Historically, the lending industry has faced concerns regarding equitable access to credit, particularly among underrepresented communities. Research supports these concerns: a 2021 survey conducted by Credit Sesame found that 54% of Black respondents had a credit score below 640 (classified as “fair” or worse), compared to 41% of Hispanic respondents, 37% of White respondents, and 17% of Asian respondents.
In response, financial technology (fintech) companies have been working to advance more inclusive models of credit evaluation. One promising innovation is AI-powered lending, which leverages alternative data and machine learning to provide a more holistic and potentially fairer assessment of creditworthiness. By partnering with traditional financial institutions, fintech firms are helping reshape the lending landscape to better serve a broader, more diverse population of borrowers.
Let’s explore how these partnerships are fostering greater equity and opportunity within the credit ecosystem.
Defining Inclusive Lending in the Modern Economy
Inclusive lending involves discovering new methods of loan application determinations that correct the errors in the current system and find creditworthy applicants who would have previously been declined due to low credit scores. It’s not simply targeting loans to minority communities, but it’s a way to better identify which potential borrowers should receive a loan.
The Role of Fintech in Closing the Credit Access Gap
Fintech serves a vital role in closing the credit access gap by revolutionizing the way that credit is granted. The incorporation of new datasets and the use of AI, both of which are more commonly associated with fintech than traditional financial institutions, represents a significant advancement in lending technology and procedures.
Under the old system, a person’s credit score and employment history were the main (if not the only) considerations in determining whether an applicant should receive a loan. By using AI in financial services, a person’s utility or other regularly paid monthly bills, their social media activity, and other factors can be used to give a fuller picture of their ability to repay debts.
Why Traditional Institutions Are Teaming Up With Fintechs
When fintech first began to emerge as a developing industry, many traditional institutions reacted with fear. However, in the years that followed, it became clear that both groups would be better served by embracing the other and looking for ways to synergize their core competencies for the benefit of both consumers and themselves.
As Acting Assistant Secretary for Financial Institutions at the Department of the Treasury Laurie Schaffer explained in a November 2024 speech, “Traditional credit scoring methods may exclude potentially creditworthy borrowers because of reliance on a static range of data inputs and, in part because reliance on historical data may perpetuate bias.” She went on to say that collaborations between fintech and lenders can benefit both parties by expanding the pool of qualified applicants.
Leveraging Technology to Serve Underbanked Populations
Technology (as in, the “tech” part of “fintech”) is an important part of serving underbanked populations. AI can analyze a person’s creditworthiness in a matter of seconds using a bigger picture than just their FICO 8 credit score. It can make these decisions objectively while also using the newest information available about external factors, like overall economic conditions.
It’s important to note that the use of AI in digital lending is specifically designed to support underbanked populations and will have little to no effect on existing borrowers. A 720 credit score will still be excellent, and loans will still be issued to those with excellent credit. Expanding the pool of approved applicants won’t affect those who would already have been accepted.
Data-Driven Lending: Going Beyond FICO Scores
The easiest way to achieve an inclusive lending ecosystem is to increase the scope of the search into the applicant’s creditworthiness. AI-based lending does take FICO scores into account, but only as a small part of the overall picture. For years, creditworthy applicants have been denied access to capital because their financial situation didn’t fit into the traditional model.
Imagine a second-generation immigrant with a strong connection to their heritage who wants to open a business. Their culture encourages them to live with their families to take care of the elders, discourages borrowing money, and promotes having multiple employers. They have four part-time jobs, have never had their name on a mortgage, and bought their truck with cash. They might not even have a credit score, but they would be rejected under the old system. With fintech-backed AI lending, they’d be approved.
Examples of Successful Fintech-Bank Collaborations
Fintech and banks have collaborated successfully many times in recent years to achieve win-win-win situations that benefit both parties and their customers. Goldman Sachs teamed up with Apple to create the Apple Card, allowing iPhone users a faster and more convenient way to make purchases.
A Spanish multinational bank called BBVA acquired an online-only bank called “Simple,” which resulted in better consumer protection for BBVA customers while expanding the bank’s digital service offerings.
Balancing Innovation With Risk Management
It’s always important to balance innovation with risk management, especially in lending. On one hand, it would be possible to devise a system wherein loan acceptance rates reach 100%, but the result would be many unpaid loans and lost revenue for the lender.
Conversely, you could nearly eliminate risk by only providing loans to very qualified borrowers willing to put up collateral against their loans, but revenues would significantly decrease.
The goal is therefore to find the ideal midpoint where as many loans as possible are issued while keeping risk levels manageable. As this is the stated goal of fintech-backed AI-based lending, it is not just a useful tool but an essential one.
What Inclusive Lending Ecosystems Mean for the Future of Finance
Inclusive lending ecosystems represent the future of finance. They’re still in the “early adoption” phase, but once they grow in popularity, they’ll become the industry standard. Once the majority of major lenders begin to use fintech-powered AI lending, those who refuse to adapt will begin to lose significant business. Word of mouth will spread quickly once borrowers learn that they can finally get approved by a lender whose system was designed this century.
