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“More expansive inclusion opportunities improve the financial well-being of both consumers and small businesses, thereby contributing to overall economic growth,” Federal Reserve Governor Michelle Bowman said on Tuesday at the Fed’s Financial Inclusion Practices and Innovation Conference in Washington, DC.
The ability of small businesses to access financial resources could be improved, as a Fed survey of small businesses found that many small businesses experiencing tight financial conditions often had to rely on personal financial resources such as personal funds or a loan from family or friends. “Because access to credit is fundamental to broader financial access and inclusion, this experience of reliance on personal financial resources shows that the credit needs of small businesses may not be fully met by the financial industry,” Bowman said.
The private sector can help support financial inclusion. A recent Survey of Household Economics and Decisionmaking report by the Fed found that 10% of adults with family incomes of less than $50,000 per year used payday, pawn, auto title, or tax refund anticipation loans to obtain needed funds. “These types of products often carry high or even punitive direct and indirect costs and risks to the consumer,” she noted.
Another safer alternative can be small-dollar loans offered by banks, which can often be provided “on terms that are safer and at lower cost than other types of loans.”
If those banks use automated underwriting based on alternative information (as compared with traditional credit reporting models), bank underwriting costs could be reduced, “potentially making affordably priced loans available to consumers on a more timely basis,” Bowman said. ” If these loans were more available in the banking system, they could serve as an alternative to more costly options from alternative financial services providers.”
Greater inclusiveness in the financial system is a priority for the Fed, she said. “While we have made great progress, there is more to be done for both the public and private sectors. We should be open to considering how new or innovative products and services could promote financial inclusion.”