Transcript | Financial Inclusion and Its Impact – with Alyse Mauro Mason, Tracie Anderson and Shelley Metz-Galloway

Welcome to the Board Perspectives podcast, brought to you by Protiviti, a global consulting firm where we explore numerous challenges and areas of interest for boards of directors around the world. I am Alyse Mauro Mason, and I help lead the ESG and Sustainability practice at Protiviti. I am joined today by Shelley Metz-Galloway and Tracie Anderson.

As a champion for marginalised communities, Tracie Anderson leads the development and execution of strategies to fulfill TransUnion’s ongoing commitment to advance financial inclusion. In her role as principal in U.S. markets, Tracie collaborates with stakeholders internally and externally to cultivate commercial and community relationships focused on driving sustainable financial returns and social good by expanding opportunities with underserved consumers. These opportunities create inclusive and equitable pathways where more consumers can successfully use financial services, products and services to enhance their quality of life.

My colleague Shelley Metz-Galloway is a managing director and U.S. regulatory compliance lead with Protiviti. She has more than 30 years in the financial services industry and offers expertise in consumer regulatory compliance, enforcement action response and remediation, compliance, and fair lending and UDAP risk assessments, as well as compliance management systems programme development, business performance and risk analytics, strategic planning, and process reengineering. As a leader of Protiviti’s Multicultural Employee Network Group and its Racial Equity Advisory Council, Shelley also conducts audits for clients interested in assessing their diversity, equity and inclusion programme effectiveness and remediating DEI gaps.

Today, we are going to discuss financial inclusion, defining financial inclusion and its impact, what it means for your business and how to manage the risk of more inclusive credit and lending practices. Tracie and Shelley are joining us today in their personal capacity to share their experience, expertise and insights with us. Thank you both for being here today.

Alf, thanks for joining me today.

Thank you for having me.

Shelley, how are we defining financial inclusion for purposes of our conversation today?

Typically, when the industry thinks about financial inclusion, they’re usually thinking about underserved communities — communities that historically have not been able to meet standard underwriting guidelines. For the purposes of our conversation today, we are defining financial inclusion as the provision of financial products and services that are offered to consumers that meet their needs in the context of their financial condition. We are also defining this more broadly to include financial services beyond traditional banking: Think utilities, think communication companies and streaming services, think credit services or credit providers — any entity that engages in a transaction that involves credit or payment for services with consumers.

Thank you so much. It sets the stage for our conversation today and making sure that we’re defining it in a way that’s going to make sense to our audience and to set up the rest of our conversation. Tracie, it’d be great to hear from you about how you define financial inclusion, and what does that mean for business growth?

When I think about financial inclusion, it’s about creating inclusive and equitable pathways to participate in the modern economy. When you think about how the pandemic has accelerated the need for digital financial tools, for consumers to participate in the economy to get the goods and services they need to improve their quality of life, you have to think broadly about, are you serving all consumers? And that’s where TransUnion has been laser-focused around ensuring that we continue to advance and make the ecosystem more and more inclusive for all consumers.

In a recent study, we identified 60 million consumers who do not have sufficient credit to be scored by a traditional risk score. If you think about it in the context of business, especially in the digital age we’re in, if your business has any connection to a consumer needing to use credit to purchase your good or service, then you’re thinking about, how many consumers are you missing because they’re unable to be scored by a traditional risk score? Therefore, there’s a chance that they could miss out on your product or service.

When I think about that, I take it personally because I came from very meager beginnings, and growing up, my parents, all they wanted for me and my sister was for us to have a better quality of life. They weren’t necessarily thinking about “Tracie, grow up and be banked,” or “Have credit,” but they did want me to have access to a home, access to a car, and the things that would give me a great quality of life. When I think about having 60 million consumers who don’t have that access, it hits me personally around, what can I do? Given the strides I’ve been able to make, what can I do to make sure that pathway for others to gain access to credit is inclusive and equitable so that everyone can have a greater quality of life?

Hearing you say that number, and say it a few times — 60 million — it is remarkable how exclusive that is. The importance here is talking about that inclusivity. When you think of 60 million who are underbanked or underrepresented, that is a profound number. And it’s probably higher than that — any of our estimates generally tend to be on the lower side. I appreciate you sharing that and your personal experience as well. Shelley, could you share your experience working with clients on financial inclusion?

Initially, my experience centered around advising financial institutions on the identification of fair and responsible banking and servicing violations related to regulatory requirements and the remediation of such matters: Think fair lending risk assessments, statistical analyses, matched payer file reviews, etc.

But as the financial services industry has been changed by technology, my focus has expanded to include the assessment of fairness of the models used by automated systems that identify and market to consumers, rate their qualification for products or services offered, and underwrite and price, as well as service, consumers through the opening and to closure of their financial service relationships. It’s far greater than it has been previously, and as a result, we’re looking at a much broader consumer base when we’re looking at the risks associated with, and the management of those risks of, an expanding credit portfolio.

That is fantastic to hear that it’s gotten broader — you’re reaching more industries, more clients — and we can hopefully reduce that 60-million-person number. It’s great to hear the way that you’ve seen the transformation in the access and the way that companies are thinking about this. To build onto that, how are you seeing financial inclusion be relevant in ESG and sustainability when you’re talking with clients from a DEI perspective, but also the broader ESG and sustainability strategy within companies?

From an ESG perspective, financial inclusion falls squarely in the realm of sustainability as investors are increasingly interested in understanding how financial institutions are contributing to the sustainability of the communities they serve. But it also falls under the governance element of ESG. Since the compliance management frameworks and systems are very important to how well any financial entity is managing the provision of products and services, it’s critical to their regulatory compliance and their products and their services sustainability in the marketplace overall — directly related and very important to being able to continue to serve a broader community.

It’s important when you have an acronym like ESG — “environmental, social, governance” — to be able to categorise and understand where things lie within that strategy is so important for companies. I appreciate you sharing your insight and expertise there. Tracie, I’d like to talk about what TransUnion is doing today and planning to do in the future from a financial-inclusion perspective.

I agree wholeheartedly with the points Shelley shared because that TransUnion is creating data identities to make sure that all consumers are reliably represented in the marketplace is important and critical to our work. That is definitely a strong pillar of how we advance financial inclusion. We also couple that with the ability to empower the consumer.

In addition to making sure that that representation allows them to be fairly evaluated for the products and services they may be applying for, we want to empower the consumer, because if you can imagine if you did not grow up in a banked household that used credit, these concepts and terms and terms and conditions can be very foreign to you. At TransUnion, we are committed to making sure we have services and products that directly serve consumers in a capacity to help them understand credit, how to monitor their credit. Credit Compass is one of the solutions that helps consumers not only understand what their credit score is but also create a plan to improve their score because by improving their score, they’re going to be able to purchase those products and services. They’re going to help them achieve that quality of life.

Then the last piece is around engagement because I’ve seen articles and studies related to companies creating products and services designed for underserved consumers, yet they’re not being utilised to the extent they thought they would be. That’s where this third pillar, around engagement, is critical because you have to have a strong consumer experience, and that’s part of what TransUnion is able to help customers do to reach these consumers. Through our data identities, using both credit and noncredit data, we can help you create marketing campaigns to be very personalised to consumers so they know that you have products and services designed to meet their needs.

That is incredible, hearing that the consumer is at the heart of all this. Representation, empowering the consumer, the engagement, the education around that, it creates community in and of itself and that connection point, and when we can empower each other and the consume,r and when the client is at the forefront of all of that, that feels good, hopefully, to everybody.

Absolutely.

Given the current economic conditions and interest rates that might be affecting customers and clients, how do you see the credit and lending practices being impacted from a financial-inclusion perspective?

What we are experiencing is not unlike what we’ve seen before during challenging economic times. Rising interest rates result in a contraction in consumer demand for financial products and services due to increases in the cost of borrowing, which directly affects credit affordability. This slowing demand for credit impacts our clients directly, which results in less revenue and profits for financial institutions or financial service providers more generally. In the current credit environment, we have yet to see huge increases in credit-related losses from delinquencies and defaults.

And while many large banks increased their credit loss provisions in the fourth quarter of 2022, this was in anticipation or fear of a recession as opposed to actual losses. As of the end of the first quarter of this year, we began to see tightening of lending standards in response to the impact of rising interest rates on regional banks. More strict lending standards have slowed lending to small businesses and consumers, mostly in the areas of credit card and auto loans. Small businesses and lower-income households are more sensitive to the cost of credit since they have fewer borrowing options. From a financial-inclusion perspective, this has the effect of limiting participation of marginal consumers, which is a risk-management approach.

To build on that further, Shelley, because you just mentioned risk, what risks are you seeing, and then, what steps can financial service organisations take to manage that risk?

The risks we typically see are the risk of delinquency and the risk of default. But the action steps you can take in the financial-inclusion arena to manage this risk are know your products, know your services and know your customers. Understand the risk profile of each, and conduct analyses of how they will perform under various economic conditions. When you’re engaged in financial inclusion, you have the opportunity in advance of providing products and services to do analyses that help you understand the risk characteristics of your product, of your service and of the consumers that you’re marketing to. Design your products and services with this understanding in mind, and market and price them accordingly.

Establish a consistent cadence for the review and analysis of the performance of both your existing and your new credit products or services. This will allow you to quickly identify issues that may need ongoing attention early, before they become critical issues, and then, during challenging economic periods, review historical-performance data to determine where risk may be increasing. Financial institutions have a very good deal of experience working with customers during down economic periods, so, reconsidering the strengths and the weaknesses of these approaches before they’re needed gives lenders an opportunity to determine what will work before they have to put it into place.

Small businesses and consumers on the margins of the economy are the first to be impacted by downward-trending economic conditions and increasing credit cost. Conduct outreach so you can understand what their concerns are, if any, and what needs they may have considering current or future economic conditions. Use this information to get ahead of risk for delinquency or default by working with your customers to position them to successfully meet their credit obligations.

During an economic downturn, our consumers need us the most. Everybody is impacted — businesses, people — and to Tracie’s point earlier, the consumer first, the client first. Thinking about that in that frame of mind, everybody truly is impacted, so how can we be anticipating some of these things and have the support and the data that’s required to make the business decision that also meets the needs of the consumer? What I heard from you is, know your product, know your services, know your customer. Also, design is important with your products and services. Market and price it accordingly, and then follow a consistent cadence of review.

Tracie, I’m going to shift back to you because now we’re talking about this data part and how we interact with data, how we can use it in some of these practices. Data is an important element for almost every business. What are some of the traditional data sources used from a credit and lending perspective? And what can companies do differently while working to increase financial inclusion?

When companies are thinking about how to better serve underserved consumers, this starts with one of the points that Shelley brought up: pricing. How do you price your products and services? In financial services, that price is often associated with the risk. At TransUnion, we are dedicated to making sure that those consumer identities are as rich and comprehensive as possible so that price can be as equitable as possible. In economic times such as this, credit is tight, but the reality is, consumers, in some cases, — especially with inflation the way it is — need access to credit.

What’s important is for organisations to embrace not only traditional credit but also new and alternative ways to evaluate consumers. The more inclusive you are doesn’t mean you’re being more risky, because, again, having that additional data keeps the lender in a responsible lending practice, but it’s also helping you reach consumers who need you the most. I feel like this economy has been something TransUnion and many of our peers and our entire industry have been working toward for a number of years because as we’ve acquired new data and new modeling capabilities, that has allowed us to be more inclusive and meet customers when they need us, such as in times like this.

That’s excellent to hear. It’s a balance: How do you meet inclusion with data assets to represent the identity well, which will also meet the needs of the consumer and the business? You’re addressing risk while being inclusive. Could you share more about those data assets and what that looks like from an identity perspective?

We have a number of tools. One of the things about TransUnion as a pioneer in the space is having trended data — as Shelley mentioned, knowing your customer and knowing, is their financial situation increasing or decreasing so you can assess that risk properly. We also talk about how to use more inclusive data to evaluate consumers. One of the tools we have found a ton of success with with our customers related to that is our TruVision blended score, which takes alternative data, but then accredited data. That holistic picture allows that lender or that company to see the entire picture of the consumer and make that decision more equitably.

It’s products like that I’m passionate about, and that I know TransUnion will continue to evolve and iterate on. Historically, because of data limitations, because of technology limitations, there were pockets of our economy, of our marketplace, that we were not serving. But in this day and age, it’s critical that we use all assets available to us, use our information for good, to make sure that we’re serving all our consumers, because that’s the only way that we’re going to grow as an economy — continue to evolve and expand and to reach all consumers.

Thank you for providing more insight there. Shelley, how have you helped your clients manage risk while enhancing inclusive credit and lending practices within their businesses?

That ties directly to Tracie’s response. One of the ways we have helped financial institutions manage risk is in understanding their data. Tracie talked about having a rich body of data and, as a result of that, being able to design products and services, being able to market and being able to price and service credit products to marginalised communities better.

In understanding that data and how it’s being used, we’re assisting financial institutions in understanding the element of risk contained in that data. We look at the risk characteristics contained in that data, and that helps them design and price more effectively. It helps them market more effectively as well.

We spend a great deal of time looking at, for example, automated underwriting and pricing systems. Those systems are sometimes considered to be black boxes: Information goes in about the consumer, and then pricing and decisions come out as a result. And what we’re saying is — and regulators are saying this as well — you need to know what the elements are that are contained within those black boxes. You need to know whether those elements are resulting in disparate impact for protected-class groups.

We have worked closely with a number of financial institutions to help them understand the variables contained within the models that are decisioning, from a pricing and underwriting perspective, consumers who have come to them for credit products and services and advising them of any of the variables that might be creating disparate impact, that may be excluding people who should not be excluded from a positive-decisioning perspective, or could be overpricing consumers who should not be overpriced.

That’s an area where we spend a great deal of time helping our clients understand the risk from a regulatory-compliance perspective, but also understand the risk associated with managing the portfolios for expanded credit services. To be inclusive means that you have to take these steps and make investments in these types of processes to better serve your consumers.

One of the things often associated with risk is fear. Shelley, you brought up fear earlier in the conversation. How can we help, whether it’s board members or companies, think about risk more as preparedness rather than as fear?

When you say fear, immediately, what comes to mind for me is as an acronym for “false evidence appearing real.” And that’s where data is king — making decisions based on real data, real information. The work Tracie is doing at TransUnion in terms of having rich and full identities of consumers allows financial institutions to step away from false evidence appearing real and to move into a deliberate and intentional and informed response in the decision to expand access to credit to those on the margins within the economy, to design products and services that meet their needs, that meet them in the conditions in which they are operating and allow them to effectively manage risk.

I agree wholeheartedly because oftentimes, again, there have been limitations in modern technology. There’s a history in our country of not being as inclusive as possible, and that fosters fear. And we are in the business of creating trust — the opposite of fear. We want folks to transact with confidence. I say this every day in the work that I do: Financial inclusion is not about charity work. It is about being more inclusive in a sustainable way.

If you’re giving loans to someone who doesn’t have the right risk profile for that product, that’s not sustainable over time. And we saw that not play well in our industry just a little over a decade ago. We’ve learned from those mistakes, and we’re looking at, how can we make sure that we have this inclusive picture, that we connect the appropriate consumers to the right product so that over time, they can build their credit and gain more access to the products and services they need?

But again, trust is based on that foundation of being able to know who you’re engaging with. A lender or a company has a profile of tracing. They not only know my historic payment behavior from traditional credit, but they’re also using open-banking and cash-flow data to see my capacity to pay currently. That holistic view allows customers to be confident in their ability to trust consumers versus fear them.

I love what you just said — the business of building trust, which is the opposite of fear. That is so beautifully said and puts in perspective what you were saying earlier from an engagement and an education perspective, and that consumer-first approach. Thank you both for that. Shelley, one other point that is important for our discussion: Because a lot of members of the audience are board members, what questions should board members be asking to increase financial inclusion at their organisations?

Board members should be asking their companies and the management within those companies how they are defining financial inclusion and what it means to the products, services, consumers and markets they are seeking to expand into. They should be asking them what the risk profile is of the new or expanded product, market, service or consumers they wish to expand into. They should be asking them how that compares to their current risk profile, whether it meets their risk tolerance and how they intend to manage that risk. Those are the three or four key questions that as a board member, I would be asking for any financial institution moving to expand financial inclusion for their companies.

Thank you, Shelley. It’s very relevant to the board members in our audience today.

Tracie, you’ve touched on this a little: There are a lot of great community-engagement programmes out there that are advancing financial inclusion. Could you share more about that?

When I say financial inclusion isn’t charity, it means that this is part of how you responsibly grow your business. But there is a community-engagement piece that is critical, because if you are engaging in something you do not have experience with, or maybe you have, and that the experience is negative, you may have some level of distrust or lack of understanding.

One way to reach underserved communities who tend to distrust financial institutions is by engaging in community organisations that work within these communities as a way to build that trust. One of the ways TransUnion is building trust is working with Mocafi — Mobility Finance Capital. Their mission is for all communities to achieve prosperity regardless of their ethnicity or financial or social status.

We love that approach because they are literally targeting how to bring underserved communities into the financial ecosystem. We specifically work with them on our block programme. They’re bringing banking services to banking deserts. We’re bringing financial education. We’re bringing products and services to the community because when we meet consumers where they are versus saying, “You come to me,” we’re coming to you in a capacity to meet you on your block to give you access to financial products and services.

TransUnion partners with Mocafi. We do a ton of credit literacy, credit education, because we want to empower consumers to understand, engage them on their block where they are, and give them the ability to be evaluated and to be brought into a financial ecosystem so they are set up to thrive. That’s the community piece that is important. If you create a product and you wonder why it’s not being adopted as quickly as you hoped, I challenge everyone to think about, how well are you taking that product that may be perfectly designed for underserved consumers to meet that consumer where they are, because that’s a critical piece of advancing financial inclusion.

Meeting the consumer where they are and making sure they get to where they want to go is a great point that you just made. I want to thank Tracie and Shelley for being here today and sharing their insights with us. A few of the keywords I heard throughout this conversation are innovation, identity, inclusion, quality of life, fairness, representation, consumer-first, engagement, empowerment and education. Not all of those might relate to everybody listening to this in the audience, but some of those likely will. Remember some of those keywords as you leave here today.

Shelley, I welcome you to close out our conversation today with three key takeaways you want our audience members to remember from this conversation today. 

You’ve covered very nicely the ideas of representation, empowerment and engagement. The only other thoughts I have are from the risk-management perspective, coming from a financial-institution perspective on financial inclusion: Increasing access to credit does not necessarily mean increase in risk. It is about understanding who your consumer is, understanding what their credit needs are, designing products and services that meet those needs and then, on the basis of that understanding, building in risk assessment protocols, frameworks, monitoring and testing that allows you to effectively manage that risk in all economic circumstances — in the ones in which you implement or execute and introduce new products and services into new markets, as well as in changing environments.

Having discipline as you would in any other credit-provision service to the community is equally important in any service or product you’d be offering in an expanded, more inclusive financial services market. The rules are the same, the discipline that is required is the same and it can be done effectively.

Thank you very much, Shelley and Tracie. What an amazing conversation we’ve had here today. I hope our listeners take this back to their organisations and continue the conversation. And I certainly hope to continue this conversation with the two of you as often as possible.

Thank you for being loyal listeners. We hope you enjoyed our discussion today about financial inclusion, what it means for your business and navigating risk. If you have any questions, please reach out to us at Protiviti, or Tracie at TransUnion. Until next time, take good care.