phone, and that alone can increase access to services. We really recognize the opportunities provided by innovative banks and fintechs. And when they partner, the opportunities are almost endless.

Community groups and national civil rights organizations are also an incredibly vital part of coming up with the solution here. These organizations have seen this problem, firsthand, every day. Here’s the demographic of people who are taking the time to understand what fintechs offer, and engaging with their constituents to help them understand, “Look, you may have to share some of your financial data with this fintech company. But if you do it, it will help you.” That’s the trust factor. This is why it takes a village.

To build off your discussion on trust, data policy, and financial inclusion. Minority consumers, myself included, can feel uneasy about giving out identifying information out of fear that it could be used to profile against them. However, policies are better targeted, when there is more robust and granular data. What is your take on the data collection of minority financial data? And tangentially, how are regulators considering data privacy issues associated with the use of alternative data?

Unfortunately, that fear is founded in some truth and some realities that many people have experienced. And it is the trust factor that I speak of. Clearly, there are benefits offered by financial data collection. It’s really going to be key to meeting the needs and trying to establish financial inclusion, because it all does really require robust data sets.

Strict privacy guidelines and expectations, those are paramount. They have to be established to ensure consumer confidence in this space. And that providing that data won’t be used against you.  We’re really focused on striking the right balance between encouraging alternative data use and innovation, while trying to make sure that there’s adequate data protection, and it’s challenging to achieve that balance, especially when you look at the fast pace at which financial technology is enabling changes across the entire financial services industry.

I do feel as though the financial regulators are always playing a bit of catch up. But we haven’t lost sight of the data privacy piece. We engage with the industry, the fintechs, we’re trying to determine the most effective way to find the balance, and to construct and implement the data privacy framework. it’s hard, But I do believe the robust data sets are key to unlocking the barriers and really making financial inclusion a reality.

It can’t happen overnight, but encouraging individuals to share that data is how we get traditional financial lenders comfortable with what they have, I think, to this date seen as an unquantifiable risk. And to offset that mindset, that these credit invisible are high risk individuals. I would submit that many of them are not just because we know the responsibility with which they handle their day-to-day finances. It’s just not what we have traditionally seen.

It’s something that minority depository institutions can take a leadership role in helping to establish trust. It is the stepping stone with which our more traditional larger financial institutions can begin to model and develop different products, and understand how to assess that individual’s creditworthiness. And once you do those things, you really do begin to see how you can break down barriers for those who have been locked out of this system for a century.

I’m just so glad you talked about trust. I think that is such an important issue, especially if we look back at the 2008 to 2009 financial crisis. you probably will agree that one of the takeaway from that crisis is that the community, the general society’s reduced trust to the financial services sector, are there any lessons to be learned from fintech firms or more broadly, newly emerged financial services providers that are testing with different business models, different financial products. You had made the point, I think, there is a real opportunity for policymakers to think about and really define what responsible financial innovation should look like here.

I do think there are some opportunities here. There’s some real alignment between the fintechs and how they can add value, and really try to help build that trust in the financial system at the same time. after the economic downturn, back in 2008, which lasted practically for a decade for us, trust in the financial institutions was at an all-time low. And if people chose to leave a system that they did not have trust in anymore, then it’s important to try to bring that back.

So, how can they help? I think things like alternative credit scoring, really can leverage a broader set of data and help to build some trust here. Digital financial services, that’s another area with increasing availability, and it’s the convenience of those services, which also helps to build that trust. Digital identification solutions offer an ability to enable more consumers to access banking and other financial services.

It’s amazing to me, if you think about it, we’re all walking around with mini computers in our pocket. a platform that fintech companies have managed to create apps that help individuals understand how to manage money, how to create savings account,  and fundamental money management is being conveyed through a medium that people do trust.

Think about how many people see a brand new app, there’s a lot of disclaimers there, but they want that app. And so, if they have to give up personal identifiable information, for that app that gives them access to something. We need to build the same levels of trust with a financial institution.

I see that as a way for fintechs to partner with our more traditional financial institutions, and thereby help to establish trust. There are some keys that these companies have found that appeal to people, if it’s I get this app that tells me it’s going to help me do this to help manage my money, help me understand how my credit score works, there’s more trust embedded in that company with no faces inside your phone. And we’ve got to translate that in a way that helps people advance their lives. And I am hopeful, we can get people to develop some level of trust.

If they walk into their bank branch, and they have a personal relationship with someone who is not going to judge them, or deny them merely because they’re a minority, and therefore keep them out of the system. In many ways, the anonymity really creates a foundation of trust in apps on phone, is the same way we need to have our more traditional financial institutions making credit worthy decisions that are not based on judgments about who you are and what you look like.

Can I ask a follow up question on the role of the regulator and making sure that the people’s trust in fintech is well founded. For example, there’s a concern that biased algorithms could further widen inequality by adding another level of hardwired structural discrimination, and on a much greater scale. How we can make sure that this doesn’t happen?

That is an excellent question, and it’s something that I speak to banks about all of the time. Many institutions use algorithms, whether through artificial intelligence or other means. But they need to ensure that there’s transparency and strong data governance regarding the sourcing, and the integrity, and the use of that data. And the governance around this is critical. the data quality of the inputs directly affects the accuracy and reliability of their predictive outcomes. And so, financial institutions, from a regulatory standpoint, you can’t buy this off the shelf and not understand how it works, and what data sets are powering those decisions.

Because ultimately, financial institutions are still going to be held accountable for following and complying with every financial lending law, ECOA, Fair Housing, you cannot discriminate in these areas. And an algorithm that creates a bad outcome is not going to be an excuse. So in utilizing algorithms, they really need to understand that the outputs are indicators of risk, and not indicators of race. There’s a big difference.

Before we wrap up, since we are recording this interview, at the beginning of 2021, reflecting upon everything we have learned from COVID, from economic crisis, new data points we’ve collected about inequality and the work you have done on inclusion. And thinking about things that need to be achieved in 2021, what’s on your plate? What’s your priority?

      Oh, my. Well, I tell you, the priorities are big, we are still in COVID-19. I think the country has great hopes. The vaccines are being rolled out, and it gives us a renewed faith that we see the light, if you will, at the end of the tunnel. But I am concerned about increasing unemployment, prolonged closures of businesses that may not be able to survive this. And the impact of people who lost jobs have no income, and what that does to their ability to make the rent payment or the monthly mortgage payment.

I am heartened by the activities of Congress, both through the CARES Act, and the most recent legislation to provide that helping hand. But I also recognize that our financial institutions have some great unknowns that they’re going to have to deal with

And I really feel that this is where we need to be very much focused on financial inclusion. We need to take inventory of people who may be under banked now by circumstance, or worse. And our financial institutions will need all of the strength and guidance from the Federal banking agencies to help them navigate through the credit issue that could potentially create more barriers for us. So my attention is really going to be focused…  how we get capital to banks that need it, so they can continue to meet the needs, understanding the market risk that is there.

Keeping an eye on our international partners, and what they’re going through. This is not a United States problem, this is a global issue here at the OCC,  it is an interconnected effort to make sure that we don’t lose more people into an unsafe space, and we bring more people and utilize the financial system to shore them up. And the one thing I will say, going into this pandemic, our banks were in the strongest position that they have been in, in many, many years, and able to actually deliver all of the prescriptions that were being written by Congress or by our agencies to make sure they can help people in need.

And so, this is the focus now. But our population across the United States, we need to make sure that they’re able to really benefit and be able to trust the financial system of the United States.

Thank you so much, Grovetta. I actually couldn’t think about a better way to conclude this episode. So thanks a lot for sharing your perspectives and your great work there.

Thank you. And you all keep up the great work in spreading this word.

We hope you enjoyed today’s conversation with Grovetta. The discussion certainly has given us a lot to think about in terms of financial inclusion challenges here in the US

As Grovetta said, there are still a lot of work to do ensure that population across the nation are able to trust and benefit from the financial system, and racial equality is a crucial piece of that bigger picture.

As we wrap-up the Financial Inclusion and Beyond series, we hope you will stay tuned for more of our work on financial health and well-being.  There’s a lot of work to be done.

If you like what you heard, join us for a live event on May 18th with Greta Bull, Arjuna Costa, Ting Jiang, and Jose Quinonez. The registration link is in our show notes. And if you can’t make it, we’ll be releasing the audio in this space on iTunes, Google Play, Stitcher, and Spotify. And for even more content, look up our Pacific Exchange Blog, available at FRBSF.org. Thanks for joining us.