Bringing executive teams in financial services up to parity for gender and race will take time, but it is possible for companies to quickly demonstrate leadership in diversity, equity and inclusion while at the same time capturing new markets and driving revenue.
The business case for inclusion and diversity is stronger than ever. The latest report from McKinsey, “Diversity Wins,” reveals once again that the relationship between diversity on executive teams and the likelihood of financial outperformance continues to strengthen over time. But it’s not just profitability that is making the argument for diversity and inclusion in the workplace. The International Labour Organization recently reported: “Companies with more inclusive business cultures and policies see a 59% increase in innovation and 37% better assessment of consumer interest and demand.” And yet, men still make up most of the management ranks at banks and insurers.
While financial services leaders can ponder what they can do to better adopt a systematic, business-led approach to inclusion and diversity for the good of their bottom line, there is a different aspect of this topic the industry doesn’t hear enough about.
A report from The Brookings Institution’s Artificial Intelligence and Emerging Technology Initiative states that white homebuyers have an average credit score 57 points higher than homebuyers of color. The distribution of credit scores is also unequal: More than one in five people of color have FICO scores below 620, while only one in 19 Caucasians have credit scores below 620 — the threshold most credit rating agencies consider subprime. In thinking about auto finance, it’s not hard to imagine that the gap extends well beyond homebuyers.
The Consumer Financial Protection Bureau (CFPB) also estimates 20% of the adult population is underserved for credit, and those who fall into this category are more likely to be from minority groups. Any conversation about diversity, equity and inclusion must seek to remedy the historic structural and cultural racism minorities have had to endure when seeking credit.
Forward-looking lenders will understand the scope of the business opportunity. But what is the quickest, most expedient way to solve the problem of inclusivity and equity in access to credit?
A good place to start is by doing a better job of crafting a nondiscriminatory scorecard. To do that, we must focus on two key areas: bias and data sources.
For years, developers had no idea that they had baked their own unconscious bias into algorithms. The advent of machine learning in lending platforms presents technology companies with a unique opportunity to rid software of the biases embedded in the historical data used to train algorithms.
Being wary of unconscious bias in algorithms is an important step, but lenders must also accept that it’s time to move beyond traditional credit data in order to better understand our customers’ ability to pay.
The good news is that modern lending systems are able to integrate with alternative data sources to give a more nuanced view of a borrower’s risk profile. Alternative data sources like Trust Science or Zest Ai are integrated with some loan origination systems to create a more comprehensive auto-decisioning matrix and scorecard. This will give nonprime borrowers access to the financing they need to grow their business, enter the housing market or get that new set of wheels.
If the carrot is the business opportunity, then the stick is compliance. Discriminatory lending is at risk of noncompliance. In decisioning a deal, companies need to be able to rely on their lending system to eliminate cognitive biases in order to demonstrate that their policies don’t discriminate, and keep in line with the U.S. CFPB and the Canadian CPA governing bodies. Sophisticated lending systems can do that.
While improving diversity, equity and inclusion initiatives across the board can’t happen overnight, crafting a nondiscriminatory scorecard is an area where companies can show real leadership in championing diversity, equity and inclusion, while at the same time capturing new markets and driving revenue.
Vlad Kovacevic is the founder and CTO of Inovatec Systems. With a focus on efficiency, flexibility and connection, JAVELIN by Inovatec is a state-of-the-art lending platform.
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