Updating CRA will help bring fintech to the masses

Fintech adoption by consumers is accelerating, especially among millennials. But using technology to improve financial condition faces a roadblock similar to challenges for adoption of less tech-driven financial services: financial literacy.

Fintech tools able to improve consumers’ overall financial health require financial and tech literacy to utilize them. Yet studies in financial literacy show that certain socioeconomic factors can pose a hindrance to consumers’ financial aptitude, limiting their ability to benefit from innovation. And while banks can address financial literacy issues, they do not always effectively funnel resources to that end. The Consumer Financial Protection Bureau last year found that banks spend $25 on consumer marketing for every dollar spent on financial education. Like technology, marketing could return more on its investment if it truly impacted all consumers, not just the most literate. Banks can access consumers in a responsible way through education.

Traditionally, the Community Reinvestment Act has been useful in promoting education; financial literacy programs targeted to low- and moderate-income individuals count as credit under the CRA. Studies from academia and government conclude that, on balance, CRA has effectively enhanced access to credit for LMI and minority borrowers. This includes through financial literacy efforts.

And the need to improve financial literacy against the fintech backdrop has never been greater. Several studies show a persistent financial literacy gap, including among low-income communities. This is of particular concern when one considers that for the first time in 50 years, a majority of U.S. public school students came from low-income families in 2013. This sets them behind in profound ways.

Yet current technology innovations are a missing piece of the existing CRA framework.

A recent BankThink article by Reps. Gregory Meeks, D-N.Y., and Cedric L. Richmond, D-La., on a plan by the Office of the Comptroller of the Currency to apply CRA requirements to fintech charter recipients, summed up the issue succinctly. “The CRA’s spirit is in dire need of reinvigoration in the digital age,” they said.

The federal bank regulators have issued updates on how CRA is enforced, but a recent interagency regulatory guidance on CRA exams and compliance did not really dig into the technological advancements redefining the industry. When it does mention technology, the guidance emphasizes ease of access, usage and rate of adoption of alternative delivery systems, but does not directly address educating consumers about fintech.

The CRA was enacted in 1977, at a time when ATMs were just becoming widespread, and nobody could have predicted the smartphone, which is essentially a bank branch in our pockets.

Additional guidance on how CRA incorporates cutting-edge financial technology is necessary. The industry is still struggling to get definitive answers from individual examiners on what they should be doing.

The gap between the CRA and technology represents the perfect time for banks to unify as one major force when talking to regulators about how to bring the CRA into the 21st century. In turn, regulators can provide valuable and clear guidance in the form of data points and benchmarks that the industry can depend on. Doing so will help define the virtually limitless potential of modern technology to respond to community needs.

If banks work with other industry stakeholders to fuse modern CRA efforts with developing technology, they can spark financial wellness in unprecedented ways.