CRA credit for high-speed internet access?

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Garry Reeder was recently helping a bank client rebuild its Community Reinvestment Act program when it became especially clear to him why the 41-year-old CRA law needs updating.

Though the unnamed bank had seen branch traffic decline as customers migrated to digital channels, regulators told its leaders that the bank would need to build new branches, at a cost of roughly $1 million, in low-income census tracts if it hoped to pass its next CRA exam.

Management would have preferred to spend the money on revamping an outdated mobile platform but Reeder, vice president of innovation and policy at the Center for Financial Services Innovation, cautioned that if it did, the bank would wind up paying many millions more in consulting fees, legal and fees and fines.

Still, Reeder said that if CRA were updated, he may have been able to offer different advice. During a panel discussion at a conference on financial inclusion in Boston last week, he suggested that investment in high-speed internet access, particularly in rural areas, could be more effective than bricks and mortar when it comes to serving the needs of large swaths of low- and moderate-income households.

“There are many ways in which we can provide access to consumers today, which isn’t to say that branches don’t play a role, but they can’t be the sole measure by which consumers have access,” he said.

The need to update CRA and other policies to better keep pace with rapid changes in banking was an ongoing theme of the one-day conference sponsored by the Boston Fed and the nonprofit Aspen Institute.

In panel discussions and keynote speeches, industry experts said that if policymakers are serious about promoting financial inclusion, then they need to modernize regulations to better reflect the realities of how consumers are using financial services in their everyday lives.

The keynote speaker, Federal Reserve Gov. Lael Brainard, also had this message for banks: Pay close attention to how nonbank providers are serving low-income households.

The conference was titled FinTech, Financial Inclusion — and the Potential to Transform Financial Services and Brainard set the tone by outlining the various ways the industry could use technology to be more inclusive.

For financially vulnerable Americans, faster payments and real-time payments can make a real difference in avoiding overdraft and bounced-check fees, she said. Machine learning and data aggregation can be effective as well, by analyzing a few weeks’ worth of expenses and income to tell bankers whether a person with a thin or nonexistent credit file might actually be a good credit risk.

In her remarks, Brainard also urged banks need to more closely examine why unbanked consumers intentionally choose to do business with higher-cost providers.

For example, consumers who use check-cashing firms tend to do so because those businesses offer a much simpler fee structure, “similar to an overhead priced menu at a fast-food restaurant,” she said, citing published research on the topic. By contrast, checking accounts can be unpredictable, she said, because account holders don’t always know when funds will be available or when checks may clear.

“That lack of predictability can be extremely important to a family that is living paycheck to paycheck,” she said.

Other panelists and presenters said that in designing products and services, bankers also need to be mindful as to how people define financial wellness.

For many, that might not necessarily mean a higher income, but simply greater predictability. A survey conducted for the U.S. Financial Diaries Project and cited at the conference found that Americans overwhelmingly prioritized income stability over making more money.

Panelists further discussed the role that government and regulators can play in working with the private sector to improve access to financial services.

Most agreed that CRA should be updated to both better reflect the role of technology, and the idea of giving banks CRA credit for providing internet connectivity in rural markets appears to be gaining traction since being floated by Cleveland Fed chief Loretta Mester at a community banking conference earlier this month.

“The focus should be on outcomes … and not necessarily the process,” she said during a speech at hosted by the Fed, the Conference of State Bank Supervisors and the Federal Deposit Insurance Corp.

The Center for Financial Services Innovation’s Reeder said that CRA could also be updated to be less focused on access to credit and more on steps they are taking improve financial inclusion in their market areas.

“It doesn’t mean we shouldn’t have these obligations,” he said. “It just means maybe these obligations should be testable to see if they’re actually improving the financial health of consumers.”

Of course, it doesn’t take changes in laws and regulations to improve consumers’ access to financial services.

Boston Mayor Martin Walsh shared some examples of collaboration between the city and its financial sector aimed at improving the financial standing of its poorest residents.

One city-sponsored program designed to encourage residents to open accounts at banks and credit unions now allows residents to open accounts online, he said. Another is the Economic Mobility Lab, which analyzes economic and demographic data to identify other ways to lift more Bostonians up into the middle class.

Still, while the focus of the conference was to highlight how technology can play in better serving unbanked and underbanked populations, Walsh reminded bankers that there are still many neighborhoods that sorely need physical locations.

During his remarks, he gave a shout out to the $11.3 billion-asset Eastern Bank for opening a branch in Boston’s neighborhood of Roxbury earlier this year. It was the first bank branch to open in that predominantly African-American community in more than 20 years.

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