This is Pacific Exchanges, a podcast from the Federal Reserve Bank of San Francisco. I’m Sean Creehan. Today we’re excited to share a special episode in partnership with our colleagues in the San Francisco Fed’s Community Development group, which conducts research and engages communities in the nine western states of our District — toward a vision for a healthy and inclusive economy in which all people can participate and no one is left behind. Our teams recently collaborated on a special issue of the Community Development Innovation Review in partnership with the Aspen Institute’s Financial Security program, which examined the potential ways financial technology can promote racial equity in the financial system. Today’s episode is a corollary to our recently concluded Financial Inclusion & Beyond series where we explored what we can learn from efforts around the world to improve financial inclusion and wellbeing.
Like our recent Financial Inclusion & Beyond live event, today’s episode is a recording of a recent event hosted to launch the Review. To kick us off, I’d like to welcome Bina Shrimali, who leads the community development research team, and Rocio Sanchez-Moyano, a senior researcher whose interests include the role of fintech in low-income communities. Bina and Rocio, welcome to our podcast! What was the motivation for this event?
Thank you Sean! Well, the motivation for this issue of the Review, which is available on our website, and the event launching it was two-fold:
First, we wanted to challenge those working on financial inclusion to engage with fintech as a way to better meet the needs of groups who have been excluded from the financial system. Our aim was to cover a broad range of issues in the fintech ecosystem to bring together stakeholders working on this issue and highlight areas for possible impact and collaboration, as well as potential pitfalls.
Second, we wanted to focus on racial equity as an important dimension of financial inclusion and acknowledge it as a unique challenge. Racial equity is directly connected to the Federal Reserve’s full employment mandate and our mission to promote a healthy and inclusive economy. We know that inequities are holding back our economy. As an organization, the SF Fed has made a public commitment to taking action that will result in greater racial and ethnic equity in our organization and the communities we serve, and this work is part of that.
And I’d add that while fintech, racial equity, and inclusion in the financial system were all areas the SF Fed has been working in for some time, the pandemic spotlighted the ways that many people weren’t being well-served by the financial system – people who struggled to make online payments, were late in receiving stimulus or unemployment checks, or small business owners who struggled to apply for and receive relief loans, and that these patterns varied by race and ethnicity. We realized that as the pandemic unfolded it was important to acknowledge that disparities in our current financial system stem in part from deeper root causes, including various forms of institutional and interpersonal discrimination over time. Our goal was to bring in multiple perspectives, voices, and this needed context on the issue to spur dialogue and solutions.
Alright, thank you, Rocio and Bina, for that introduction, you’ll here more of them both in the conversations that follow. This episode is a little longer than usual, but we think you’ll appreciate the depth. Alright, let’s get to it.
Hello, and welcome to today’s event on Fintech, Racial Equity, and an Inclusive Financial System. This event marks the launch of our latest issue of the Federal Reserve Bank of San Francisco’s Community Development Innovation Review. My name is Bina Shrimali and I’m Research Manager for Community Development at the SF Fed. I had the pleasure of leading our editorial team in this collaborative undertaking. Our team included colleagues from the SF Fed Community Development and fintech Teams and the Aspen Institute Financial Security Program. Together, we curated a set of articles representing the unique roles and experiences of 25 different authors. The result is a rich volume of varied voices and perspectives, spotlighting areas of opportunity and potential downsides to fintech. Racial equity is directly connected to the Federal Reserve’s full employment mandate and our mission to promote a healthy, inclusive, sustainable economy and support the nation’s financial and payment systems. Research by the Fed and others has revealed that racial and gender-based inequity translates into real economic losses.
As technological change yields broader adoption of new innovations in the financial system, there’s an opportunity to support economic inclusion and close racial inequities. All of you listening, working in community development, or in the fintech space, or wherever you sit, you play a role in creating a healthy economy. One in which all people can fully participate in and no one is left behind. We invite you to think about that role as you listen. Well, we have a great event in store for you today. Whether you’re new to the topic of fintech or you’re a seasoned professional, you’re in the right place. Over the course of the session, we’ll explore key tensions in the field with a goal to spark ideas, new partnerships, and ways to deepen impact.
First, we’ll hear from Mary Daly, President and CEO of the Federal Reserve Bank of San Francisco in conversation with Ida Rademacher, Vice President at the Aspen Institute and Executive Director of the Aspen Institute Financial Security Program. Next, we’ll hear from a panel of experts facilitated by Rocio Sanchez-Moyano, Senior Researcher in Community Development at the SF Fed. Our panelists will explore promises and pitfalls of fintech and we’ll conclude with a question and answer session where you can submit your questions to our speakers. Keep in mind that the views expressed today are those of the speakers. Without further ado, I’ll pass the virtual mic to Ida Rademacher. Take it away, Ida.
Thanks, Bina. Great to see you and it’s really been an honor to collaborate with you and the team at the Federal Reserve Bank of San Francisco. Mary, I wanted to say that out loud for you to hear as President of the bank. You’ve got an amazing team, really committed to issues that are shared by the Financial Security Program here. We get to kick off with a bit of a grand tour of the issues that are going to be highlighted in the journal. Thank you and thank you for making time today.
Oh, it’s completely my pleasure and I’m really delighted that we’re in this partnership thinking about these very important issues.
Yeah. We have had a couple of opportunities to engage you, particularly, at the Aspen Institute with other parts of the Federal Reserve’s focus, even within its community development work. Your Zip Code [Economies] Podcast that really focused on grounding the work in the footprint of the San Francisco Fed was amazing, and your own background as a labor economist that’s come up looking at macroeconomic connections, it’s been interesting and important, I think, for the San Francisco Fed to start to double down on fintech and financial inclusion. I’m just wondering if we can start with you sharing your own perspective on how the past year and this particular economic recession brought on by a pandemic, teaching different lessons than the Great Recession in terms of why fintech, why financial inclusion needs to be front and center as a conversation we’re having now.
Sure, absolutely. It’s a great question because it highlights so many different things that are influencing, I think, our thinking and our future plans and what I personally think needs to be done to really ensure that everyone has access to what they need in a time of crisis or a time of growth. Both are true. Let’s go back to prior to the pandemic just ever so briefly. Every one of us, I think, here would know that fintech is important, an emerging technology and an emerging business model that really has an opportunity to do different things, perhaps, than we had done before. We also know that there are large portions of our population that are just underserved or unserved by the financial system we have today. Those two things are known and we have people working on this and re-imagining how that can be changed, and then we get the pandemic.
What the pandemic did, when you really think about it, is it shocks everyone. Everybody’s in a major economic, financial shock and the government, the federal government, and many state local governments give support. It’s like we were all very thirsty and really thirsty, desperately thirsty, and the federal government, state, and local government say, “We’re going to give you water.” Now, imagine that only a portion of our population has the pipes to get the water delivered, and the rest of the people remained thirsty despite an abundance of water. That way of thinking about it, to me, talks about the pain that we saw happen in the pandemic.
Many, many people, they’re located at low and moderate income communities, disproportionately people of color, actually disproportionately bearing the burden of the pandemic itself, and now, they don’t have the means to connect themselves to the financial system in any way that allows them to get PPP loans as easily when they need them to keep their small business open, unemployment insurance checks, the stimulus checks. All the things that we talked about for support, they just go ultimately through some type of financial system. That is where, I think, we’re lacking. On the good side, and I would really want to put a good side, I had conversations almost daily, definitely weekly with fintechs, community banks, groups thinking about, “This is not acceptable. How are we going to work on this?” So I’m both chastened by the pandemic and hopeful from the pandemic that these are going to change.
Yeah, I think that’s all exactly right. The kinds of partnerships you saw emerge for problem-solving, the question that arises is what knowledge can we bring to problem-solving no matter what sector we’re in? How do we work on this together? I think that’s a theme. I think it shows up in the journal that we just produced together, too, in terms of the kinds of authors that we have.
I want to go to a place with this that we talked about a little bit as we were prepping, which is that this feels like somehow a different way of thinking about systemic risk than the Federal Reserve is traditionally conditioned to think about it. This recession wasn’t brought on because businesses were over leveraged or failed in that sense. So what kind of lessons come out of this in terms of how you’re thinking about the Federal Reserve’s role in bringing these kinds of spontaneous connections between public and private sector innovation with tech together, and how that actually may be a part of a new way of thinking about systemic risk at the Fed?
Sure. Another word for all of this is we recognize where we were weak on resiliency, right? Resiliency is your salve, essentially, to risk. If you’re resilient, you’re resilient against systemic risk. And you’re absolutely right: regulators of all types, the Federal Reserve included, we have really focused a large fraction of our work on the systemic risk caused by financial overleveraging, et cetera, that can come, especially among the systemically important firms. In the Great Recession, we had many, many people displaced from their homes because they were over-levered in their homes, and banks and other groups not being able to absorb the losses and then struggling themselves. That’s a financial crisis, and one that we are doing everything in our power, among other regulators, to ensure we don’t repeat.
Then we get another completely different type of crisis. Banks in this event are very well-capitalized. Financial institutions come in very healthy and able to lend and get things through. We find ourselves with a different kind of weakness, a different kind of risk. That is the risk that the plumbing, if you will, this basic financial infrastructure, these things, the pipes that connect people, they’re just not available to everyone, and people aren’t familiar with them, and people don’t have ready access. So that means that we have a different kind of risk when we have shocks because, ultimately, the economy is about people. People spending, people getting jobs, people being able to keep their businesses open, that’s the resiliency of the whole economy. So if I’m, as a monetary policy maker, thinking about economic stability, economic sustainability, I’ve got to focus on that type of risk as well, that systemic risk of not having everyone have the ability to get the help that they need to intermediate through a crisis and into the next period.
I do want to mention this: this risk isn’t only at times of crisis. It’s actually a risk to our ability to grow, right? It’s a bridle on our growth. If everyone doesn’t have access to the things that will allow them to grow, then we find ourselves with the risk of having grown more slowly than we could, the kind of unforced errors we don’t want to make.
Yeah. I feel like that’s one of the themes coming through. Well, we’re not out of this pandemic, and we’re not out of the economic impact implications of this pandemic, but I think what you’re saying plants the seed that, look, we were thinking about this journal and this topic before the pandemic even hit our shores.
We can’t let the lessons be just about a band aid for now, right? This is about real systemic kinds of reforms to that infrastructure and even placing priority on the kinds of infrastructure that is about financial institutions hitting the last mile in terms of where those pipes go in that sense. I think that there’s another piece of this to call out, and we can get back into it later about the disproportionate impact on households and communities of color, both in terms of the pandemic, and the economic recession, and how the pipes aren’t just pipes. That there’s a systemic bias built in sometimes to how those pipes work or don’t work in certain communities. That’s been a deep area of work for you over your career and with the Federal Reserve in San Francisco. Do you want to say a little bit about that? Then we can get into solutions.
Absolutely. We are very interested in an economy that works for everyone here at the San Francisco Fed, and we’ve recently adopted, earlier this year, what we call a framework for change. In that framework for change is what do we need to do in terms of studying, in practicing, in being out in the communities, and in dialogue? Basically, what do we need to advocate for? I don’t mean advocate like lobby or try to get a particular policy. I mean advocate for the resilience of the economy and the resiliency of our people who we serve. When we think about that and look at where there are deep gaps that we could work on, and if we improve them, people would have access to an economy that gives them the kind of self-sustaining ability that everybody wants, the mobility that everybody wants.
When you look at that, a key piece of that is financial inclusion. The ability to use the financial system, financial intermediation, which by and large, many of us who are on this call wake up and think is just there for us. We don’t think about our banking system in our daily actions. We just use it, but for a lot of individuals, people in low- and moderate-income communities, people predominantly of color, they don’t have that same sense of comfort. In the background, they’re worrying. How do they get this money? How do they get that loan? How do they get from this week to the next? Those are things that matter a lot to the financial health, but also, I would say, the overall health of our communities.
I will say just a one little thing here that I think is important. People spend their bandwidth on things like worrying about how they’ll pay their rent, or get access to the things that they need, or grow their business. All that bandwidth is bandwidth they don’t get to use to participate in their economy, to participate in their communities, to raise their kids, or do whatever they need to do, grow their careers. So it’s not just the loss of those individuals today. It’s the loss of all the other brainpower they would be bringing to other things if they weren’t worried how am I going to get from here to there. I mean our financial system actually takes a weight off of us when it’s well-used, and it puts a weight on us when it’s not available.
Right, and it’s invisible. I almost feel like it’s that Harry Potter wall, in some ways. You live in one world or you kind of push through to the other. It’s totally different when the system works for you, and certainly, folks in our field, I’ve heard say, for a certain percentage of the population, the systems behave really well for us. For other parts of the population, they have to behave for the system. I think that part of the conversation that we are talking about today is how do we utilize technology? Both in terms of how the Federal Reserve System thinks about technology, but also the ecosystem of fintech. How do we utilize technology to make that service that you’re talking about as ubiquitous and frictionless for the folks that we don’t tend to center on?
That’s hard sometimes given the incentives of a fintech industry that is driven by investments that expect a market rate return on investment, right? So centering your solutions on the lowest income, potentially, least margin kinds of populations, I don’t want to underestimate how difficult that is. So I do think that part of the future of this is aligning incentives, aligning mission, trying to think about what kinds of public-private, not just partnerships, but conversations need to happen so that we are centering innovation on solving real problems that we’re seeing in society. Specifically, in this case, in our financial services system.
Can I add something to that or talk about that a little bit? Because much of what you say, I completely agree with, but I want to add one thing. I want us to back up, if you will, almost, and get back to something you mentioned earlier, which is for most of us, the system works well, and it’s invisible to us. So automatically, that tells us that we can’t use introspection to figure out what other people need. I mean that’s the starting point. So I think you hit the right note. We have to have conversations, but not with ourselves. I mean this is a very nice starting point, but the conversations I really want us to have are with our communities who are underserved or completely unserved. What do you need? Because I’m guessing that the things that they need… In fact, I’m not guessing. I know. The things that they need are not the same things that I need.
I’m in a whole different situation with my financial intermediation, my financial systems, so I can think of cool ideas that make my life even easier, but they’re actually thinking about ways that make their lives that first level easier, that first level sustainable. So the very first thing to do is to get out of our introspection, in our talks with others, and then get into the communities. There are many startups and community groups, and I saw this in the pandemic. I had a conversation with people, CEOs who do small dollar lending. In that, you get CDFIs, you get people who do microlending, you get minority-owned depository institutions. They all have very different business models, but they have found one thing to be true: they can be profitable, successful, self-sustaining in those communities.
This is where I really think it’s important for us to get our focus. It is not about being charitable. It’s about being knowledgeable and being knowledgeable enough to recognize that these are also productive individuals that you can make a profit offering them services, but you cannot make a profit offering them services that work for me. We have to make a profit offering them services that work for them because once they see that as a service and it fits for them, then it will earn a rate of return. I think that’s the other big hurdle. Then, of course, I agree with your notion that we have to have public-private conversations. The best CEO roundtables or community roundtables that I had was when I brought people of different walks of life together, so that they’re not all in their own echo chambers, and you start seeing the ability for people to cross-fertilize.
One thing that I think is undermentioned too in this pandemic is community banks, and I would say fintechs would have the same ability. People were served by their relationship banks. They weren’t served often by the big banks. The bigger banks did get lots of money out, so there’s nothing wrong with that. That’s their job. But if you didn’t already have a relationship with them, it was hard to make one. But if you’re in a community, you can, or if a fintech is working to say, “Well, I want to be in that community. Maybe there’s some things I can offer to help them, but then I’ll be there for them when they need it.” I think that’s the model. I actually think the time is right for fintechs to partner in any kind of way with community banks and others in the community to say, “We’re there for you, and we’re going to do that because it’s a profitable business line, not because it’s part of our philanthropic effort.” That’s the main message, I think, that I’ve taken from the pandemic.
Yeah, and that really is, I think one of the bright spots. I don’t want to gloss over the fact that there is a certain amount of skepticism from community-serving organizations that fintech is a trusted piece of the puzzle. At the same time, I think that what we’re learning very much, and we’ll hear from this from folks in the discussion next is fintech is partly being successful because it is extremely consumer-facing. It is very much singling out what are the markets we can serve, where is there opportunity to do well by those customers because they do see them as customers in that sense, and that’s incredibly important.
There are lots of different pieces in this journal that we unpacked. When I say we, I mean the royal we. There are incredible authors in the mix.
We call out kind of some of the buckets of fintech that our consumers need, the ones that they see and feel and use either easily or not, and also some of the backend, back of the house ways that technology really needs to help kind of create this infrastructure you’ve talked about, this intermediation. Obviously, there’s payments, there’s credit, there’s long- and short-term savings, there’s insurance. There’s a whole bunch of different areas there. And I would say the other part that’s become I think really clear during the pandemic is that inclusive financial systems are as much about the safety net, and who that reaches, or the way that government reaches people, government to household and government to small business, as it is people interacting in the economy and businesses interacting in the economy. But what are the buckets of fintech that you’re most excited about or you think are most important for us to be focusing on?
Sure. Let me talk just from my perspective. I’ll put on my economist hat for a second, and also my CEO of the Federal Reserve Bank of San Francisco hat. I speak to a lot of community groups. I’m out with our community development teams. We’re talking to people, asking them what they need. Here’s one bucket that I think is really important for people. Making their payment life easier, making it easier to pay bills. So many of us…I reckon all of us use some sort of automatic payment system to pay people. When you can do that, that is just something that gives you efficiency and an ease that if everybody can use their phone to do these things, that’s just less time spent lining up at a bank or worse yet a payday lender or something like that. So there’s just the ease of operation, the ease of life. That requires you to be integrated with their financial world and their pay schedules, and when they’re going to need to do these things, but that is a really important feature. I had the pleasure of visiting Singapore before the pandemic. One of the things I learned when I was there is they have this connectivity of financial system that connects all their people and they can get 50 cent payments to people. It allows them to do… I mean not people are doing a lot of 50 cent payments, but imagine small dollar payments, $5 here, the babysitter, et cetera. Being able to do that without being attached to a bank, that is a really helpful thing. That’s one bucket. It’s just the basic payments mechanisms that we all take for granted.
The next thing, of course, is personal small dollar lending. It can get into bigger dollar lending, but for most small businesses, once they’ve opened the business, it’s really small dollar lending relative in the scheme of lending. It’s how do I get my inventory for my business? What if there’s a inventory delay? How do I move my cash around? It’s a cashflow management and these small dollar loans that don’t take forever to pay off, but shouldn’t have to go through all of the‒I mean in an efficient world‒wouldn’t go through all these different requirements. You would just say, “Okay, up to this level, you can do this and you can…right now people do it through their credit card, but wouldn’t it be great if that wasn’t your only option? If there was a service where, you know, Square and others have done this, not to market a particular group, but I’m just saying there are people out there, companies thinking about how to do this. And I think that’s a really important bucket.
And then the third one, of course, and, well, I don’t know if of course, one thing I would like to see is that fintechs as they venture into these markets, recognize that a big role of banks, at least when I was growing up, was financial education. Not just: “Here it is. I hope you make it. And if you don’t, I’m going to take whatever I can get.” And I don’t mean to take time telling too many stories, but early on in my life, I was 15 and I went into the bank and the woman said I couldn’t have a bank account unless my family signed, but that wasn’t really possible. So I told her the story, and then she gave me a bank account, checking account. And then she sat down with me for 45 minutes and she taught me how to use it. And she taught me about financial planning, and how not to bounce a check and all these types of things. And I remember that story because for, until I moved out of the area, I was devoted to that bank. I was loyal. I paid everything. I did everything, even when it was hard that got prioritized for me, because she had made that relationship. So I want fintechs who are here, think about this as relationship financial intermediation. You can have relationships, they’re on technology, but you can have relationships with your customers. It’s the kind of “know your customer,” which I know all financial institutions have as a regulatory requirement. This is actually: know your customer, understand what they need and reach out to them and give them what they want.
Those are the three buckets. Ultimately, if I could design this myself as a social planner, I’d say, what do people really need in these communities? They need one-stop shopping. They need a place where they can go and they can be offered an array of services that allow them to participate in their lives so that ultimately this fades into the background for them. And they can get to the real work of managing their economy, their lives, their financial future.
It makes a ton of sense. I think the one-stop shopping conversation is going to have a lot of animated follow-up on it as well. Thinking a little bit more about the rails, the infrastructure, the intermediation, and what else is in this journal that I think also connects to where you’ve been showing a lot of leadership at the San Francisco Fed, in addition to the payments, in addition to the kinds of services people need: the underlying animating feature of connectivity, equalizing the playing field in terms of broadband and digital access, thinking hard about the consumer protections that come along with the innovation in that space, digital identity, who owns data and where is data.
As I think about where tech can go, not just the upsides of what’s possible, but also the risks we’re going to have to manage. I think that one thing that we’ve had multiple waves of innovation throughout the lifetime of financial intermediation in this country and in the world. And every time, there is a sense that we will have greater inclusion because of that innovation. And it doesn’t just happen because of a technological revolution. There’s something much more intentional about it, and there’s other facilitating factors. As you think about the Fed, as you think about the levers you can pull, the kinds of tools you can utilize to push technology and technical innovation toward greater inclusion and better outcomes. Are there a couple of tools or levers that you feel are front and center for you?
Well, I’d say the very first one is our voice, getting out there, talking to fintechs. I mean, we’re here in California. We have a lot of fintech companies and regularly meeting with them and talking with them, not just about: “Hey, open the door,” but what are the things that are building blocks? What are the things you need to do to be in these communities? And what’s your obligation once you’re there? And I think that you can regulate companies and we do, but it’s also important to incentivize companies through the conversations you have, to do the things that you want them to do to, to make the value proposition, let them see the value proposition. A financially healthy community is a resilient community. You want things paid back, you make sure that community, those people, have access to the things that allow them to get back on their feet in the shock and allow them to grow and create a cushion when the economy is good.
I think that’s one of the main tools we can use. Then, of course we’re under review of the Community Reinvestment Act, and one of the things top of my mind is how do we ensure that financial inclusion is really front and center in that? Not just about development of communities, but about including communities. I mean, it’s really important for us to recognize, I think, that you don’t just go in and build and invest and then leave. It’s about building, investing, and engaging, and including, and creating that self-sustainability, that virtuous cycle. Now I know fintechs aren’t a panacea, but no financial innovation has ever been a panacea. And you said something really meaningful that I want to emphasize is that there are risks and there are rewards. And the way we balance this out in my judgment to get to the right solution is with intention. Being intentional, not being stuck because we think it’s too risky, and not being so optimistic that we forget that there are risks, but being intentional and saying where’s the risk reward trade-off worth it. Because, ultimately, you know where I think low- and moderate-income communities have suffered the most? No one ever gives them a chance to take a little risk, to earn the big reward. And that’s the piece that if we can get that out of our mind, it takes a little risk, earn a big reward, but you mitigate the chances that’s going to backfire on you by being intentional, taking these steps, making sure you have guardrails and insurance, if you will, around it. And it takes a lot of work, but we have an opportunity I think with this technology, which is much easier to disseminate. And to my mind, just if I’d had this when I was 15, for instance, it demystifies financial inclusion, because you don’t have to go into a facility, you don’t have to feel like you don’t belong. You don’t have to worry about: “Hey, I’m not, what do I have? Am I missing a document?” You can just sign up, but that is a great opportunity and it comes with great responsibility.
Thanks. I’m going to wrap us up with one more question and a little bit of a highlight of what I think that the takeaway is from the journal and why we did the journal now, together. And just so everybody knows there’s a whole set of follow-on opportunities. I think one of the things that is a call to action, one of the things we’re really hoping is that the folks that are anchored in community, specifically that have understood the disparities, the racial disparities that played out during the pandemic in terms of where the weakest links are in our financial systems and how they could be inclusive by design. How do we perpetuate an ongoing set of conversations and partnerships with unconventional allies? That’s going to be one thing that we really hope comes out of how people read and think about the journal.
I want to ask you what you think are some of the most important takeaways for the audiences you care about with this. I would like you to answer what’s one thing, what’s your biggest takeaway for a call to action for people listening? And do you think we’ve reached a point where issues of household and small business, financial stability and security have gained a seat at the table as part of what it takes to fuel macroeconomic growth?
Okay. Those are big questions. I’m super, I’m very proud of the journal. I’m proud of the work that my team, and you, and your team did on this. I think the authors really, this is what I like about a volume or a journal is when people know their stuff, they’ve put their heart and soul into explaining it to us. It’s because we get an evidentiary platform to think through the ideas and have the dialogue. And so the journal is amazing and people should take a very close look. And then the second thing I’ll say from that, what’s the biggest takeaway? This is going to take work, and we are going to need everybody. And one of the things that we’re going to have to do, in my mind, is not be afraid of the other. We call it breaking down silos, whatever. So if you’re a community group, it’s: “Don’t be afraid of fintechs.” And if you’re a fintech, it’s: “Don’t be afraid of communities you don’t understand.” If you’re an academic researcher, don’t be afraid to go out in the field. It’s just going to where you’re weakest, because you don’t have the familiarity, asking questions. And I think what will happen, and I’ve seen it happen many times, is when we do that, then we see, we have more natural opportunities to do things together than we would if we sort of stayed on the sidelines and didn’t look. That’s my main takeaway from this, as these are really terrific foundational articles. And they tell us that working together gives us a lot of opportunity.
Now, do I think that household and financial inclusion and the importance of those have reached a place, have found a place at the table? I would have to say that the door is open. The invitation to come in has been granted. And now it’s the work of making the way to the table and raising the hand or eating, whatever the analogy, the metaphor you want to get out, but it is: no. The answer is: not yet. It’s not so solidified that we can look away and hope it sticks. It is absolutely available, but we have to stay on it. We have to keep raising our collective hands if, when you’re interested in this issue and say: okay, financial stability of our households and our individuals, and ultimately our communities, that’s the interconnectivity that we saw so plainly in the pandemic, in the depths of the pandemic and we have to keep it right close to us. You recognize that this isn’t just a nice to have. It’s not just a heartstrings kind of moment. This is actually a resiliency moment. It’s what makes us strong. It’s what makes us competitive. It’s what makes our communities able to weather shocks, but then grow to full potential. And that’s the piece that I think we’ll continue to demand that we’re on it, that we are continuing to raise these messages.
Well, I hope to have a follow-up conversation in a year, see how we’re doing, keeping it on the table. And it’s been an absolute pleasure to talk with you and collaborate, President Daly, with your team. Thank you.
Thank you, really a pleasure. So proud of them.
I’m going to turn it over now to Rocio Sanchez-Moyano, is the Senior Research Associate in the Community Development Division at the San Francisco Federal Reserve. She’s been one of the masterminds behind the project, and you’re going to take it away from here, right, Rocio?
Thank you. Yes. Thanks Ida and Mary for kicking us off, with such a great conversation about the importance of financial inclusion and the opportunities for fintech to help individuals who are not currently well-served by the financial system access financial services. I’ll be joined here today by a panel of experts, several of whom are also authors in our latest issue of the Community Development Innovation Review to dive deeper into the ways in which fintech can enable inclusion. Exclusion from the financial system is broad, and it can take many forms. It can occur because financial services are too costly, do not meet consumer needs, or are not available in their neighborhoods. But financial exclusion can also be systemic, resulting from a legacy of intentionally exclusionary practices in the past that affect the current operation of our financial system. Many of the ways in which people of color cannot fully access and utilize the financial system stems from this historic legacy. Fintech can offer solutions to some of these forms of exclusion by decreasing costs, being digital first, or introducing new ways of evaluating consumer risk.
In this panel, we will explore these themes as we consider how to leverage fintech for greater inclusion. The panelists will be taking questions from the audience at the end of our session, so please submit your questions in the Q&A function on Zoom. And with that, I’d like to introduce my panel today. Marla Blow, President and CEO of The Skoll Foundation, Kelly Thompson Cochran, Deputy Director at FinRegLab, Julieta Cuéllar, Policy Research and Communications Manager at Propel, and Kabir Kumar, director of Flourish Ventures.
Hello, everyone. I’d like to start with a question for all of you, which is to ask you to reflect on the conversations around racial equity that have been brought to the forefront over the last year. Has your work changed? And if so, how? And what sorts of opportunities do you see with the greater awareness and will to address racial gaps that has arisen in the last year or so? Why don’t we start with you, Marla?
Thank you so much, Rocio, and that was indeed a fantastic conversation that Ida just led with the San Francisco Fed. I think in this last moment, this last year, or year and a half, even, if we think about what we’ve observed, I think there’s been a recognition of the fact that so many communities have been underserved, underinvested in, under focused, and basically kind of overlooked. And I’ve seen commitments by a whole host of actors, many of whom ordinarily don’t think of themselves as playing a role in civic life, right? So think of corporations have really stepped up to the plate and made commitments, and really acknowledged some of the challenges.
In terms of how we operate, I’m at the Skoll Foundation now where we really focus on how philanthropy has been meeting this moment and looking at the ways that we understand how race acts as a multiplier effect, right? So, we’re in a pandemic, what we’ve seen is the impact of that pandemic and the virus itself is much more pronounced in communities of color, in vulnerable communities, in those same communities that have been underinvested in, where we face things like racial justice. What we look for is how do we empower and invest in and make grants to leaders that are proximate, right? Leaders that are in and of the communities that we are looking to serve and ensuring that philanthropy, which has had the same kinds of distribution of grantmaking and support for nonprofits, that we see in places like venture capital and other kinds of capital allocation systems, and really going and looking deeply at our own process and how we change our process and embed equity in how we do this work so that it has lasting effects and, drives lasting change in this arena. So ensuring that the grantmaking that we do indeed goes to those that are most closely aligned to the challenge.
I’m just going to move around the circle on my screen. So we’ll go to Julieta.
Thank you so much for the opportunity to participate in both the journal and this event. I work at Propel, and we’re a company that has created an app called “Providers” formerly called “Fresh EBT,” and its principal function is to allow people to check their EBT card balance in real time. But, in addition, we’ve now sort of launched a more holistic financial management app. We also feature a free debit product.
Propel was founded, I would say, to address the racist legacy of why it’s so difficult to access and manage government benefits. The red tape involved in indexing benefits is pretty well known, but the experience of also receiving them is incredibly difficult. Before our app, food stamp recipients had to call a 1-800 number and enter a 19-digit EBT card number to hear their balance through an automated system. It made it really difficult to plan and manage on an incredibly tight budget. And it also led to a lot of stigmatizing, embarrassing moments at the cash register when people didn’t have enough funds and had to put items back.
But turning to what’s happened in the past year or the past year and a half: I think for us, the pandemic revealed and created opportunities to address racial and economic inequalities. Our user base was hit really hard, really fast. And we have learned that our, predictably, unfortunately, that our users of color really suffered the most. And we responded really quickly at the onset of the pandemic, first by launching a partnership with GiveDirectly in which we distributed a thousand dollars, no strings attached, to randomly selected users. And we started distributing payments March 22nd, I believe. We were really out there kind of among the first people sending money out.
And in addition to that, we also created tools that helped reach a larger, the whole, user base, such as we created a benefits hub, which helped distribute information and address that kind of confusing and just constantly changing information regarding new or expanded government benefits programs. And it’s become our most used feature. It’s a permanent feature now. And if I could just maybe go into like one more example, we are also with the change in administration, and this new sort of mainstream interest in addressing systemic racism, we’re also having a huge opportunity to engage the federal government on how to address racial inequalities as they relate to government benefits. We’ve been very involved in making the new child tax credit much more accessible to our users and, by extension, low-income people across the country. The baseline when the program was launched was that people would just need to file taxes and they would get their payments where they filed taxes. But we knew that among low-income people and among our users, that they didn’t previously have a reason or an obligation to file taxes, and they would be missing out. And they’re the people who need the most help. So along with other advocates we pushed and the White House also pushed for a non-filer portal to come out sooner. And sort of the same thing was repeated when it came to being able to access, sorry, to update payment information, which we knew that would be outdated, or simply that people couldn’t wait to get a check in the mail. These are some of the ways that we’ve been able to sort of capitalize on this new interest and motivation to address racial inequality in the government benefits system.
Thanks, Julieta. Kelly, I’ll turn to you.
Thanks so much for the invitation to participate in both the panel and the issue. FinRegLab is a non-profit, non-partisan research organization, and we’re focused on the use of data and technology and financial services with a specific focus on how it can increase access and positive economic outcomes for underserved communities, whether they’re consumers of color, whether they’re small business owners, specific geographic communities, I mean, there’s a wide variety of populations that aren’t sufficiently served by the financial system. And we’re looking at the many ways that data and technology can kind of intersect with those questions. So, I don’t think that focus has changed in their past year.
I think what’s changed the most is the intensity of the discussions that we’re having in two ways. One is a negative way because the pandemic and all of the change that we’ve seen in the last 18 months have made many of these problems harder. They have hit communities of color so hard in terms of the economics, and the health impacts, and other things. And it’s complicating the things that were already problematic about the system. At the same time, there’s also opportunities because I think we’re seeing so much attention on these questions and a greater appreciation of how it is affecting the entire economy. And, so where we’re really seeing it as just the tempo, I think, and the need to be smart and effective in this moment to both make sure that the recovery is stronger and broader than the last financial crisis. And also that the things that have shifted, that are causing people to look more seriously at these questions, that we really take that moment and use it to make more lasting change. So, it feels like an acceleration to us more than anything else.
Great. Kabir, let’s close out this question.
Thank you, Rocio. And thank you for me too for the opportunity to contribute and to be on the panel. And it’s great to be with friends and familiar faces on this panel. Flourish Ventures, we are a venture capital firm, but we are a bit different. For instance, we back Propel and we helped create FinRegLab. And so we are very much interested in the financial system as a system. And we were created three years ago because we wanted to build a fair financial world, and we have a set of principles that guide us.
And so we’ve been, I would like to believe, acutely aware, more than aware, working on addressing the racial gaps in financial access, and financial health, and how black and brown households have disproportionately impacted. We say that the share of population that is unbanked is in the double digits for black and brown households versus white households. But there is also the nature of being banked, having a checking account, but not being able to save, having a checking account and being saddled with fees. And we strongly believe that the answer lies with technology enabled businesses, digitally enabled, digitally native businesses, ideas like Propel’s, and we believe those are the best places to address these gaps.
But the racial, I would call it the racial reckoning that we are living through, that we will continue to live through has emboldened us in our direction. So we were backing businesses that we believe were addressing these barriers but now we are also much more driven to back black entrepreneurs, for instance. We have also created the space and gone through the exercise of reflecting on are we somehow contributors to systemic racism and how we think and how we communicate and how we look at businesses or individuals. And then there were gaps that, I think, we knew but we didn’t really focus on. I’m thinking specifically draws from university professor, Chris Brummer’s paper last year, about the lack of diversity at regulatory agencies, an area that I’ve worked on a lot. I’m so grateful that he wrote that paper that brought that issue to the foreground.
But the one area where I think we have the biggest conviction as what Mary Daly was talking about, that the pipes, the plumbing, making people’s payment life easier and so on. This is about the underlying infrastructure, how money moves, how we identify people, how data works, how credit works, and we believe those gaps contribute to the racial wealth gap and we strongly believe they need to be addressed and that’s part of the set of issues that we highlighted in our paper.
Great. Thanks to all of you for starting us off by really foregrounding the racial equity components of this work. And now I want to get into the weeds on fintech and racial equity and inclusion. So, let’s start by thinking about the end user of the fintech solutions: the individuals or the small businesses that fintech might be able to bring further into the system. Julieta, Providers was inspired by the experience of your founder, Jimmy Chen, in applying to food stamps. Can you talk to us about designing an app that starts with the users and how do you learn and what do you learn from the users of your app?
Yeah, thank you for this question. It’s interesting because at the beginning, Jimmy was focused on helping people apply, improving the application process when it comes to SNAP food stamps but through standing in grocery stores and going grocery shopping with people who receive SNAP, we learned just how hard it was to not be able to easily access your EBT card balance. And so, my early co-workers observed what I described earlier of people having that 19-digit EBT card number memorized and the phone, the 1-800 number memorized to call and get their balance. Another thing that they saw commonly was people going into the store and just buying a banana and doing that so they could see their EBT benefits balance on the receipt. It was so common that they call it the balance banana.
But Jimmy also often talks about the fact that people built tools for their experiences, the problems that they know. And in tech, those are often the experiences of problems of white male affluent people. And we really see a dearth of technology companies that address the challenges of low-income people. And there are many people at the company who have had those experiences but we obviously don’t live them anymore, even if we grew up that way. And so, we are really committed to users being a key part of everything that we do. We have a staff person that’s dedicated to incorporating users in everything we build, and before and after every new feature, product, brainstorm, we run surveys and we talk to users.
We really took this to the next level in creating Providers by creating a co-design group, which was a group of users who participated on an ongoing basis in the creation of Providers and the debit card, which were both launched quite recently. They tested new features. They tested our new designs. And I also want to note that we compensate all our users for their time, every time. And just recently, we launched, I’m co-leading, something we’re calling our child tax credit experience project. So we’re following 10 families for seven months while they receive the child tax credit payments and also in January. And we’re learning about the impact that those payments are having on their families but also the difficulties that they’re facing in accessing those payments and trying to identify opportunities to influence policy for the better or build new tools and apps to help our users.
In terms of things that we’ve learned from our users, I don’t think that I could say that succinctly at all, but I can tell you that we have a whole page up on our website, which is propel.com/learn, which we’re really publishing at least once a month, if not more frequently, user insights, stuff that we’re learning on a monthly basis about how people are doing in terms of food insecurity, financial insecurity, housing insecurity, and also more top level findings as they relate to different government benefits, for example.
Great. Thanks. Marla, I know you’ve thought about this a lot. How can fintech companies put themselves in the best position to serve traditionally excluded customers, and be promoting racial equity?
One of the big opportunities that fintech entities have is typically they are small and nimble and can focus on relatively niche kinds of populations to prove out their solutions. So differently positioned from organizations like big banks and others that have really broad incumbent populations that have to be met, and it’s a lot harder for them to run tests and experiment. The nice thing about fintechs is you can choose a population, you can choose a platform, you can run a small experiment and see how that goes and then build on that. One of the ways that I’ve seen that work really, really nicely is, again, around this notion of empowering people that are close to the problem and understand how communities that have been underserved have found ways to solve their own problems creatively. I love what Julieta was just sharing about the balance banana. I hadn’t heard of that, but it’s a hilarious and creative way that people figure out how to solve the problems that they have.
And so when I look at some of the fintechs that have really started to grow and take hold, it’s been those entities that are led by leaders of color who are supporting communities of color that have come up with things like a shared lending and community lending kind of solution, similar to what we might see at Mission Asset Fund or an Esusu or some of the others where that has now been able to be digitized and scaled and rolled out with the support of other kinds of financial backers, whether that’s banks that are now able to serve another part of the population, and they can adopt that solution once it’s been proven by fintech or direct to those consumers and understand how to identify them and replicate that solution that has been longstanding in the physical world amongst these communities that are in need of some kind of alternative when the banking system and traditional lending has not been available, and find a way to accomplish something very similar, build the same kinds of trust, the same kinds of feedback mechanisms, the same kinds of tracking abilities, and then create that kind capital amongst and within that community.
And then ultimately finding that in many instances, those solutions actually have broader application once they get proven out in certain communities that may be specific and can actually apply to much more general parts of the population and so ultimately can become adopted by big banks that now partner with those fintechs and offer that same solution on their really large platform and can bring that to much bigger populations and other kinds of applications of it.
So, I do think that there is a real opportunity for that same creativity to really be unleashed with some incremental empowerment, again, of voices that typically don’t gain the kinds of access that we might otherwise see and let them demonstrate their knowledge and understanding and ultimately put in place some options that otherwise are not a part of how traditional banking system thinks about accumulating capital and making that capital available. So, more of that is what I would love to see, and I think is a real possibility to drive change in fintech and then expand that change into the entire banking system, as it’s proven out.
Thanks Marla. Kelly, you’ve done a lot of work around assessing credit risk. Can you tell us about innovations in this space and their potential impact for racial equity?
Sure. Automated underwriting is not a new concept. That’s been around for decades, and there are a lot of advantages to it in terms of scale and consistency but there also weaknesses and dependencies that come with it. It really depends on the quality of the data and the quality of the analysis going on. And we know, over the decades, that some of those weaknesses and gaps have become apparent in the current system. So people have been working for years to try and address those, both by getting better data and by thinking more deeply about the analytics they’re to use to predict when a particular applicant, whether it’s a consumer or a small business, is it going to struggle to repay a loan.
What we’re seeing right now is a wave of continuing work and this is not new, again, but a lot of initiatives are accelerating. People have been looking at alternative sources of financial data in the U.S. for more than a decade. There’s a real recognition that continuing to depend on the traditional data that is funneled through consumer reporting agencies has some disadvantages. It’s reported on a lagged basis. It only focuses on certain expenses of the consumer. And there are 50 million consumers who aren’t included in that system because they don’t have enough traditional history to generate scores using the most widely available models. So people have been thinking about ways to try and overcome that.
A lot of the efforts early on were focused on trying to get more information into that traditional system, whether it was from landlords, utility companies, telecommunication companies, other types of companies to which consumers are making regular payments. But what we’re seeing now is a real move towards getting that information through other means, more than a push from the companies that rent or the landlords or whatever. Some of this is now a pull where the consumer is giving permission and the data is being pulled by a different set of intermediaries, with the consumer’s permission for that specific purpose in that specific moment. It may be coming out of their bank account records or may, in some cases, be coming from, for instance, a utility, but it’s just being pulled through different mechanism. So we’re seeing a lot of interest in that right now, and the opportunity to potentially go deeper and really understand more about applicants who, beyond what you can see in their traditional records and in the cases where they’re just not showing up the traditional system.
The other change is on the analytics side. We’re seeing a lot of interest in machine learning techniques, which may be able to draw more insight out of data, whether it’s either traditional data or this expanded financial data universe to really understand and go more deeply and understand subpopulations of consumers or small businesses that may have different considerations or different risk profiles, and really do a better job of predicting what products will work for what consumers or applicants more generally.
So, both of those changes are encouraging. Fintechs are a part of it but banks are looking at these same questions as well. We’re just seeing a lot of interest across the ecosystem, even prior to the pandemic, but I think particularly with the pandemic, it has accelerated tremendously. In part, because there’s so much uncertainty in the system right now, even for the types of applicants who normally can be risk assessed using traditional data, right now it’s really difficult to do that because there’s so much uncertainty in the system about what’s happening and those lags that I talked about are really important in a time where you have a lot of economic change going on.
So, the incentives to address this question have just gotten much stronger because it’s not just about reaching populations that aren’t being very well served by the system, but the entire system as a whole and how it deals with risk in times of change, whether going into a downturn or coming out of it and how do you extract important signals and really make good decisions, both for the applicant and for the company. So, we’re seeing a lot of activity right now in those two fronts.
Thanks, Kelly. And actually, I think you’ve set us up to, to shift the conversation a little bit to talking about the ecosystem around fintech and financial services and how to set up a system that fosters inclusion and equity. And so, Kabir, in your article, you discuss the essential components of the ecosystem or plumbing. Can you highlight one or two of the most important components as you see them to improve racial equity and inclusion?
So, Rocio, Marla, Kelly, Julieta, let me say this, there are balance bananas throughout the system, in the sense that there are efforts by people to figure out how they can overcome problems with the fundamental plumbing. That’s really what that example is. We create shortcuts, and that’s not how it should be. We should not be putting burden on people to create shortcuts. The system should just work for them. And that’s really at the heart of what we contributed to the Review, which is that we need to address key components of the plumbing. And we identified five, Rocio, as you intimated. Payments, identity, credit data, specifically open data for finance and what we call regulatory, which is really digital reporting. And these are essential. Kelly’s already talked the importance of data, especially alternate data and credit access.
Mary Daly touched on identity. So maybe I’ll pick up on that. As you know, we have a patchwork identity system that creates a range of challenges. As we noted in our paper, identity theft of reports, I think this is, frankly, maybe research that Kelly has done. Identity theft reports tracked by the FTC have more than doubled in the last two years. African Americans are three times as likely and Latinx, two and a half times as likely to have experienced that related fraud. This is people reaching out to say, “Can you mortgage refinance?” or “Can you consolidate your debt?” Those kinds of schemes. And then whites, so three times more of African-Americans, two and a half times more for Latinx, and then for both populations, two times more likely to be victims of income-related fraud. This is people reaching out to say, “Hey, get rich quick scheme from home. Join this pyramid scheme or this business scheme.” This is tied to the challenges we have in the identity system.
And then, the other area where the gaps in the system became very clear to us was during the pandemic in the delivery of government services. Ida touched on that in her conversation with Mary. And we commissioned a study at McKinsey, they looked at 12 government programs across seven countries and we found that the U.S. response was the most ambitious, arguably, or one of the most ambitious, that’s share of GDP, but it was the least effective. And we all know the GAO study and we know the public news stories about how money went to deceased people, that money didn’t get to people on time, people had to qualify themselves to get money. All of that is tied to the drawbacks that we have fundamentally with how identity works. And I’m particularly excited about one of the solutions identified in the Review by the Beeck Center, by Waldo [Jaquith], on login.gov. So I encourage people to read that. I think it’s one of the ways in which you can aggregate all of the federal data and, potentially, data at the state level the government has on us. And if we can aggregate that and create a single authentication window thorough login.gov, it could be hugely beneficial for a whole range of services. So, that’s one area, I think, that would go a long way if we can take steps, meaningful steps in that direction.
Great, thanks. And Marla and Kabir, you both have a lot of experience on the funding side, funding new ideas. And so, Marla, I want to start with you, what do you see as the role of venture capital and other forms of investment in facilitating equity and inclusion?
One of the opportunities in venture capital and in early stage capital, in general, is to make some high-risk bets in areas that are not proven. That’s what venture capital does best, is identify opportunities that are very scalable, massively profitable when they are structured in the right ways and bring those and then fuel those and put in a position, the opportunity to capture that market opportunity and scale and ideally scale at almost zero marginal costs. Those are the kinds of opportunities that are really big fits for venture capital. And what we’ve seen is an approach to venture capital that focuses significantly on what that industry has described as pattern matching. What I am really excited about is, now that venture capital has, I would say, saturated how that pattern matching model can work. And what I mean by that is looking for the kinds of demographic fits that are consistent with successful entrepreneurship in the past. So they’re looking for the next Mark Zuckerberg, which has somehow come to mean like young white man in a hoodie, which is not at all what we need more of, but brilliant and insightful, and able to identify and think about what might drive people and turn that into interesting opportunities for all of us to experience the world differently, absolutely, and look for that might come in a packaging that might be a bit different from what has been the traditional person and profile that venture capital has been looking for.
So what I’m really looking forward to seeing in the venture capital arena is this opportunity to broaden the aperture in terms of what the exterior might look and really try to identify the characters, the character traits. The kinds of knowledge, and not just the traditional prudential type knowledge, but experiential knowledge and find people, and I’ll highlight an example. There’s a young man named Marcus Bullock, who I’m a huge fan of, who’s built a business called Flikshop. And Flikshop is about enabling people to communicate with their incarcerated loved ones. And it’s informed by his own experience of having been incarcerated when he was a teenager and his mother communicated with him every day. Literally every day, his mother sent him a letter, a note, a postcard or something and that made it possible for him to get through the experience of being incarcerated as a teenager in a way that those that were not receiving that kind of communication could not. And now he’s built a business focused on making it easy for people to stay in touch with their loved ones who have gotten caught up in our, what I will describe as problematic, criminal justice system.
Fixing that and addressing the criminal justice system, absolutely, but also finding more Marcus Bullocks in the world and enabling him to bring what he knows and what he’s observed and what turns out to be an incredibly scalable, really powerful, very sticky business that makes people really comfortable and want to participate in it, to solve a problem that they have. But Marcus does not look anything like Mark Zuckerberg and doesn’t have anything like a profile of Mark Zuckerberg’s but has an early stage opportunity based on some experiential knowledge of his, that could really be powerful if given the opportunity and given a little bit of fuel. So in some ways it’s a lot of similar to what Julieta was saying about Jimmy trying to solve his own problem. There are lots and lots of people that come in different packaging that trying to solve a problem that they know. And I’m excited to see venture capital tackle that.
Kabir, you’ve also been thinking about public investment. Where’s the role for public investment and where’s the role for private investment? Can you talk a little bit about how you see those working in the system?
Yeah. Look, we are a venture capital firm and so we strongly believe that venture can play a significant role and we see it happening. And I mentioned at the top of this, how we are, to Marla’s point, changing who we invest in much more systematically. But when it comes to the underlying infrastructure, I think it’s less important whether it’s a private investment or a public investment. And recognition, and we make this point in our paper, that these are quasi-public goods. They’re meant to work to enable both private innovation and government effectiveness. They’re meant to enable development of new solutions that impact all of us. And so, I think we need those kinds of investments. In fact, we’ve made this recommendation, for example, to the Biden administration. And it turns out, as we highlight in our paper, that these investments needn’t be sizable. Like, for example, India’s instant payment system which is very well-regarded, costs $600 million to run. It was recommended to the Fed by Google as a way to enable instant payments.
Let’s take the identity example I made earlier. If we went the sort of full-fledged identity system closer to what we see in India or even in Singapore that Mary mentioned, maybe it’s $3 billion to develop something, but the GDP impact is 4% to 5% of GDP or trillion dollars, it’s the ROI dimensionality. But if you did something like what Waldo in the Review paper talks about, the Beeck Center paper, login.gov, that’s significantly less investment. And the GDP gain could be 0.5%, which is still pretty significant.
So I think that there is a role here for defining a space for sort of public good oriented investment, whether it’s coming from the private sector or it’s coming from tax dollars because I think we need to make these. And as we’ve highlighted in the paper and we already discussed today, they are, I think, essential in addressing the racial wealth gap and the challenges we face today.
Great. Now before turning to audience Q&A, and I encourage you to keep sending in questions, we’re already starting to see some in the queue. But I do want to touch about some of the risks that might arise from using fintech in trying to expand inclusion. Kelly, you’ve laid out a lot of the opportunities that come with the new data and the new models, but where do you see potential pitfalls in the use of these data and methods?
Many of the pitfalls are similar to the prior generations of automated underwriting. There are some ways in which the new technologies and data create new challenges, and they definitely require people to be thoughtful about what they’re doing as they go through the process.
So, first question is data. As we talked about before, with the current generation and prior generations, the models are only as good as the data. So where there are gaps, whether there are inaccuracies and so on, that tends to lead to worse performance and worse prediction. And we know that many of the biggest data gaps affect communities of color far more severely than whites. So that fundamentally is something that has to be grappled with and whether it’s a traditional model or a new model, and whether it’s traditional data or new data. But we know that many of the new data sources are potentially more inclusive, they do cover a broader proportion of the population. But you still have to think through where are the weaknesses and gaps and what are the questions about accessing that information that could still create blind spots? So a number of questions there, and a number of questions about just fairness and how they potentially affect different populations as these models change.
There’s a second set of kind of fairness, transparency, and privacy concerns with data that aren’t so much about fair lending, but they are about other ways about what consumers understand about how they’re being evaluated. So if consumers don’t understand the criteria under which they’re being judged, they may not manage their finances in a way that increases their chance of being approved for credit and having a good experience. And there are also questions about privacy and transparency and just understanding what’s happening to them, improving their finances over time and making it a positive experience. And as we get into new forms of data and more complex models, these questions about how we educate consumers about what’s happening and what they’re being evaluated on become increasingly important. Because even in the current system, there’s a lot of people who don’t understand exactly how credit scoring works and what information is available in their credit files. But that becomes exponentially more complicated when you’re going beyond those traditional sources and starting to talk about other kinds of information.
And then a third area that’s really important when it comes to machine learning models in particular, many of these of models are more complex. They’re harder for developers and regulators and kind of all of the various stakeholders to understand exactly how the models are making the predictions they’re making. And so that raises a number of concerns. It can raise fair lending concern because we don’t really understand what associations the models are making. But it also raises just basic considerations about do we know if the models will stand up when conditions or data start to change? And how do we provide the disclosures to consumers that they get under law to make sure that they do understand what’s happening and have a chance to potentially correct the record of some of the underlying data might just be wrong for that individual consumer.
So one of the things that we’re focusing on right now is a large project looking at some of those explainability and fairness considerations when it comes to using machine learning. Because if those models are going to become a more important part of the credit ecosystem, those management concerns are very important both to the applicants, whether it’s consumers or small businesses, and to the lenders and the broader system to make sure that the outcomes that we’re getting are positive for all of the stakeholders.
Great. Thanks. And so the last question before we skip to Q&A from the audience is for you Julieta. You work at a fintech, you talk about in your piece things that Propel thinks about in terms of protecting its users. And so can you talk to us about how fintechs can be protecting their users?
Sure. We often talk about Providers as a financial management app, which it is, but helping individuals manage their government benefits or just simply serving a low-income user base is fundamentally different. I think the stakes are higher for us, but there may be lessons for others in the field. Our user base is more financially vulnerable and getting anything wrong can have huge consequences for them. So we have some driving principles, like [inaudible 01:15:02] and I think they all stem from one idea, which is that connecting with this subset of households is a privilege for us.
So this means that we’re not an open advertising platform. That’s something that was decided from the beginning. And that’s kind of uncommon, I think, for a tech tool. Let me back up. All offers and job opportunities that appear in Providers, which is how we generate revenue, have to provide a clear value to users. And this isn’t driven by paternalism, I don’t think that our users are any less savvy than any other consumer. But we do this because it’s much harder for our users to absorb any financial loss. And it’s also good business for us, right? If we show predatory ads or we’re otherwise showing ads that aren’t useful to our users, they’re going to stop continuing to use the app.
We also start from the principle of collecting as little user information as possible, and this is pretty different. A lot of companies collect information and they’ll figure out how to use it later, potentially, but that’s not where we started. And we also communicate to users clearly that they’re authorizing us to pull information, their data, in real time to display in the app from another source. We do still kind of I think struggle in communicating in this. A portion of our users think that we’re the government, still, so it’s kind of an ongoing struggle to communicate that well.
And then I think I’ll just finish by saying that just like we did with advertising, we’re starting to develop standards for how we share user research externally, right? We are in communication with users very frequently. We have over five million monthly active users across the United States and three territories. And people are very responsive to us, we can get information in real time and there’s a great amount of demand and just interest to know how are people faring month to month. Are new government benefits reaching low-income people at what rates? What impact are they having? And we really welcome this interest, but we are wary of the research feeling extractive. And I think we’re really committed to creating opportunities for our users to speak for themselves.
p>And we recently invited Tyrone Hanley of the National LGBTQ Anti-Poverty Action Network to speak at Propel. And he articulated something really well. He said, privacy is a privilege and it’s not one that’s afforded to the poor often. And I think we have that top of mind, want to protect our users because anything we say about how receiving a cash benefit is spent or how it affects participation in the labor market is incredibly fraught. To be poor, and to be poor and receive government assistance is to be under a microscope and to be constantly judged and monitored for this decisions you make. So it’s something that we consider very, very carefully.
I know we are running against the clock, but I wanted to quickly add that Propel’s approach to data privacy and handling data has been an inspiration for Flourish Ventures for the kinds of services we provide for our entire portfolio. So I think Julieta you have a set of principles, if I’m not mistaken that Jimmy originally drafted, on data handling and I think it is unique and ahead of the industry and in working directly with the portfolio it’s a stand out. So kudos to you guys for driving that forward.
Great. Well, thanks to all of you for that. And thanks to everyone who’s submitting questions. I’ll start with one for anyone in this group, feel free to jump in. What do you see as some low-hanging fruits that consumer-facing tech companies could be doing, but aren’t? What could be easier win-win for both them and the underserved community that we could be bringing in?
Low-hanging fruit is probably hard, right? If there were low-hanging fruit a lot of people would already have gotten to it. But one of the things that I think is really interesting right now is the opportunity to build a little bit, I guess, on what Kelly was referring to earlier around data and putting consumers, individuals, and in some way in a position to have an artificial intelligence structure operating alongside them on their behalf, right?
When consumers are making decisions about financial products and how to navigate their financial lives, there is often artificial intelligence on the other side, right? They are interacting with a company or with an entity that is leveraging artificial intelligence. But don’t have any kind of access to artificial intelligence enabled, input advice selection, algorithms, etc, and are left to kind of do that as best they can on their own.
And so as the cost of implementing artificial intelligence starts to come down, what I’m really interested in is how some of that can be flipped on its head, right? In putting individuals in a position to rely on and seek input from and be advised by some kind of artificial intelligence kind of on your side, if you will or something like that. I don’t know if that counts as low hanging fruit right now, but one day, as this starts to become more attainable and again more economically viable, I’m hopeful that we’ll see something along those lines that will put people in a position to be kind of evenly matched, right? Whether they are choosing against an algorithm over and over and over again in their lives.
Yeah. I would say… Do you want to go ahead.
No, I was going to say something about alternate data, maybe you’re-
That’s where I was going too. I don’t know if I would describe it as low-hanging fruit. I think I do kind of focus on that phrase. But I think that the focus on cashflow information and bank account data is really key. I touched on this earlier, but that was the focus of our first large empirical project. And one of the reasons that we focused on it is because these data while there are racial disparities in the use of transaction accounts, bank accounts, prepaid accounts, and everything else they’re much smaller than the disparities that we see in the credit system. And these accounts can help provide a much more holistic picture of consumers’ finances than the selective kind of slice of what you see through the traditional credit system because you’re getting kind of potentially all of their recurring expenses and a sense of their income flows and balances over time. So it’s giving you potentially more information, more real-time information. So there are a lot of reasons to focus on that as a potential source of really much richer understanding of what’s happening to consumers in their finances and when credit makes sense and when it doesn’t.
And at the same time, it’s not easy. There are a number of questions about how you get those data flows working and how individual companies build their models, and all of those questions. So it’s not an easy lift, but it is a really promising area. And our empirical evaluation, we looked at data from six companies that are using this kind of information in the market either for consumers or small businesses. It was encouraging both as to the general predictiveness the potential for inclusion and fairness considerations. So that’s an area where I think a lot of people are looking, whether they’re drawing very specific things out like just what is the consumer’s rent. If you’re looking at evaluating them for a mortgage, that’s an obvious piece of information that’s potentially really valuable, but isn’t usually available in a traditional credit report or a more holistic look at the applicants. So that’s an area where we’re seeing a lot of interest in activity.
Kabir, do you have something to add, or should I jump to the next one?
Yeah, I would go as far as to say that it could qualify as low-hanging fruit, because it turns out that the vast volume of lending today is still FICO-driven, so we are at the beginnings. We understand how this works and we are at the beginnings. And on top of that, other data sources are being available. So we are moving towards not exactly an open data for finance system, but pretty close to it over time. And you saw Fannie’s announcement of using rental payments data, right? Kelly, if I’m not mistaken. And then you saw the White House executive order on data portability, focused on data portability. So we are moving in that direction. There’s already sort of proof points on cashflow data. And it turns out that the vast majority of lending is still the old system that has perpetuated racial inequality. So in some ways it does qualify as a low-hanging fruit and it will be great to see more ambition and more businesses pursuing that with greater thoughtfulness. We will be excited for that for sure.
I think one of the things that goes to is what’s the nature of the infrastructure you need. Some of it is pipes, right? But some of it is also regulatory infrastructure and that’s a place where the system isn’t fully built out. And in some ways the U.S. is substantially farther behind other countries that are focusing on some of these questions. And all of those things kind of come together to make the business conditions, right? So it’s definitely gaining momentum. I mean, there’s no question, I don’t mean to not acknowledge that. But there are important things to get sorted out that will affect the pace going forward in scale.
I think some of those answers actually lead really well into our next question as we think about the system, which is what are your thoughts on a potential public option for banking? Potential for postal banking or something else in that, and whether that has a role to play here?
I have spent most of my career in the emerging market context where the banking system in the hand of public entities has not always given us the most favorable outcomes. And so when I think about the public option, I think about what can the public do? What can the public sector do and where can public money go? And in part, we wrote our paper to highlight other ways in which the public sector can play a role. And one of the big ways, and I’m like a broken record on this, is on this infrastructure. I think these are severely under invested areas, they’re shockingly under invested. It’s very instructive that the head of the San Francisco Fed is talking about a system in Singapore.
And so I think we need to make those investments, which I think will unlock significant innovation. In fact, it’s well documented that will unlock significant innovation and arguably it would go a lot further than a pure play public option of the kind that I’m skeptical based on my experience in the emerging market context. So that’s a strong line in the sand right there. So hoping for others to correct me, Julieta, Marla, Kelly, what do you think?
I mean, it’s an interesting dilemma because we do have very different banking system in this country than almost all other countries everywhere else in the world. And so I think we have to think about it in this country given where we are as how can a public option co-exist with the private sector banking system that we already have. And that usually operates in places where traditional business models are not viable. It’s unclear to me, I guess, what would need to be true, in order to facilitate the creation of a sort of side-by-side system that would allow that. There are some ways in which the banking occurs in postal service outlets now. money orders, etc. And so we do have a little bit of data on it, but I think there’s still big question marks given how different our system really is already.
Another point I would make is…Go ahead, Julieta.
I was just going to say, I think it’s an exciting possibility, right? I think that at Propel, we often think about what’s a good fit for a company to do and what’s a good fit for the government to do, and the way that they coexist and build on one another and really reinforce each other’s goals. And I think that the government stepping in can take us on a big leap forward much more quickly than we can as Propel or other fintech companies working at the margins. And then on the other side, sort of a downside is that they must serve everyone in that it encumbers them in many ways.
But if they take that first leap forward, we as these companies, and as Marla described, can focus on a niche population and probably focus on low-income people that have smartphones, which is like 75% of low-income people. It’s a large portion, but we can build on top and customize the experience. But we’re missing a big infrastructure underneath for a lot of low-income people.
I mean, part of the concern I have with the public option is that it creates a two-tier system in a way, right? So, Marla, you talked about the public and private coexisting. I’m talking about a system on the one hand designed for poor people, Black people, Latinx people, and a system that’s designed for others. There’s a sort of intent here that seems to suggest our existing system cannot be fueled to serve all, and that’s what we should be driving towards, that would be my strong preference. And we talk about coming out of the pandemic, the broadband access and the gap in access and how we have to close that access. In a similar way, we need to talk about payments access, identity access, credit access, closing that gap because they are some of the infrastructure components.
Thank you. We have a couple other questions in the queue, but unfortunately my clock says 11:30. So I just want to say thank you to all of the panelists today for sharing your insights. Thank you to everyone who has tuned in. I encourage you to keep having these conversations with each other, with us, and to check out the issues in the CDIR. We have a lot of other collaborators who were part of this project and have a lot of really interesting things to share. And with that, I’ll let everyone go. Thank you so much for your time today. Thanks everybody.
Thank you. Thank you all.
We hope you enjoyed this special episode. We were thrilled that several of the contributors to our recent journal on fintech and racial equity were able to come together in conversation. Bina and Rocio, any final thoughts coming out of this project? Maybe you could share one thing you’re most excited about, and where you think there’s more work to be done.
I love how Propel is learning from its users. The company not only brings lived experiences of using benefits from its staff, but it acknowledges that those experiences might not tell the whole story or might be out of date. So they lean into their most valuable resource: their users. I think that’s a takeaway for the field overall. More diversity within fintech firms, founders, and investors will certainly help bring new ideas to the table, but the innovations may still take a few years to materialize. By heeding Mary’s advice to have conversations, to lean into areas where our knowledge is weak and find partners to illuminate it, ideas can surface that really meet the needs of consumers who are left out of the traditional financial system.
I agree Rocio; I also see the promise of closing that gap between those who have experienced issues firsthand and those designing solutions. For me, I’m excited about the moment. As speakers on the panel alluded to, folks are emboldened to address inequities head on, and there’s greater understanding that closing the gaps will be good for all of us. I hope this will create space for new leaders and more solutions grounded in lived experience. It’s great to see the will for this. At the same time, where I see more work to be done is in how to scale and accelerate that process. I think there is more work to be done to align capital and incentives in the fintech ecosystem to meet the moment.
And Sean, I’d love to turn that question back to you, as a collaborator on this issue, what excites you and where do you see more to be done?
Yeah, I really liked both of your comments. I agree that there’s a lot of momentum in this moment and so I think one of the big challenges is keeping that energy going and then coming up with targeted solutions, and not just continuing to make the case that there’s a problem without specific ideas for solving it. Rocio picked up on Mary’s call during the event to listen to the communities that are underserved. I think we have a tendency whether we’re central bankers and regulators or the financial firms that serve these communities, to come up with these solutions in a vacuum. And as Rocio mentioned with Propel, the work they were doing to engage their customers directly, understand their problems, meet them where they are, that really echoes a lot of what we heard in our recently concluded Financial Inclusion & Beyond series, so I’m excited about that. In terms of where we need more work, I think it’s doing that, it’s getting more engaged with these underserved communities. From a regulator and policy maker perspective, we’re doing a lot to understand what firms are doing, but getting more engaged there is a big part of this. I feel really energized by this and really appreciate your collaboration on this. For anyone out there listening who wants to learn more, like Bina said, look up the Community Development Innovation Review on FRBSF.org. You can find a number of awesome articles there and just keep following the SF Fed—we’ve got a lot of work to come in this important space.
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