There’s plenty in the press on financial inclusion and ways to embrace the under-and-unbanked. Yesterday’s discussion on a solid solution to help onboard those with thin credit files is a perfect example. In that case, those who pay bills regularly will be able to get a FICO Score on the boards through an innovative program designed by Experian. It is likely to expect Equifax and TransUnion to follow. By June of 2022, there will likely be notable improvements in those underbanked and unbanked in the United States.
Plenty of surveys size the market, but the go-to document comes from an annual study by the Federal Reserve. The official report is the Survey of Household Economics and Decisionmaking (SHED). As the Fed defines the objective, it “evaluates the economic well-being of U.S. households and identifies potential risks to their financial stability.” The subsequent report publishes in May 2022, but the 2020 report provides a suitable lay of the land. To see the impact of the CFPB’s success in broadening the under-and-unbanked, we will likely need to think about the 2023 and 2024 reports.
There are few surprises in the current report. For example, households with incomes >$100,000 are most likely to be banked, registering a 94% rate, and those with <$25,000 come in at only 63%. Similarly, education comes into play, where 92% of those with at least a college degree are fully banked, but only 51% of those with less than a high school degree are fully banked. Ethnic differences exist, with 89% of Asian-Americans being fully banked versus 58% of African-Americans.
The challenge here is: How do you raise inclusion and not create a credit nightmare, when the Office of the Comptroller of the Currency or any other regulatory agency concerned with “safety and soundness” may come knocking on your proverbial door?
If CFPB does not coordinate efforts with other regulatory agencies, which monitor delinquencies and credit losses, the credit industry will be in a no-win situation. Lower standards, expect higher losses. Drive up losses, pricing becomes an issue. Raise rates to cover the losses, and decide whether all borrowing rates rise. Should all borrowers pay to solve a social problem, or do your price rates reflect the segment risk?
While we do not have the answer, we know the right question. The topic includes every lending class in the market, from auto loans to credit cards, student loans, and unsecured lending.
Credit managers must also consider the state of the economy. On the one hand, if you open the doors to include riskier accounts, how do you manage current challenges such as a protracted public health issue, spiraling inflation, and pending interest rate risk?
CFPB has accomplished a lot since its inception in 2011, and you will find few that think their enforcement actions are unfair. The hope here is that there will be some coordination by federal agencies to ensure that consumers are embraced, and financial institutions (and investors) are protected from pricing mandates, loan approval standards, and operational risk.
This does not mean that the industry sacrifices things like the ability to repay (ATR) rule or that there should be different charge-off requirements for different segments. However, the right hand of consumer protection needs to be coordinated by the left hand of risk management. The buzzword here is harmonization, as the European Payment Services Directive used so many times.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group