Fintechs can help banks meet CRA obligations

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

Even though the emerging fintech industry — largely built to help customers previously overlooked by financial providers — would not exist without the goal of being inclusive, there is no federal law placing a measurable, geography-based investment requirement on technology firms.

Banks, however, do have such a requirement through the Community Reinvestment Act of 1977. There are some fintech companies actively seeking bank charters that would bring them under the CRA requirements, but most fintechs don’t have a banking charter. That distinction is important, because a chartered bank can accept insured deposits through the Federal Deposit Insurance Corp., and the CRA is a condition of that deposit insurance.

That crucial difference between fintechs and banks creates a bifurcated system; banks benefit from insured deposits but have heightened obligations, while fintechs have neither. But as fintech offerings such as digital lending, mobile payments, earned wage access, robo investment advice, budgeting apps and digital wallets grow in popularity and compete with services traditionally performed by banks, there is a concern among banks that fintechs are eating their lunch.

But when considering what a fintech’s obligations to low- and moderate-income customers could be, it’s important to consider how much we know — and don’t know — about the customers and geographies fintechs are already reaching.

First, even without a CRA obligation, fintech companies can, and must, be a force in helping all American communities thrive.

Upstart, for instance, 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 brick-and-mortar 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 loans made in low- and moderate-income areas, and that expanded access to credit is particularly notable when compared with LMI ratios for traditional credit card loans.

In addition, the Consumer Financial Protection Bureau’s study of Upstart and the use of alternative data showed that utilizing new technology can increase access to credit by 27% and reduce average annual percentage rates by 15%-17% for all borrowers when compared with traditional underwriting approaches.

A Philadelphia Federal Reserve study revealed similar findings in a study of the pricing of loans generated by or in partnership with fintechs in geographic areas underserved by traditional bank branches.

These data points are promising, but what is likely needed is a more comprehensive data collection effort from federal banking authorities on fintechs’ impact on financial inclusion. Such an effort could help policymakers craft sensible policy solutions that ensure that the growth of fintechs’ footprint doesn’t leave any communities 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 lending. A similarly granular data collection effort for fintechs’ reach and impact would help to inform federal fintech policymaking, especially on issues of technology and financial inclusion.

The CRA as written today is not legally applicable to nonbank fintechs. But with the right data and regulatory clarity on the CRA, regulators could support banks tapping fintech firms to help them do a better job of meeting the original intent of the landmark law.

In metro areas where there are dozens of financial institutions, the banks often compete for the same CRA-eligible loans rather than being offered incentives to reach new, underbanked customers. Banks meet their CRA obligations in large part by buying existing loans from other financial institutions to meet the CRA 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 a bank’s assessment area. Such partnerships can go a long way to fulfill the CRA’s intent while providing underserved communities with more affordable credit offers and fostering new banking relationships.

In short, CRA policy should strongly support banks making affordable digital credit offers to LMI communities and borrowers.

While it may seem counterintuitive, policymakers and regulators should remain open to the possibility that the banks that utilize fintech platform partnerships may do a better job of organically meeting the intended purpose of the CRA than banks that try to go it alone.

This is a virtuous cycle that should be encouraged. If banks are able to compete in the marketplace successfully and meet their obligations through digital credit offerings and partnerships, they will stay viable. That can help banks sustain their physical branches in LMI 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 fintech firm partners to help American communities thrive in a rapidly changing world.

Editor’s note: This op-ed is the second in a monthly series called "Deposits and Withdrawals" offering a point and counterpoint on a key topic. The first in this series can be found here.