The Weekly Extract from Extractable is a condensed roundup of digital experience news for financial services institutions, and our take from San Francisco.
This week we look at diversity, or the lack of it, in financial services and fintech. We examine discussions on the revitalization of postal banking amidst the current conversations surrounding the USPS, and finally we delve into the growing interest in AI within community banks and Credit Unions.
Fintechs Promise to Fight Inequality
In an article in Forbes this week, Ilona Limonta-Volkova of Vanguard Fintech Ventures, quotes a 2019 study from McKinsey noting the growing disparity between black and white households since the Great Recession of 2008:
“The racial wealth gap between black and white families grew from about $100,000 in 1992 to $154,000 in 2016, in part because white families gained significantly more wealth…while median wealth for black families did not grow at all in real terms over that period.”
As the fintech industry began to grow in the early 2010s, many observers touted advancements in technology “as having the potential to stymie this economic divergence.”
The use of unbiased algorithms would treat everyone fairly and allow access to discriminated groups. The theory went that as new jobs were created by the new industry, diverse talent would be hired and further remove the possibility of continued bias.
Clearly these predictions haven’t played out as expected. The black boxes that make automated decisions have been found to reflect the same biases that human have exhibited, as noted in the McKinsey study.
In 2018, a University of California at Berkley study reached similar conclusions. Study co-author Adair Morse, Finance professor at UC Berkeley’s Haas School of Business, noted:
“The mode of lending discrimination has shifted from human bias to algorithmic bias. Even if the people writing the algorithms intend to create a fair system, their programming is having a disparate impact on minority borrowers—in other words, discriminating under the law.”
Limonta-Volkova calls for fintech firms to make good on the promise to reduce inequality. Often these sort of calls fall on deaf ears. However, a group of fintech firms spearheaded by Betterment, The Fintech Equality Coalition, has been formed to actively fight inequality within the financial industry and society at large.
According to a report in Finextra,
“the group acknowledges that the black community is underserved by financial services. In response, it says it will work on partnerships, education and outreach to make sure products and services are accessible.”
The coalition includes: “Cadre, Carver Edison, Credit Karma, Divvy Homes, Dosh, Earnest, Fabric, Freedom Financial Network, Jetty, Kindur, Marqeta, MoneyLion, Monzo, Nova Credit, Rhino, SoFi, Spruce, Stash, Tally, and Varo.”
We’re excited to see this move by some of the leaders in the fintech industry — and hope to see legacy organizations making similar commitments. Limonta-Volkova points to one of the conclusions of the McKinsey study:
“We all pay a severe price for economic disparity.” She adds, “it robs us all of better financial futures – on national and individual levels.”
The Return of Postal Banking
Recently, Representatives Bill Pascrell (D-NJ), and Marcy Kaptur (D-OH), introduced an amendment to an appropriations bill to fund a $2M postal banking trial. Representative Pascrell was quoted in an article by Anna Hrushka in BankingDive:
“Ninety percent of ZIP codes lacking a bank or credit union are in rural areas, and approximately 46% of Latino and 49% of African-American households are underbanked. With a branch in every rural and urban ZIP code and trusted by all Americans, the Postal Service must provide a financial lifeline to those in need”
In an article in Fast Company, Talib Visram notes, “for many years now, progressive politicians have been recommending the return of postal banking.” He details other recent efforts:
“Senator Kirsten Gillibrand proposed the Postal Banking Act in 2018, and has reignited her push this year in light of Drumpf’s attacks on the service. Senator Bernie Sanders has also been championing it since at least 2014.”
A curious development was reported this week. As Visram reports, “the USPS has talked to JPMorgan Chase about a proposal for the bank to put ATMs and other banking services in some post offices.”
Visram quotes Trish Wexler, JP Morgan’s Corporate Communications for Government Relations, Legal and Regulatory Affairs, “we had very preliminary conversations with the U.S. Postal Service several months ago about what it might look like to lease a small number of spaces to place ATMs to better serve some historically underserved communities. There is no agreement in place and no imminent plans to move forward.”
Visram ads:
“Postal banking is not new. Between 1911 and 1966, the post office provided banking for four million Americans. In other developed countries, where it’s common practice, it also generates substantial revenue for postal services.”
The possible involvement of JP Morgan Chase, or any other commercial bank, in such a scheme is problematic on various fronts. Visram quotes Mehrsa Baradaran, Professor of Law at UC Irvine, “a banking pilot, even if via a private company, could increase access for some communities. But: I think those benefits are outweighed by the potential antitrust issues.”
As community banks and Credit Unions face competition at all fronts – including fintech firms, big tech partnerships and large banks — the combination of a top four bank and a public entity like the USPS could be a bridge too far.
5 Ways AI will Impact Efficiency and CX
Recently, we have noted an increased desire on the part of banks and credit unions to invest in Artificial Intelligence (AI) and Machine Learning (ML). As discussed in an article in Techiexpert, AI is being used by many banks to reduce costs, improve efficiency, but also “in establishing a strong connection and trust between customers and banks.”
For example, the article references a recent interview with Casey Royer, Executive Director, Personalized Experience Management USAA. Royer describes how USAA is using “AI to broaden banking offerings, make their operations more effective and efficient, and offer greater value to their growing customer base.” Among the activities that AI facilitates at USAA are fraud prevention, ID verification, and customer care.
In an article in Customer Think, Ved Raj writes:
“The use of artificial intelligence (AI) and machine learning (ML) is evolving in the finance market, owing to their exceptional benefits like more efficient processes, better financial analysis and customer engagement.”
He notes that a “prediction of Autonomous Research, AI technologies will allow financial institutions to reduce their operational costs by 22%, by 2030.”
Raj discusses several areas in financial services where the application of AI will impact efficiency and customer experience:
- Decision-making
- Fraud prevention
- Trading and wealth management
- Client risk profiling
- Predictive analytics
While efficiency is certainly important, much of the focus we hear about, even as we face a new recession, is how AI can improve the customer experience. Raj concludes that:
“As the market continues to demand easier and faster transactions, emerging technologies, such as artificial intelligence and machine learning, will remain crucial.”
We agree that AI/ML belong in all organizations’ digital roadmap. Ignoring its benefits will continue to widen the capabilities gap between forward thinking FIs and the so called “fast followers.”
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