Inclusive Lending: Better for Banks, Better for All

For too long, discrimination, unequal access, disinvestment, gentrification, and other types of market failures have led to banking and credit deserts in underserved, urban, and rural communities. Mainstream players in a scale-oriented financial industry have traditionally overlooked low income communities, those with low or no credit histories, and those with criminal backgrounds based on the way traditional credit scoring models deem their likelihood of generating profit. 

Traditional credit standards for system entry haven’t improved much over the past 20+ years. As technology and process take center stage, applicants are now scored instantly and sent on one of two paths: 1) “Good to go — get us some documents, and we’ll keep the process moving” or 2) “Sorry — we can’t help. Good luck in your search.” 

In our opinion, scale as a means to profit has outweighed public benefit long enough. 

Inclusive economies are better for society from a human rights and equality standpoint, and they’re more beneficial for the industry in the long run. According to McKinsey, the impact of shrinking inequities would be huge: eliminating disparities in wealth between Black and white households and Hispanic and white households could result in the addition of $2 trillion to $3 trillion of incremental annual GDP to the US economy. 

What is an Inclusive Economy?

An inclusive economy is one that prioritizes shared prosperity for all segments of society, including those on the margins. In an inclusive economy, everyone is able to participate and receive the benefits of adequate income, loan approval, and home ownership. 

When there are wide disparities in access to resources within a community or market, the industry cannot function at optimal efficiency, nor reach its potential to have a lasting impact. By continuing to ignore underserved markets, the traditional lending industry loses the opportunity to build a more inclusive, accessible, and thriving economy. 

Serving Others Serves Banks

Contrary to the long-held belief that underserved markets slow economic progress, inclusivity and growth actually go hand-in-hand. Economic exclusion is actually a threat to prosperity. 

Banks can benefit from inclusive lending, both directly and indirectly. 

DirectlyResearch suggests that up to 40% of GDP growth in the US economy between 1960 and 2010 can be attributed to greater participation of women and people of color in the labor force. Banks should double down on this trend and fuel businesses owned by women and people of color.  

Indirectly — Should banks choose not to serve these small businesses, they could very easily establish referral programs with their local Community Development Financial Institution (CDFI). They can point the business to a values-aligned partner that exists to focus on underserved small business owners. 

If underserved communities continue to exist, so do the inefficient and predatory systems that serve those communities, costing society much more in the long run. 

Technology Can Break Barriers

The industry is beginning to see how technology can create opportunities for more inclusive growth. Data science and artificial intelligence (AI) are opening doors to new and more complex ways to assess creditworthiness and intent to pay, well beyond the traditional credit score. Companies like Socure, Middesk, Able.ai, Alloy, and others are bringing automation and APIs to bear, creating new avenues to connect disparate systems and companies to streams of data in the process. These developments can reduce costs while simultaneously increasing access to new financing outlets. It’s yet to be determined whether these new data streams and insights will be a boon or bust for previously underserved markets. 

While the Fintech impact is unclear, mission-driven lenders measure success through their impact on the community, not the shareholder. These lenders are already leading the way toward more inclusive economies by placing emphasis on other benefits besides profit alone, including:

  • Deeper community outreach and engagement
  • Increased economic development in underserved areas
  • Job growth and retention
  • Better training and borrower education, increasing the likelihood of business success and loan repayment

We believe that when institutions like mission-driven lenders have the right technology, they will not only drive more engagement with underserved communities, but increase mainstream participation in these markets, forging fundamental positive changes for the industry.

SPARK Champions Mission-Driven Lenders

At SPARK, we believe in the power of mission-driven lending because we’ve seen its impact firsthand. We know the effect that increased access to capital can have on the lives of borrowers and their communities. 

And we believe it’s worth sacrificing pure profit for — so much so that we’ve been championing mission-driven lending since our founding.

  1. We understand the needs and motives of mission-driven lenders because we were born from one ourselves.
  2. We were established as a public benefit corporation to ensure decisions go beyond pure profit motives. 
  3. We were built to support SBA loan programs, which were created specifically to increase access to capital by underserved markets. 
  4. We actively support and provide discounts to mission-based lenders focused on serving minority communities.

It’s our vision to streamline the connections between traditional lenders and mission-driven lenders through SPARK technology. In doing so, we can help traditional lenders better meet the needs of underserved markets by ensuring access to partners that support their growth into the mainstream. 

Learn more about The Cost of Ignoring Underserved Markets in Banking by downloading our latest report, and join us in building a more inclusive economy by contacting us today.