America still has a very long way to go when it comes to equitable financial inclusion.

While the emerging fintech industry – largely designed to help customers previously overlooked by financial providers – wouldn’t exist without the goal of being inclusive, no federal law imposes a requirement on tech companies to measurable investment based on geography.

Banks, however, have such a requirement through the Community Reinvestment Act of 1977. Some fintech companies are actively seeking bank charters that would subject them to CRA requirements, but most fintechs do not have a charter. banking. This distinction is important because a chartered bank can accept deposits insured through the Federal Deposit Insurance Corp., and ARC is a condition of this deposit insurance.

This crucial difference between fintechs and banks creates a bifurcated system; banks benefit from insured deposits but have increased obligations, while fintechs have neither. But as fintech offerings such as digital lending, mobile payments, access to earned wages, robotic investment advice, budgeting apps, and digital wallets gain popularity and compete with the services traditionally provided by the banks, the banks fear that the fintechs will eat their lunch.

But when considering what a fintech’s obligations might be to low- and moderate-income customers, it’s important to consider what we know – and don’t know – about the customers and the geographies that fintechs reach. already.

First, even without CRA obligations, FinTech companies can and should be a force in helping all American communities thrive.

Upstart, for example, works with banks and credit unions of all sizes to help find creditworthy customers online, both within and beyond the institution’s branch footprint. Upstart also provides these physical institutions with the technology to accept digital loan applications and improve credit decision making.

Through partnerships like this, fintechs have helped these institutions increase the share of consumer lending to low and moderate income areas, and the expansion of access to credit is particularly noticeable. compared to LMI ratios for traditional credit card loans.

In addition, the Consumer Financial Protection Bureau study on Upstart and the use of alternative data has shown that the use of new technologies can increase access to credit by 27% and reduce average annual percentage rates by 15-17% for all borrowers compared to traditional underwriting approaches .

A Philadelphia Federal Reserve study found similar conclusions in a study of the pricing of credits generated by or in partnership with fintechs in geographic areas poorly served by traditional bank branches.

Those data points are promising, but what is likely needed is a more comprehensive data collection effort by federal banking authorities on the impact of fintechs on financial inclusion. Such an effort could help policymakers craft sensible policy solutions that ensure the growing fintech footprint leaves no community behind.

Existing laws like the Home Mortgage Disclosure Act and the Dodd-Frank Act have data collection requirements that provide regulators with a more granular understanding of mortgages and small business loans. An equally granular data collection effort for the reach and impact of fintech would help inform federal fintech policy making, particularly on issues of technology and financial inclusion.

The CRA as it is drafted today is not legally applicable to non-bank fintechs. But with the right data and regulatory clarity on the CRA, regulators could help banks tap into fintech companies to help them better meet the original intent of the landmark law.

In metropolitan areas where there are dozens of financial institutions, banks often compete for the same ARC-eligible loans rather than being offered incentives to reach new, underbanked customers. Banks largely meet their obligations to the ARC by purchasing existing loans from other financial institutions to meet the ARC’s obligation for an assessment area.

Fintech partnerships could break this perverse incentive by helping banks generate their own new loans to consumers or small business borrowers in LMI areas, both inside and outside the assessment area. from a bank. Such partnerships can go a long way in realizing the CRA’s intent while providing underserved communities with more affordable credit offers and fostering new banking relationships.

In short, ARC policy should strongly support banks offering affordable digital credit offers to communities and IMT borrowers.

While it may seem counterintuitive, policymakers and regulators should remain open to the possibility that banks that use fintech platform partnerships will do a better job of organically achieving ARC’s goal than banks that are trying to go it alone.

It is a virtuous circle that must be encouraged. If banks are able to successfully compete in the market and meet their obligations through digital credit offers and partnerships, they will remain viable. This can help banks maintain their physical branches in LMIs and underserved communities, which helps banks and communities at the same time.

With the right data and the right policy framework in place, banks of all sizes will be able to work with partners from fintech companies to help American communities thrive in a rapidly changing world.

Editor’s Note: This editorial is the second in a monthly series called “Deposits and Withdrawals” providing an update and counterpoint on a key topic. The first of this series can be found here.

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