On October 17, 2018, Federal Reserve Board Governor Lael Brainard delivered a speech entitled “FinTech and the Search for Full Stack Financial Inclusion” at the FinTech, Financial Inclusion — and the Potential to Transform Financial Services Conference, hosted by the Federal Reserve Bank of Boston and the Aspen Institute Financial Security Program in Boston. She began by noting her long-time interest in the potential for innovation – specifically the combination of smartphone apps, big data, artificial intelligence, and cloud technology – to improve financial access for families and small businesses who are underserved. She observed that “no single app is likely to be a silver bullet for the complex challenges faced by underserved households and small businesses,” and noted that achieving inclusion “will require a holistic understanding of the challenges faced by underserved groups in order to develop full stack solutions to address them.”

While noting that account access and credit are “helpful and possibly even necessary components of a solution,” Governor Brainard cautioned that they are not the complete solution on their own. “Continued progress on financial inclusion is likely to require solutions that are designed with an understanding of the issues that underserved communities face,” she stated. In particular, she pointed to what appears to be many unbanked or underbanked people in the United States intentionally choosing not to maintain a bank account, which she believes “may hold clues to what underserved families and small businesses actually need.” In short, she concluded that it is” increasingly clear that financial inclusion is less about account access and more about families’ financial resilience in the face of volatile income and expenses.”

According to Governor Brainard, policymakers and financial services providers “are beginning to assess financial inclusion in more nuanced ways,” and, in parallel, “new technological building blocks increasingly can be used to build more full-stack approaches to financial inclusion.” She stated that policymakers and researchers are learning how to more effectively assess financial health (which admittedly is more difficult to measure than bank accounts), and that there has been progress on tools that are “specifically designed to address the challenges underlying financial inclusion.” While she noted that the Federal Reserve’s recent decision to seek public comment on how it can help create an infrastructure that facilitates safe, innovative, and ubiquitous faster payment services is a fundamental part of any such solution for both consumers and small businesses, Brainard clarified that faster payments “would not address the root causes of financial fragility.”

Governor Brainard spent some time identifying what she calls “infrastructure-level innovations in the basic accounts offered to consumers.” For example, she pointed to how many recent mobile apps provided by bank and fintech providers, separately or in partnership, allow consumers to check balances, pay bills, and deposit checks around the clock and every day of the week via their phones, and some banks have introduced innovative online-only accounts that are fee-free and require no minimum deposits, while offering phone-based deposits, account interfaces, and bill payment. Other banks offer no-fee, phone-based accounts that incorporate savings and budgeting tools “that look and feel like nonbank fintech apps,” she stated. When coupled with new platforms like faster payments systems, other technological innovations, including “cheap access to cloud computing and an open-source approach to artificial intelligence,” can create “more full-stack approaches to financial inclusion,” she stated. Brainard described how a new generation of offerings “experiments with using machine-learning tools and data aggregation to study consumers’ expense and income flows in order to offer credit to consumers with little to no traditional credit histories,” and other products are using behavioral economics-based ‘nudges’ to help consumers grow their savings.”

Brainard acknowledged that we are still in the very early stages in financial innovation, and that many of these products and services “have difficult issues to work through with respect to consumer data security and privacy, which may have important implications for pricing of services.” For example, she highlighted how when products are free, “the consumers themselves may be the product” as many financial apps that provide “free” services earn revenue by being paid for lead generation, and other apps may sell consumer data in ways that consumers may not be aware of. In her view, “a lot of work is needed to ensure” that financial innovation will be able to reach communities that lack infrastructure for digital service delivery.

“Expanding access to financial services is most effective when consumers and small businesses are equipped with the ability and information to determine which financial products are suitable for their needs. Financial literacy and consumer protections are critically important regardless of whether financial services are delivered through traditional means or smartphone apps. Here too, digital delivery can expand the reach of traditional financial education systems by providing consumers with online and mobile education, just-in-time information, and interactive financial tools to evaluate their options,” stated Brainard. Noting how financial services providers have an “affirmative obligation to deliver clear and transparent products and services and to protect the personal information and financial assets of the customers they serve,” she commented that the challenge for regulators is to “ensure trust in financial products and services by maintaining the focus on consumer protection, while supporting responsible innovation that provides social benefits.”

Governor Brainard concluded her remarks by noting that it is still too early to determine whether these innovations will help foster and promote financial inclusion, but stated that she remains “cautiously optimistic that these new technologies “will be combined in ways that move the needle on financial inclusion.”