Testimony & Comment Letters

FinRegLab Responds to Treasury Request for Information on Financial Inclusion Strategy


WASHINGTON, D.C.,

Department of the Treasury

1500 Pennsylvania Avenue, NW

Washington, D.C. 20220

RE: Docket No. TREAS-DO-2023-0014

Thank you for the opportunity to provide input on the development of a national strategy for financial inclusion. FinRegLab is a nonprofit, nonpartisan innovation center that tests new technologies and data to inform public policy and drive the financial sector toward a responsible and inclusive financial marketplace. With our research insights, we facilitate discourse across the financial ecosystem to inform public policy and market practices. Financial inclusion is critical to FinRegLab’s mission, as an inclusive financial system is a crucial component to increasing broader economic participation, financial health, and equity among historically marginalized and excluded populations.

FinRegLab’s research has focused deeply on the financial inclusion and fairness implications of data and AI/ML in consumer and small business lending. Our response here focuses primarily on credit-related issues to illustrate broader dynamics that should be considered in building a comprehensive financial inclusion strategy. In some places, we have addressed the broader topics raised by the Request for Information rather than each individual question in isolation.

A.    Defining Financial Inclusion

  1. How do you or your organization define financial inclusion?

We define financial inclusion broadly as practicable access to (1) useful, affordable financial services that meet customers’ needs and are delivered in a responsible and sustainable way and (2) meaningful market opportunities to participate as employees, consumers, entrepreneurs, community members, and leaders. This definition is based on those of the World Bank and the International Finance Corporation.1

We consider fairness and equity to be closely interrelated with inclusion. Fairness at a minimum dictates similar treatment for similarly situated parties and freedom from discriminatory, arbitrary, dishonest, or exploitative conduct. Equity entails addressing historical disparities that cause parties to not be similarly situated and systemic barriers to practicable access and participation. These issues can be significant contributors to financial exclusion.

(a)  Some definitions of financial inclusion include considerations of access, safety, usefulness, appropriateness, and affordability of financial products and services, among others. What are the key elements of your definition and why do you include them?

See above for our definition. We believe that it is important to consider such qualities rather than simply counting accounts opened or loans originated as a measure of inclusion because

high-cost, high-risk financial services can undermine economic participation, financial health, and equity rather than promote it. Financial inclusion must be useful and practicable. “Useful” means financial services or market opportunities meaningfully help consumers achieve their financial goals. “Practicable” means access to financial services or market opportunities is reasonably attainable for those who want it.

(b)  Some topics related to financial inclusion include financial health, financial well-being, financial capability, and financial resilience. Do any of these or other related topics relate to or influence your definition of financial inclusion, and if so, why?

Yes, as discussed above, we believe that financial inclusion is important because it tends to enhance these long-term outcomes. For instance, inclusive financial systems facilitate financial resilience, health, and stability in that they help families and businesses both to handle emergencies and to plan for and meet long-term goals. Analyzing barriers to financial health and stability holistically can help to inform and prioritize financial inclusion efforts, and analyzing the impact of inclusion initiatives on financial health can help to gauge their effectiveness.

2.  What do you consider to be in and out of scope for efforts to promote financial inclusion?

Initiatives that facilitate practicable access to useful financial services and market opportunities are within the scope of financial inclusion. This includes improvements in the offering of useful and affordable financial products (credit products, insurance, savings accounts, etc.) for consumers and small businesses, accessibility of both physical and digital delivery channels, management of consumer data used to provide financial services and the data generated during the provision of financial services, financial education and advice, and more. It is also helpful to consider potential intersections between financial inclusion and other sectors or topics that can potentially magnify or frustrate financial initiatives. For instance, initiatives to improve the delivery of government benefits may provide complementary opportunities to encourage and facilitate recipients’ access to financial services for other aspects of their daily lives.

While the scope of financial inclusion is expansive, activities that cause consumer harm or otherwise fail to meet our definition are not in the scope of financial inclusion efforts. For instance, the provision of credit on terms that undermine rather than promote borrowers’ financial health does not advance financial inclusion and should not be touted as such.

(a)  Which financial products and services should consumers be able to access in order to be considered financially included? Please provide specific examples. Are there particular qualities that are important for these products and services to have?

A range of financial products and services are relevant to financial inclusion if they are provided in useful and practicable ways as discussed above. It may be particularly helpful to prioritize focusing on products and services that provide a building block for further participation in the financial system. For instance, while transaction accounts are useful for daily payments and money management, they can also facilitate credit access as providers are increasingly using transaction account data to underwrite credit. Credit is particularly important because it can help both to manage short-term cash flow needs and achieve long-term capacity improvements like home, car, or small business ownership. Similarly, savings and retirement accounts are important vehicles for saving meaningful amounts to make long-term investments and achieve financial security more broadly.

(b)  Which consumer financial activities are relevant when considering how to advance financial inclusion? For example, do you consider accessing tax benefits you may be eligible for, sending peer-to-peer payments, or transacting in cash relevant? Do you consider activities like saving for retirement, investing, purchasing a home, or starting or growing a business relevant to financial inclusion? Are there consumer financial activities that are not relevant?

We believe it is helpful to concentrate primarily on financial activities that facilitate broader economic participation, financial health, and equity among historically marginalized and excluded populations. This certainly would include activities that can build long-term health and stability such as saving, investment, purchasing homes, and growing small businesses (and associated borrowing activities), but it also includes day-to-day management of household finances such as managing payments, accessing benefits, and bridging short-term emergencies. Reducing the costs and transaction frictions of such daily activities for underserved populations can improve household finances and create capacity for engaging in longer-term investments.

(c)  What is the relationship between financial inclusion and financial security? Between financial inclusion and building wealth?

Financial inclusion helps to promote income, wealth building, and financial security both through increased economic participation (e.g., more reliable transportation, access to higher education, small business formation and growth) and through the provision of vehicles for savings, investment, and insurance to build assets and security.

B.    Barriers to Financial Inclusion

Even where there are not direct/formal barriers or other intentional exclusion, multiple challenges complicate efforts to increase financial access and participation among historically underserved populations. These challenges include:

  • Economics: Serving under-resourced customers is often more expensive and less profitable for financial institutions than focusing on wealthier populations due to such factors as the size of transactions, the amount of risk, information gaps, and delivery challenges.
  • Data: Predictive models used throughout financial services often rely on historical data to forecast the future, but such information is often shaped by the impacts of prior discrimination, exclusion, and quality issues that make it more difficult to accurately and fairly predict outcomes for underserved populations.
  • Industry dynamics: The lack of competition, resources, and a level playing field between industry actors can stymie access to affordable and responsible financial products and services, for instance, where access to data or key technologies are severely restricted or controlled by a small number of actors. Industry-wide reliance on legacy data, technology, and systems can make it difficult for individual actors to implement inclusive innovations.
  • Underlying systems: Gaps in connectivity, education, and broader societal and governmental systems can make it more difficult to access and use financial services, such as mechanisms for proving identity, physical and digital access, general and financial education, and social safety nets.
  • Public policy: Regulatory frameworks and expectations can disincentivize financial inclusion initiatives, for instance, through uncertainty about the legality of particular practices or products and concerns about getting caught on the wrong side of the changing expectations and priorities of policymakers and the public at large.
  • Unsuitability: Financial products and delivery channels are often not designed specifically to meet the needs of historically underserved and excluded populations, and some versions involve predatory or high-risk features that may undermine rather than promote users’ financial health.
  • Lack of trust: As a result of all of these factors and other economic and cultural dynamics, historically excluded populations’ knowledge of, relationships with, and trust in financial services and financial services providers are often less robust than wealthier populations.

There is no one simple solution to these challenges, but FinRegLab focuses on data and technology because they may represent the single biggest market lever we have in the current environment to increase access to responsible and affordable financial services at scale. Even where market actors are not primarily motivated by such considerations, the burden of building a more inclusive system may be substantially lower at a time when financial services providers are adopting new technologies and transforming related systems and processes. However, poor implementation of some innovations could worsen existing system flaws and create new barriers to access. Furthermore, the speed, scale, and details of data and technology adoption are wildly uneven in today’s markets. We therefore urge that a national inclusion strategy reflect the importance of data and technology in impacting financial inclusion, fairness, and equity in today’s rapidly changing environment.

C.    Measuring Financial Inclusion

Specific metrics may vary depending on the product, market, and data availability, but as discussed above we believe that it is critical wherever practicable when measuring financial inclusion to push beyond simply tracking the number of accounts, loans, branches in a particular area, or other basic quantitative measures to consider such issues as usage patterns, affordability and terms, and financial health outcomes. This is in line with our standard for usefulness and practicable access for financial inclusion. Measuring underserved populations’ beliefs about how well particular financial products and services, delivery channels, or provider types meet their needs can also be extremely powerful. Finally, we encourage a national strategy to include measurement of systemic issues such as digital access and consumer data portability since those topics help to facilitate access, use, and tailoring of products and services to better meet underserved populations’ needs.

D.    Actions to Promote Financial Inclusion

While a broad range of government, advocate, and industry initiatives are promoting inclusion in different customer, geographic, and product markets, the use of cash-flow data in credit underwriting is especially noteworthy. Records of consumers’ deposit and card transactions and feeds from small businesses’ accounting software provide a relatively detailed and comprehensive picture of how applicants manage their finances on an ongoing basis.

FinRegLab’s empirical research has found that using this data for credit underwriting could be particularly important for millions of U.S. adults and younger, smaller companies that are difficult to assess using traditional data sources and credit underwriting and scoring models.2 However, the adoption of cash-flow underwriting is complicated by a range of compliance, coordination, and competition concerns, which we outlined in a 2020 policy analysis and other publications.

While this innovation has not yet reached its full inclusion potential, it has gained significant momentum in recent years due to a variety of factors. These include the availability of independent public research analyzing data performance; continuing improvements in data availability, modeling capabilities, and transfer technologies; economic and policy incentives to improve underwriting models in the wake of economic upheaval following the COVID-19 pandemic and racial justice protests; and regulatory action such as a 2019 interagency statement on the use of alternative data and the Office of the Comptroller of the Currency’s

Project REACh initiative.3 The Consumer Financial Protection Bureau’s current rulemaking regarding customer-permissioned data sharing will play a critical role in shaping further adoption of cash-flow underwriting models and customer acceptance going forward, since permissioned transfers are critical where applicants seek loans from lenders who do not already provide them with transaction accounts.4

Further technological advances that could potentially further advance credit access include the use of machine learning algorithms to build underwriting and scoring models–particularly in combination with more inclusive data sources–as well as secondary tools and techniques to address explainability and fairness concerns in the machine learning context. FinRegLab has published market context,5 empirical,6 and policy analyses7 on these topics as well, and is embarking on additional research on related issues.

We believe that broad stakeholder and policymaker engagement in issues relating to the use of more inclusive data and advanced analytical techniques will be critical going forward to sustain and expand current momentum around increasing the inclusiveness of scoring and underwriting models, particularly with regard to deploying machine learning models. Clarifying regulatory expectations with regard to the use of machine learning models, explainability tools, and debiasing techniques could help to strengthen guardrails and increase lender and applicant confidence going forward. Initiatives to help ensure access to accurate and representative data sources for model building subject to appropriate privacy, data security, and other customer protections could also substantially boost adoption.

More broadly, these innovations highlight the ways in which data and technology innovations can potentially facilitate greater financial inclusion, but are often shaped by technical issues, economic incentives, competitive and coordination challenges, regulatory standards and uncertainty, and customer attitudes. Among other priorities, we believe that it is important for a national strategy to consider data and technology adoption across a range of financial services markets to identify both opportunities to facilitate greater inclusion and exclusion risks that warrant mitigation.

For both credit and other financial services markets, it could be helpful when conducting this analysis of data and technology issues for the national strategy for financial inclusion to consider the importance of replicating key elements of these examples, for instance by broadly supporting:

  • Data and technology access among researchers and financial service providers to improve the efficiency, delivery, and tailoring of financial products and services to better meet underserved consumers’ needs;
  • Improvements in data privacy safeguards and consumer protections to increase customer confidence;
  • Targeting resources to help members of underserved communities, civil society organizations, and other mission-based stakeholders to increase their engagement with data and technology innovations and other inclusion initiatives to ensure that products are tailored to better meet consumers’ needs; and
  • Attention to issues that data and technology may struggle to address, such as strengthening relationships and outreach among historically underserved populations through mission-based providers and other channels.

Developing such programs will require thoughtful and sustained engagement from the full spectrum of stakeholders (including public, private, and nonprofit actors) and robust and ongoing efforts to engage with underserved populations. A national strategy for financial inclusion could help to facilitate these processes by identifying critical opportunities and needs, facilitating public research initiatives, fostering better coordination among the wide range of federal agencies whose activities implicate critical financial inclusion issues, spurring market-based initiatives to improve business and technology practices even in the absence of regulation, and encouraging ongoing monitoring and assessment to determine which initiatives are bearing fruit and whether adjustments are required to better optimize results for underserved populations and the broader U.S. economy.

* * *

FinRegLab appreciates the opportunity to comment on the development of a national strategy for financial inclusion and to share our thought process around this important topic. We would welcome an opportunity to engage further on these topics.

Melissa Koide

CEO & Director
FinRegLab

Prior to establishing FinRegLab, Melissa served as the U.S. Treasury Department’s Deputy Assistant Secretary for Consumer Policy. In that role, Melissa helped to build the first government offered preretirement savings product, the myRA. She also established the $5 million Innovation Fund to support research and strategies to improve consumers’ financial health and their access to safe and affordable financial products and services. Melissa has testified before the Senate Banking and House Financial Services Committees, and she has spoken extensively to policy, industry, and consumer advocacy audiences. She is also a member of the New York State Department of Financial Services’ Financial Innovation Advisory Board.

Kelly Thompson Cochran

Deputy Director and Chief Program Officer
FinRegLab

Prior to joining FinRegLab, Kelly helped to stand up the Consumer Financial Protection Bureau, where she served most recently as the Assistant Director for Regulations. In that capacity, she oversaw rulemaking and guidance activities under the Dodd-Frank Act, Electronic Fund Transfer Act, and various other federal consumer financial laws. Kelly previously was counsel at WilmerHale, where she advised financial institutions on a wide range of legal and regulatory matters including product development, compliance, enforcement, and litigation. Kelly also conducted research on financial services innovation, community reinvestment, and other topics at the University of North Carolina at Chapel Hill.

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EndNotes

[1] The World Bank, Financial Inclusion Overview (Mar. 29, 2022), available at https://www.worldbank.org/en/topic/financialinclusion/overview#1; International Finance Corporation, Promoting Economic Inclusion of LGBTI People and Persons with Disabilities, available at https://www.ifc.org/en/what-we-do/sector-expertise/gender/economic-inclusion#:~:text=An%20inclusive% 20economy%20ensures%20that,%2C%20entrepreneurs%2C%20and%20community%20members.

[2] FinRegLab, The Use of Cash-Flow Data in Underwriting Credit – Project Page, available at https://finreglab.org/cash-flow-data-in-underwriting-credit; FinRegLab, The Use of Cash-Flow Data in Underwriting Credit: Market Context and Policy Analysis (Feb. 2020), available at https://finreglab.org/the-use-of-cash-flow-data-in-underwriting-credit-market-context-policy-analysis.

[3] Office of the Comptroller of the Currency et al., Interagency Statement on the Use of Alternative Data in Credit Underwriting (2019), available at https://www.occ.gov/news-issuances/news-releases/2019/nr-ia-2019-142a.pdf; Office of the Comptroller of the Currency, Project REACh: Alternative Credit Assessment Workstream, available at https://www.occ.treas.gov/topics/consumers-and-communities/project-reach/alternative-credit-assessment-workstream.html.

[4] Consumer Financial Protection Bureau, Notice of Proposed Rulemaking – Required Rulemaking on Personal Financial Data Rights (Dec. 2023), available at https://files.consumerfinance.gov/f/documents/cfpb-1033-nprm-fr-notice_2023-10.pdf.

[5] FinRegLab, The Use of Machine Learning for Credit Underwriting: Market & Data Science Context (Sept. 2021), available at https://finreglab.org/ai-machine-learning/explainability-and-fairness-of-machine-learning-in-credit-underwri ting/the-use-of-ml-for-credit-underwriting-market-data-science-context.

[6] FinRegLab in collaboration with Laura Blattner & Jann Spiess, Machine Learning Explainability & Fairness: Insights from Consumer Lending (July 2023), available at https://finreglab.org/ai-machine-learning/explainability-and-fairness-of-machine-learning-in-credit-underwri ting/machine-learning-explainability-fairness-insights-from-consumer-lending.

[7] FinRegLab, Explainability & Fairness in Machine Learning for Credit Underwriting: Policy Analysis (Dec. 2023), available at https://finreglab.org/ai-machine-learning/explainability-and-fairness-of-machine-learning-in-credit-underwri ting/policy-analysis.

About FinregLab

FinRegLab is an independent, nonprofit organization that conducts research and experiments with new technologies and data to drive the financial sector toward a responsible and inclusive marketplace. The organization also facilitates discourse across the financial ecosystem to inform public policy and market practices. To receive periodic updates on the latest research, subscribe to FRL’s newsletter and visit www.finreglab.org. Follow FinRegLab on LinkedIn and Twitter (X).

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