To end lending bias, banks must use the right technology
Let’s face it. There have been considerable ink widely held that gender equality in the financial sector keep hanging out behind other areas, and that the representation of women in finance decreases gradually the company ladder you climb.
However, the industry’s failures in female representation do not end with the workforce. Financial services companies have also consistently failed to invest in women-owned businesses and to provide women entrepreneurs with equal access to financial resources and opportunities.
In my own career path, I have met many women who have struggled to access funding. During my time as a Peace Corps Volunteer in West Africa, I worked with talented women entrepreneurs who self-funded their businesses because they were completely excluded from local credit markets because of their gender.
These obstacles have impacted not only individuals and their businesses, but also the wider community by forcing women to make impossible choices, such as choosing between buying school supplies or medicine for their children and growing their business. .
This phenomenon is not unique to developing economies. The problem was also widespread when I returned to the United States. I’ve seen smart, accomplished friends walking around with boxes of financial plans from bank to bank, looking for funding for their startups or small business. They spent countless hours filling out loan applications, only to be rejected or fired by male loan officers who didn’t see much potential in such female-centric ventures.
A few years later, while practicing as a partner in a New York law firm, I learned about a position in the legal team of a financial technology company. focused on extending financing to small businesses underserved by traditional credit markets.
I recalled the experiences of women entrepreneurs in my life and immediately felt connected to the mission and approach of the company, which used gender and race-neutral decision-making technology that promised to place all candidates on an equal footing. So I made the decision to leave the stability of a career in corporate law to join OnDeck, just a few months after its IPO.
My experience at OnDeck has only reiterated the important role small businesses play in the health of the US economy. There are many studies extolling that small businesses are the biggest employers, job creators and contributors to the country’s national GDP.
Within this small business community, women-owned businesses play a vital, though often overlooked, role. Studies have shown that women-owned businesses account for almost half of the US market, employ millions and generate billions in sales. The number of women-owned businesses has grown rapidly, up 21% from 2014 to 2019, according to a recent study commissioned by American Express.
Yet despite all of their successes, women face significant obstacles in starting and growing their business. One of the main challenges identified by women entrepreneurs is the difficulty they face in obtaining bank financing for their business. The availability of bank financing varies widely depending on the gender, race and ethnicity of the business owner.
Indeed, less than half of small businesses have been successful in obtaining funds from a bank in the past five years, according to the Federal Reserve Small Business Credit Survey 2020. And such banking relationships were much more common among larger firms, firms with better credit scores, and firms with white owners.
During my five years at OnDeck, I have seen innovation help democratize access to financial services, but I recognize that the job is far from done.
Technology-driven application processes and inclusive underwriting approaches have enabled better access to capital for minority and women-owned businesses, rural businesses, non-storefront businesses and other underserved communities. By allowing businesses to apply online and using gender and race-neutral application technology, online lending eliminates the potential for bias that can creep into face-to-face interactions with loan officers.
Beyond that, there are now many more opportunities to use fintech business intelligence technology that relies less on an individual’s credit rating – which historically favors white men – and instead, examine hundreds of data sources to better understand and assess the health of small business. Differences in credit scoring models, credit usage patterns, and measurable wage differentials, among other factors, have led men and women to be treated differently by credit markets.
Of course, business intelligence technology is only as good (and fair) as the underlying algorithms created to support it. One can easily imagine an algorithm that may not consider an obviously discriminatory entry but can still rely on an equally problematic proxy. For example, business intelligence technology that does not take into account the gender of the business owner but contemplates a subscription to Men’s Health be an indicator of lower credit risk. The result is probably the same.
We shouldn’t assume infallibility, just as we shouldn’t assume inherent bias. The key is recognition and a willingness to continually review and question the work done. It is absolutely essential for the industry to rigorously test all inputs for potential biases and disparate impacts. And, what is more, it is entirely appropriate that policy makers demand greater transparency from institutions that rely on algorithmic decisions.
When built correctly and rigorously tested, I believe these innovative business intelligence technologies allow the industry to redefine “creditworthiness” for small businesses in ways that are both more predictive and more financially inclusive.
Reflecting on the progress made over the past decade in terms of improving access to capital, the industry should be encouraged. But we must also continue to seek innovative ways to include, encourage and involve women entrepreneurs.
After all, the US economy is as strong as its small business sector. And the small business sector will only succeed if women-owned and minority-owned businesses are able to thrive.
Christin Spradley’s BankThink publication is part of our Women in Banking Series. Other people featured in this series include US Bank Diversity Director, Greg Cunningham; the founder, president and CEO of Operation HOPE Inc., John hope bryant; and Grovetta Gardineer, the Deputy Principal Controller of the Office of the Comptroller of the Currency for Banking Supervision Policy.