Financial Access and Financial Inclusion: From account origination to economic opportunity: The role technology plays in financial inclusion

Promoting access and inclusion to historically underserved populations may be the key to long-term resilience for individuals, institutions, and communities alike. But access alone isn’t enough to create meaningful change. Forward-thinking institutions are leveraging technology to transform the cost structures at their banks, allowing them to serve broader geographic and demographic populations and turn account origination into an engine for economic empowerment.

Transcription:

Nathan Harley: (00:06)
so I'm Nathaniel Harley, CEO of MANTL. This is Erin Erhart from MBC, and we are gonna be talking about the role technology plays in financial inclusion today, and specifically how a account origination can really be an engine for economic opportunity. So just a quick intro on mantle and how we got started. So, fun fact, we actually started as a challenger bank, and one of the reasons we started a company was because we felt financial literacy was really low and there was an opportunity to really build better tech, to help people with, with their finances. today fast forward, we are an enterprise software company who really helps traditional financial institutions modernize and grow. we've helped our institutions raise billions of dollars of deposits through our online account opening origination platform. And, we really facilitate opening accounts at anywhere, any time and any device and Aaron, would you like to give a little detail on an MBC?

Erin Erhart: (01:20)
So I am with Midwest BankCentre. we are a community commercial focused bank in the St Louis area. We've been serving the market for a little over 115 years. our mission is really to enable people empower businesses and energize neighborhoods through financial services and accessibility. So, am glad to be here and partnering with mantle to help move that forward.

Nathan Harley: (01:50)
This topic in particular, it's definitely close to. At least our ethos is to really expand access to financial services. And, we obviously do that through technology and I think we both believe that access to capital is very much a right. We all all deserve. And as you'll see, as we go through this presentation, something that Midwest bank center has done a really good job at fulfilling. So today we're gonna cover three things. Number one, why financial inclusion must be considered in the digital strategy. Number two, how can technology transform cost structures to really amplify economic impact? And then lastly go over the intersection of business banking and financial inclusion and how it's really, really important to serve the under underserved segments. So why should financial inclusion play a role in your digital strategy, Aaron, where do you think financial inclusion should fall in the digital roadmap?

Erin Erhart: (02:59)
So I don't see a lot of places where it wouldn't completely fall. So if you are looking at digital strategy from a consumer lending perspective, why not expand that and take it just a little bit further to make sure that we're helping people who may not meet traditional underwriting criteria, if you're looking at it from a small business lending perspective or an online account opening perspective, right. just kind of taking that little extra step to make sure that we're, um, really making it accessible to others, which I think in general with the number of fintechs that are out there and available for us to partner with, um, it's definitely a real possibility.

Nathan Harley: (03:38)
Yeah. I think obviously financial inclusion, it's really mutually beneficial for both the institutions and ultimately the communities at the end of the day. So, these stats are really interesting. 7 million households in the us still don't have a bank account today. 20 million others are underserved by the current financial system and this really persists along racial geographical and urban lines. And there's really a big opportunity for local institutions to make an impact. And so community FIS are leaders in financial, inclusion, according to the 2021 banking impact report, the majority of consumers are actually more adept say that community institutions are more adept in providing access to underrepresented communities than neobanks regional banks and money center banks. At the end of the day and 90% of community banks executives said that they either implemented or plan to implement a formal program for financial inclusion for underserved groups.

Nathan Harley: (04:47)
But what's really key here is technology is necessary to really lead financial inclusion efforts at the end of the day. And specifically technology like online account origination can really play a critical role in bringing these initiatives to life. firstly enabling under unbanked, individuals to gain access to financial services and inconvenient branches and branched hours and things like that are a really big reason why people ultimately don't have bank accounts. And so technology at the end of the day really serves a dual purpose. Number one, as we've been talking about it does help expand access to financial services, but also there's a shifting demand in customer expectations, especially from a digital perspective. And this stats is interesting, 58% of consumers and 57% of businesses wouldn't use a bank that didn't let them open an account online. So that speaks to obviously the importance of having a digital front door and showing that you are a digital institution and more than three quarters of Americans prefer to bank digitally. So given the shift in consumer expectations, how necessary do you think having online account opening is?

Erin Erhart: (06:11)
So for us it was, it was actually table stakes. To Nathaniel's point the fact that branch location has always been the number one determiner of where a consumer chooses to bank and getting away from that branch traffic is slowing down. We have to give customers alternative ways to open accounts and do business with us.

Nathan Harley: (06:32)
Totally agree. Well, I would definitely say Midwest bank center is very much a leader in both financial inclusion and digital banking. we've obviously been a close part of that since 2018, when you guys, launched that and have definitely seen firsthand how tech can really drive the economic opportunity locally for you guys. So would love to dig into your story and the rising bank and Midwest bank center story.

Erin Erhart: (07:01)
So, like many community banks we found ourselves faced with the challenge of needing to continue to grow deposits, to fund commercial loan growth. And so traditionally the retail branches drove those deposits and we were very reliant on them, but a lot of that was CD based. And so an older customer base in general. And so as we looked at our long term strategy, we really needed to find an alternative to that. And so that is how we came about deciding to launch a digital only brand, which is rising bank. And so, the plan was to one find new markets. So, we open accounts nationally to drive deposits. So we were less reliant on our branches, but additionally branch traffic has slowed. And so, wanted to have the ability again, to be less reliant on them for account opening so that we could have more flexibility in what our long term branch footprint looked like as well. and it went wonderfully. So, within 10 weeks we raised 70 million from the launch of rising bank and within five months had exceeded a hundred million. And so, really helped us from again that, funding that loan growth that we were looking for. From beginning to end, it took about six months to get everything stood up, but absolutely, great business outcomes.

Nathan Harley: (08:31)
Do you wanna talk a little bit more about the business outcomes that you guys saw?

Erin Erhart: (08:37)
Sure. So, it did become very quickly our number one account opening channel. additionally if you look at the cost for opening a new branch, how long it would take to grow to a hundred million versus how quickly we were able to grow it and the cost it took to stand up rising bank it was really a no brainer. So, 10 times the performance as the slides shows,

Nathan Harley: (09:00)
Were you surprised that raising deposits digitally was so much more economically different than doing it in the branch?

Erin Erhart: (09:09)
So, that it was a complete surprise because it's actually what we were hoping for, but it was very pleasant surprise that it actually worked out the way that we had hoped. we have two FTE dedicated to rising bank and that's it. We have none of the brick and mortar overhead. they manage account reviews, they manage incoming calls, all of it. And so, just really looking at that is a win for us.

Erin Erhart: (09:41)
So, obviously the business outcomes from a rising bank perspective very quickly led us to decide to launch a mantle online account opening for Midwest bank center. so we did that in 2020 and, similar adoption. Now we did launch during COVID and that I believe accelerated, customer adoption of these digital channels, but we saw very quickly, it surpassed all of our branches. So the number of accounts opened online every month we were seeing there were more opened online than were opened, by any of our branches. And actually if you took all about our flagship branch combined more were coming in through, through the online channel and 40% of those were actually existing customers, which was phenomenal because it really showed the adoption that we were hoping to see with our existing customer base. we continue to see household growth like net household growth, but transactions continue to go down and then month after month, we continue to see more and more come through the online account opening channel. So, overall it's been a great success.

Nathan Harley: (10:52)
And how else has really improving the, the deposit economics? I leveraging these digital tools to open accounts, more cheaply widening the customer base. How has it really helped your bank overall and also how has it impacted the community?

Erin Erhart: (11:10)
So, from a bank overall perspective, like I said, really lowering our cost to serve and lowering our costs to grow deposits, which has been, wonderful. But then also, I mentioned earlier branch location is usually the number one reason that someone picks a bank. And I think that a lot of the underserved have been underserved because there may not be a physical brick and mortar location in the community that they're living in. And so this dives give us the option and the ability to still service them and still be their bank, which has been wonderful. additionally it also gives us the ability to focus on other things. And so less time spent, opening accounts in branch. We can focus on things like financial education. So, that's actually something that's pretty near and dear to us. A lot of our branch facilities actually have community rooms that are designed for leading these financial education sessions.

Erin Erhart: (12:06)
We partner with a lot of the not for profits in our community to facilitate these. And so all in all it's gone, really well. additionally, we partnered with Washington university in St. Louis and a group of their undergrads did some research around kind of the economics behind the financial education piece and what we were bringing back to the community and actually showed a pretty significant increase in the wealth being kind of held within the community. So if you think about having a stronger financial understanding, managing finances better, you're able to also be a better customer and to local businesses, things like that. So, it's very important to us that we continue to get back and improve the financial situation.

Nathan Harley: (12:56)
It created over $7 million of accumulated wealth within the local community, which was absolutely pretty awesome stat. Talk about the halo effect.

Erin Erhart: (13:10)
So, the halo effect, it's basically allowed us to service customers that are further away. So if you think about, again, going back to the branch location and the convenience of that being most important, it's less important. So as long as they can get ingrained and adopt those digital channels, we're actually able to expand the radius around each of our locations that we're able to serve as customers. And so, a again, another reason why that adoption is so important because, again, normally you're really just looking at that immediate community right around that location. And now we've, we've seen that expand from the three to five miles to the seven to 10 miles around they're willing to drive further because it's less frequent that they're having to do that. And they're able to take advantage of those digital channels.

Nathan Harley: (13:57)
One of the things people probably fear is that once you close branches you'll see attrition and you'll see a bunch of customers leave, but I think you guys obviously saw a little bit of the opposite effect. in the research that we've seen those that actually do have access to digital tools are actually willing to travel a significantly further distance than those that don't at the end of the day, which is really cool. And there's, we're obviously in a period where there was a record number of branch closures especially in 2001, why do you think it's important to augment branch performance with the digital channels?

(14:37)
It gives you that flexibility. You don't have to worry quite as much about customer attrition as you're closing branches, because you're still able to service them and meet their financial needs. that's actually been important to us. We are actually in the process of evaluating our branch footprint and looking to supplement anything that they might be doing today, you know, what can we give them additional digital options for? And so I think it's incredibly important when you look at that actual branch strategy.

Nathan Harley: (15:09)
So, there's definitely a correlation between mobile banking and underbanked consumers, lower income consumers are much more likely to have a mobile connection than a wifi connection at the end of the day. And when we were looking at the data at NBC, I think we saw about 55% of accounts were actually opened on a mobile device. Were you surprised by that? and what is the importance of that, of the digital channel and especially the mobile channel for the underbanked?

Erin Erhart: (15:40)
It's important to most people, right. So, if you think back to a while ago when everything wasn't available on your mobile app, so you could access your bank accounts and see the activity but you couldn't do a lot. The functionality wasn't all there. And so as we've moved forward, it's actually, to me a little bit frustrating when I go to do something on my phone and I can't because of limited functionality or limited accessibility. And so it doesn't surprise me at all that's how most of our new accounts are coming in. Because that's personally how I would probably open a new account, but I do think that as we look to those that have been historically underserved, if you think about that time before all of that functionality was there, if they don't have at home internet service or have a computer in home that really would've precluded them from being able to participate and actually have a relationship with the bank particularly if there's not one nearby. So, it's actually been pretty important for us.

Nathan Harley: (16:46)
So talk to us a little bit about your experience with it. 10 holders.

Erin Erhart: (16:52)
So, we obviously want to make banking as accessible to everybody. And so it, 10 holders are another group that we actually work pretty hard to make sure that we're able to serve, in St. Louis, for example, there is a very large Bosnian community. And so as they come over to the US and relocate to St Louis, obviously they're not gonna have a social right away. They're not gonna have a credit history. They're not gonna have a banking history, at least not within the continental US. And so, finding ways to be able to work with them and help them has been something again, that that's been very important to us. And so, through mantle, when we were having those initial conversations, it was important to us to make sure that an it account could actually be opened through the mantle platform, which it can and once you're able to establish that trust and that relationship, those they're generally pretty loyal.

Erin Erhart: (17:50)
So, again, the Bosnia and community, for example, or at least the customers that we have that are of Bosnia and descent, they're actually very entrepreneurial. And so we didn't just help them establish their first bank account. We also helped them, by their first home, we also helped them start their first business and worked with them to try to help them stand that up and be successful. So, in addition to the deposit accounts, we actually have a full suite of lending products that are designed for I 10 borrowers as well, including consumer loans, mortgages, and small business loans. But, that's just another area where technology has been incredibly helpful to allow us to continue to be accessible to them.

Nathan Harley: (18:34)
It's a great example and obviously really important and in the conversation to make things more inclusive, how do you think other banks can follow in your footsteps? And why do you think iTune holders might be more comfortable applying for bank accounts online?

Erin Erhart: (18:50)
So, some of it could be lack of understanding or potentially even intimidation. So as long as the process is easy, we have found that they're willing to adapt and to use it. this is something that's really important. when we say financial inclusion, we mean everybody, it's not just by where you live or race or gender, any of those things, we really wanna make sure that we're being thoughtful about having a solution for everyone. And so, again, each bank needs to know who their market is and who where the opportunity is to serve those that might not be being served today.

Nathan Harley: (19:28)
So, we've been talking a lot about how technology can really enable financial inclusion for consumers, but it's also really important to make sure this extends to small businesses as well. There were 5.4 million new businesses created last year, which was actually the largest total in one year history. And roughly 20% of small businesses actually fail in the first year 33% fail in the second year and over two thirds fail within their first 10 years. So what if FI's could help more first time entre entrepreneurs succeed? I think FI's would benefit right there. There would be more deposits. There would be more loans. communities would certainly benefit, with more obviously dollars circulating in the local community. Individuals would benefit with more past to economic independence and it's clearly a win-win situation, but really the problem is, as we see it is that businesses have really been underserved by technology for the most part.

Nathan Harley: (20:35)
And historically they've frankly been overlooked in the conversation. There's been a much larger focus on the consumer, but at the end of the day the business owners are consumers at the end of day as well and expect that type of experience. And so we've obviously seen a growth in third party, FinTech apps folks like square, who are really targeting the small business market and really making a race at the small business segment. Why do you think community banks are uniquely positioned to help businesses succeed?

Erin Erhart: (21:09)
So, we're talking a lot about the digital aspect and that's obviously still tremendously important, but I think that having that mix of having the digital capability as well as we're there, right? So you're a community bank you're in the community. You understand, you have relationships within that community. Our credit decisions are made locally, unlike a lot of our larger, competitor banks. And so again, I think it's, it's having that mix of both. So you're still creating that convenience still competing with some of the larger banks in that space, but then also the fact that it's high tech and high touch it gives us the ability to do both, but I think having that that presence and that understanding of the local community makes community banks a lot more able to service small businesses.

Nathan Harley: (21:57)
Community thighs have really built a lot of Goodwill with the, the small business community. 95% of executives at community banks reported providing a loan to a small business owner, who had been denied actually by a larger bank. And they really played an important role through the PPP program specifically. and the small business owners recognize the, the importance of that. You guys also played a really big role in PPP. So how did you guys participate in that and what was the impact that you felt that the small business owners felt?

Erin Erhart: (22:35)
So, we actually originated, so we're a two, 2.3 billion asset size bank. And we actually, originated over 285 million in PPP loans in total. And a lot of it was us opening up the opportunity to apply through PPP for PPP loans through us to non-customers. So, we didn't just isolate to the ones that we were serving. We were taking advantage of the fact that people were being turned away from, from some of the larger banks in the area. And a big piece of that as well. We actually partnered with the national minority supplier diversity commission. And we actually took all, took all the PPP loans and originated those for the members of that group. And so, we're able to really help people across the country. So, I think we did around 8.5 million just for that group alone. so, all of that felt really good. It was a lot of work front because we didn't have, a PPP L OS for round one worked through that for round two and ended up in a pretty good place and actually did second round loans for a lot of those borrowers. But it was pretty rewarding.

Nathan Harley: (23:51)
So how can banks and credit unions better serve small businesses and really empower them to, to succeed at the end of the day? I think first it, as we've been talking about, it starts with access to financial services. when we look at the data and you guys get this SMB and, you know, commercial deposits definitely represent a higher priority than consumer deposits at the end of the day, 40% of FIS say that their process is somewhat or very broken over half say that actually limits their ability to grow at the end of the day. And outside of just bad business onboarding process there's this assumption that small business owners want to walk into the branch or want that physical in person experience But however, there are a growing number of small business owners that actually want that digital convenience.

Nathan Harley: (24:48)
And I like to, to call up this stats, which I think is really important, 57% of businesses wouldn't use a bank that didn't let them open an account online. Right. So I think it's really starting to change in terms of how businesses themselves want actually interact with their community. FI that's certainly why we created our small business and commercial account opening solution. Took the approach of building that from scratch, taking a first principle approach, kind of understanding, all right, what do the small business owners need? What do the bank employees need to actually serve those customers at the end of the day, get rid of the paper, make it a hundred percent digital automate a lot of the processes, especially KYC and KYB ultimately and really give them that best in class fast, intuitive consumer-like experience. Because as we said, at the end of the day, business owners are ultimately consumers when it's all said and done. And, obviously in addition to arming FIS and these small businesses with better technology and you spoke about this, it's really important to, to arm the small business owners with the educational resources, they need to grow and scale. So talk a little bit more about how you guys have done this.

Erin Erhart: (26:08)
so we launched, what's called the small business academy and we offer it locally. We started with some of the diverse suppliers that were working with Amin which is one of our local utilities. And it went really well. It wasn't just basic, financial education. We were showing them, helping them understand cash flow. We were helping them understand financial statements. what we would be looking at as a bank in order to qualify them for credit, and then also to help them better manage the finances of their business. So, they don't fall into that, 66% that's gonna fail within 10 years. it went really well. And so a lot of our other, corporate partners that we've got within the St Louis area where we've actually started expanding that. But, that's something that we're pretty proud of because it's been pretty impactful.

Erin Erhart: (27:02)
And then beyond that we also started an SBA division in 2021. So to date, we've booked about 8.4 million in SBA loans just through this new group. So another way that we're really trying to stay in front of the small business community and help them. And then obviously we will continue to partner with mantle and we're actually starting implementation of the business online account, opening and omnichannel. So we'll be leveraging the mantle platform for online as well as in branch system.