To end lending bias, banks need to use the right tech

Let’s face it. There’s been considerable ink spilled over the fact that gender equality in the finance industry continues to lag behind other fields, and that female representation in finance declines the further up the corporate ladder you climb.

However, the industry’s failures with respect to female representation do not end at the workforce. Financial services companies have also consistently failed to invest in women-owned businesses and to provide women entrepreneurs with equal access to financial resources and opportunities.

On my own career path, I have encountered many women who struggled to gain access to financing. During my time as a Peace Corps volunteer in West Africa, I worked with talented female entrepreneurs who self-financed their businesses because they were completely shut out of local credit markets on the basis of their gender.

These barriers impacted not only the individuals and their businesses, but also the broader community by forcing the women to make impossible choices, like choosing between purchasing school supplies or medication for their children and growing their business.

This phenomenon isn’t unique to developing economies. The problem was also prevalent upon my return to the U.S. I watched intelligent, accomplished female friends trudge with boxes of financial plans from one bank to another, seeking financing for their startups or small business. They spent countless hours filing out loan applications, only to be rejected or dismissed by male loan officers who didn’t see much potential in such female-centric businesses.

A few years later, while practicing as an associate at a New York law firm, I learned of an opening on the legal team of a financial technology company focused on extending financing to small businesses underserved by traditional credit markets.

I recalled the experiences of the women entrepreneurs in my life and immediately felt connected to the mission and approach of the company, which used gender- and race-blind decisioning technology that promised to place all applicants on equal footing. So, I made the decision to leave the stability of a career in corporate law to join OnDeck, just a couple of months after its initial public offering.

My experience at OnDeck has only reiterated the important role that small businesses play in the health of the American economy. There are numerous studies touting that small businesses are the nation’s biggest employers, job creators and contributors to the national GDP.

Within that small business community, women-owned businesses play a critical, if often overlooked, role. Studies have shown that women-owned businesses make up nearly half the U.S. market, employing millions and generating trillions in sales. The number of women-owned businesses has grown rapidly, up 21% from 2014 to 2019, according to a recent study commissioned by American Express.

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Yet, for all their successes, women face significant obstacles to starting and growing their businesses. One of the key challenges identified by women entrepreneurs is the difficulty they face in obtaining bank financing for their business. The availability of bank financing varies significantly based on the gender, race and ethnicity of the business owner.

In fact, less than half of small businesses have managed to obtain funds from a bank in the last five years, according to the Federal Reserve 2020 Small Business Credit Survey. And such banking relationships were far more common among larger businesses, businesses with better credit scores and businesses with white ownership.

In my five years at OnDeck, I’ve seen innovation help democratize access to financial services, but I recognize the work is far from over.

Tech-driven application processes and inclusive underwriting approaches have enabled greater access to capital for minority- and women-owned businesses, rural businesses, businesses without a storefront and other underserved communities. By allowing businesses to apply online and by using gender- and race-blind application technology, online lending is removing the potential for bias that may creep into face-to-face interactions with loan officers.

Beyond this, there are far more opportunities now to use fintech decisioning technology that relies less on an individual’s credit score — which historically favors white men — and instead look at hundreds of data sources to better understand and assess the health of the small business. Differences in credit scoring models, credit utilization habits, and measurable wage gaps, among other factors, have led to men and women being treated differently by credit markets.

Of course, decisioning technology is only as good (and as fair) as the underlying algorithms created to support it. One can easily imagine an algorithm that may not consider an obviously discriminatory input but may still rely on an equally problematic proxy. For example, decisioning technology that does not consider the gender of the business owner but does consider a subscription to Men’s Health to be an indicator of lower credit risk. The outcome is likely the same.

We should not assume infallibility, just as we shouldn’t assume inherent bias. The key is recognition and a willingness to continually examine and challenge the work being done. It is absolutely critical for the industry to rigorously test all inputs for potential bias and disparate impacts. And, what’s more, it is entirely appropriate for policymakers to demand greater transparency from institutions that rely upon algorithmic decisioning.

When built correctly and tested rigorously, I believe these innovative decisioning technologies are allowing the industry to redefine "creditworthiness" for small businesses in ways that are both more predictive and more financially inclusive.

In reflecting on the progress made over the last decade in terms of improving access to capital, the industry should be encouraged. But we should also continue to look for innovative ways to include, encourage and involve women entrepreneurs.

After all, the American economy is only as strong as its small-business sector. And the small-business sector will succeed only if women- and minority-owned businesses are able to prosper.

Christin Spradley’s BankThink post is a part of our annual Women in Banking series. Other’s featured in this series include U.S. Bank’s chief diversity officer, Greg Cunningham; the founder, chairman and CEO of Operation HOPE Inc., John Hope Bryant; and Grovetta Gardineer, the Office of the Comptroller of the Currency’s senior deputy comptroller for bank supervision policy.