Measuring Financial Inclusion: A Lender's Checklist
It’s one thing to make a business commitment to financial inclusion, but quite another to set specific goals and measure outcomes. What goals should credit unions and lenders set to make financial inclusion a reality? How can success be quantified? What actionable steps must be taken to put policy into practice? The road to financial inclusion may feel long, but this step-by-step checklist can help you measure diversity and achieve goals to become more inclusive as an organization.
Step 1: Set quantifiable goals with realistic outcomes
Start by defining what you plan to achieve with a financial inclusion strategy. When setting goals, Alpa Lally, Experian’s Vice President of Data Business at Consumer Information Services, recommends organizations “assess the strategic opportunity at the enterprise level.”
“It is important that KPIs are aligned across each business unit and functional groups in order to understand the investment opportunity and what the business must achieve together,” said Lally. “The key focus here is ‘together’, the path to financial inclusion is a journey for all groups and everyone must participate, be committed and be aligned to be successful.”
Figuring out your short- and long-term goals should be the first step to kickstarting a financial inclusion strategy. But equally important is driving towards outcomes. For instance, if the goal is to increase the number of loans made to previously overlooked or excluded members, you may want to start by examining your declination population to better understand who is being left out. Or if financial inclusion is tied to a wider strategy or vision on corporate social responsibility, your goals may include an education component, community outreach, and a re-examination of your hiring practices.
No matter what KPIs you’re using, here are relevant questions to ask in four key areas – which will help draw out your organizational goals and priorities:
Organizational awareness: What action is your organization taking to enhance Diversity, Equity and Inclusion and embrace Corporate Social Responsibility (CSR) around financial inclusion? If you already have financial inclusion programs in place, what are the primary goals?
Barriers: What barriers prevent the organization from pursuing equity, diversity and inclusion programs?
Education: How do you create awareness and education around financial inclusion? Which community or third-party organizations can help you reach consumers who aren’t aware of ways to access financial services?
Markers of success: What benchmarks will your organization use to measure and analyze success?
Step 2: Do a financial inclusion audit
Before developing and implementing a robust financial inclusion program, Lally recommends conducting a financial inclusion audit – which is a “detailed assessment of where you are today, relative to the goals and results you’ve outlined.”
In a nutshell, it allows you to assess your current systems and results within your financial institution. According to Lally, a financial inclusion audit should address the following key areas:
Roadmap: What are your strategic priorities and how will financial inclusion fit within them?
Tracking: Track the actual volume and distribution of different underserved populations (e.g., young adults, low-income communities, immigrants, etc.) within your book of business. Look at the applications and the approval rates by segment. In addition, assess the interest rates these consumers are offered by credit score bands for each group: “Benchmarking is critical. Understanding how they compare to national averages? How do they compare to the rest of your portfolio?” said Lally.
Hiring practices: Is diversity, equity and inclusion (DEI) central to your talent management strategy? Is there a link between a lack of DEI in hiring practices and the level of financial inclusion within an organization?
Affordability and access: Determine if the products and services you offer are easily accessible, can be understood by a reasonable consumer and are affordable to a broad base.
Internal practices: What policies exist that influence the culture and behavior of employees around financial inclusion?
Partnerships: Identify outside organizations that can help you develop financial literacy programs to promote financial inclusion.
Advertising: Does your advertising promote equal and diverse representation across a wide range of consumer groups?
Tools to measure: Are you inclusive as a financial institution? How can you improve? The Bayesian Improved Surname Geocoding (BISG) method used by the Consumer Financial Protection Bureau (CFPB) predicts the probability of an individual’s race and ethnicity based on demographic information associated with the consumer’s surname. Lenders can use this type of information to conduct internal audits or set benchmarks to help ensure accountability in their diversity goals.
Step 3: Tap into technology
New technology is emerging that gives lenders powerful tools to evaluate a wider pool of prospective borrowers while also mitigating risk.
For instance, scoring models that incorporate expanded FCRA-regulated data provide greater insight into ‘credit invisible’ or ‘unscorable’ consumers because they look at a wider set of data assets (or ‘alternative data’), which allows lenders to assess a larger pool of applicants. It also improves the accuracy of those scores and better assesses the creditworthiness of consumers.
Consider these resources, among others:
Lift Premium™: Experian estimates that lenders using Lift Premium™ can score 96 percent of U.S. adults, a vast improvement over the 81 percent that are scorable today with conventional scores relying on mainstream data. Such enhanced scores would enable six million consumers who are considered subprime today to qualify for “mainstream” (prime or near-prime) credit.
Experian® RentBureau®: RentBureau collects rent payment data from landlords and management companies, which allows consumers to leverage positive rent payment history similarly to how consumers leverage consistent mortgage payments.
Clarity Credit Data: Clarity Credit Data allows lenders to see how consumers use alternative financial products and examine payment behaviors that might exist outside of the traditional credit report. Clarity’s expanded FCRA -regulated data provides a deeper view of the consumer, allowing lenders to identify those who may not have previously been classified as “at risk” and approve consumers that may have previously been denied using a traditional credit score.
Income Verification: Consumers can grant access to their bank accounts so lenders can assess their ability to pay based on verified income and cash flow.
In addition, artificial intelligence (AI) and greater automation can reduce operational costs for lenders, while increasing the affordability of financial products and services for customers. AI and machine learning (ML) can also improve risk profiling and credit decisioning by filling in some of the gaps where credit history is not available.
These are just a few examples of a wide range of cutting-edge solutions and technologies that enable lenders to promote greater financial inclusion through their decisioning processes. As new solutions are introduced to the market, it is imperative that lenders look into these technologies to help grow their business.
Step 4: Monitor and measure
Measuring your progress on financial inclusion isn’t a one-and-done proposition. After you’ve set your goals and created a roadmap, it’s important to continue monitoring and measuring your progress. That means your performance to gauge the impact of financial inclusion at both the community and business levels.
Lally recommends the following examples:
Compare your lending pool to the latest population data from the United States census. Is your portfolio representative of the U.S. population or are there segments that should have greater access? How does it compare against other lenders competing in the same space? Keep in mind that it has been widely reported that certain populations were undercounted, so you may want to factor this reality into your assessments.
Work to understand how traditionally underserved consumers are performing in terms of their payment behaviors, purchase patterns and delinquencies.
Measure the impact of financial inclusion on your financial institution’s overall revenue growth, ROI and brand reputation.
Conduct an analysis to better understand your company’s brand reputation, how it’s perceived across different groups and what your customers are saying.
Financial inclusion represents a big step towards closing the wealth gap and helping marginalized communities build generational wealth. Given the prevalence of socioeconomic and racial inequality in our country today, it’s a complex issue that disproportionately impacts marginalized groups, such as consumers of color, low-income communities and immigrants.
Adopting more financially inclusive practices can help improve access to credit for these groups. For financial institutions and lenders, the first step is to identify realistic, quantifiable goals. A successful financial inclusion initiative also hinges on completing a financial inclusion audit, tapping into the right technology and continually monitoring and measuring progress.