Forward-looking companies focused on sustainable growth have an opportunity to advance the “S” in ESG – the social component of ESG.
In the financial sector, financial inclusion drives a significant component of this “S:” it enables people and businesses to access affordable and sustainable banking products and services such as deposits, transactions, payments, and credit.
In fact, the World Bank cites financial inclusion as an enabler to 7 of the 17 sustainable development goals. But when people and businesses are excluded from the financial system, there are social and economic costs – including loss of potential to grow businesses, invest in health and education, and improve quality of life.
A lack of access to credit lending for small businesses
Today, small businesses promote the public good and are vital to the U.S. economy, representing almost half of private sector employment and 44% of economic output.
Credit is critical to small business health and growth, whether it is short-term credit for working capital or long-term for expansion and capital investments.
Nonetheless, according to a study by the Federal Reserve, less than half of small businesses report they are getting access to credit that they need to run and grow their businesses.
Considering the role small businesses play in the economy and the lack of access to credit reported by more than half of them, expanding access to credit for small businesses is key to addressing the “S” in ESG.
The limits of present-day credit assessment and scoring models
Already, innovative start-ups are beginning to close this gap by using extensive, holistic, and dynamic data.
Still – it is actually surprising to understand what is not included in current industry models, starting with basics: the actual terms of the loan, when the right terms can improve credit quality by 3x; peer comparisons; transparency and details about references and guarantors; and data cohesiveness across financial statements, transaction data, and tax reports.
Beyond basics, many current models leave out economic, contextual and environmental data apart from just business financials, credit reports, and loan applications.
Context exposes creativity, problem-solving, resilience, and other “assets” that may not appear on the balance sheet.
Additionally, the reason for borrowing is best asked in both structured and unstructured formats, but in current industry models, this is asked in structured formats only.
In unstructured responses used in new models, we can often use natural language tools to get insight into the borrower’s expertise and understanding of what drives success.
As is apparent, these contextual and descriptive insights provide an augmented, more complete view of the customer. This is what enables next-gen fintechs to leverage data and provide a more nuanced, real-world, and predictive view of small business creditworthiness.
The advantages of more holistic data in credit assessment
Instead of generating a static credit score that yields a limited pool of credit-worthy small businesses, expanded and more contextual data and assessment platforms can broaden our understanding of the customer and expand the pool of credit-worthy businesses, particularly those in underserved populations such as minorities and immigrants.
This comprehensive credit assessment approach provides a more predictive picture for banks to extend credit with confidence to a broader, more diverse pool of customers – resulting in as much as 15x approval rates for underserved customers over traditional models without changing the risk profile.
It’s our collective responsibility to challenge everyday practices as commonplace and unquestioned as credit scoring – which has been largely unchanged for decades and has left so many behind.
Let’s ask ourselves if we are perpetuating barriers to accessing vital products and services for the populations our companies serve.
In the case of financial inclusion, these barriers are self-imposed by financial institutions and don’t even require significant investments to change. In fact, we are leaving opportunities on the table – not to mention the higher calling of providing more inclusive finance.
Financial Inclusion as a Growth Accelerator
The winners in the coming decade will be those firms that understand the link between financial inclusion and sustainable growth and competitive advantage and will innovate with the “S” at the forefront.
In the realm of credit access, the good news is that we have the power to change this now by using data and enhanced modelling to predict a more nuanced, informed, and comprehensive view of creditworthiness, one that is also more inclusive.
Looking ahead, we need both the humility to question how we do things and the courage and commitment to change. That is the essence of leadership and the opportunity before us – to see our role in business as aligning purpose and profit to advance the “S” in ESG.
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About the Author: Allison Sagraves is an industry-renowned data & analytics leader and board advisor to Uplinq, the first global credit assessment and scoring platform for SMB lenders.