5 minutes
Non-traditional data and data-sharing could help credit unions reach more of their members.
Financial inclusion is essential when promoting access to financial services to underbanked and unbanked populations. According to the latest LexisNexis Risk Solutions Financial Transparency and Inclusion Report, two-thirds of the world’s financial institutions are committed to supporting financial inclusion, indicating that they recognize the importance of this issue and are actively working to address it by providing services to these communities.
Financial transparency, however, is also fundamental to this equation. This is true for credit unions and other institutions. Financial institutions should be able to easily identify their customers and understand their risk profiles, both to maintain regulatory compliance and support business decisions around the customer. And yet, while the recognition of the importance of these concepts exists, roadblocks to achieving them remain.
The Landscape for Credit Unions
Credit unions have a unique advantage when it comes to providing individualized member services in the communities they serve. Close customer ties enable a deeper understanding of members’ financial circumstances, thus offering greater insight to support providing financial planning assistance.
This is especially important for individuals facing challenges that impede them from readily accessing financial services due to their youth, financial status, spotty credit history, a record of bad debt, lack of financial literacy or hesitancy about entering the financial system. Celent estimates the U.S. alone has 17 million unbanked adults. However, the smaller scale of some credit unions may lead to a lack of resources to tackle the issues around transparency and inclusion.
One of the biggest hurdles encountered by underbanked or unbanked individuals stems from the current know your customer onboarding processes financial institutions conduct to verify customer information. Credit unions have a clear responsibility to verify customer identities to protect themselves against fraudulent transactions. That goes without saying, although they must also consider opting for processes that cause minimal friction for their customers.
Sourcing KYC data on underbanked individuals has always posed a challenge to financial institutions, and rejecting potential customers due to inefficient or manual processes can be detrimental to genuine individuals trying to access affordable financial services.
As a result of these high-friction processes, there is growing interest in data-sharing arrangements. In recent years, a number of initiatives have emerged around data-sharing, including KYC utilities (mostly to support corporate banking), banking consortium-based digital identity programs and commercial offerings for financial data sharing. These partnerships benefit from more timely and relevant reporting, improved quality of suspicious reporting, and better investigation outcomes.
With reliable data and the right technology in place, data sharing can help credit unions reduce customer friction, maintain their commitment to accessibility and financial inclusion and maintain regulatory compliance.
A growing number of financial institutions attest that data covering all entities would help their onboarding processes and would go a long way to improving financial inclusion. Furthermore, according to that same LexisNexis Risk Solutions report referenced above, nearly 80% of financial institutions express interest in global data sharing arrangements, such as a global Customer Due Diligence utility, to support KYC processes.
Accelerated Digital Transformation for Transparency
In the banking sector, we have witnessed rapid technological advancement over the past few decades and a massive shift toward digital transactions. When the pandemic hit, financial institutions that had been reluctant to adopt online operations accelerated their adoption of digital technologies because their customers were no longer able to visit their physical locations.
The unexpected transition posed a challenge to financial crime and compliance operations, with financial institutions citing fraud, cyberattacks and new customer onboarding challenges. On the topic of digital adoption, technologies like artificial intelligence, robotic process automation and cloud delivery are helping financial institutions overcome bottlenecks in financial transparency and onboarding operations.
In addition to credit unions and other financial institutions leveraging technology to support their diversity and inclusion efforts, these institutions began to take a broader look at alternative data. Non-traditional data insights, those not typically found on a consumer’s credit report, used to gain greater insights across their existing customer profiles, could include:
- A new degree or certification
- Social media information
- Payment history not reported on traditional credit reports
Credit unions can utilize alternative data to build a fuller picture of their customers who are not traditionally creditworthy. This type of data can improve financial inclusion efforts by helping to reduce the risk associated with using non-traditional member information and extending services to a more diverse set of clients.
A shared challenge across financial institutions in the adoption of alternative data is the lack of a common regulatory framework for its use. As these issues extend nationally and even globally, individual governments would be wise to put in place regulations to ensure equity, fairness and affordability of financial services. Widespread financial inclusion will suffer without proper infrastructure and strong governance committed to adopting these valuable tools.
Financial institutions see increased financial transparency and inclusion as essential to reducing compliance risk. And yet, it’s clear that the challenges that credit unions face in obtaining insights to foster inclusion and transparency still exist. The significant momentum in recent years from the financial services industry to implement the right technology and data is a move in the right direction to help improve access to financial services for all.
Leslie Bailey is VP/global financial crime compliance and payments for LexisNexis® Risk Solutions. Bailey brings more than 20 years of experience in the financial services field with a focus on determining marketing objectives and goals for various organizations’ financial crime compliance and payments solutions. Since joining LexisNexis® Risk Solutions in 2018, Bailey has led several key initiatives in the company’s market strategy for financial crime compliance and payments for the United States and Canada. She collaborates with the research/development and product portfolio leaders to develop data-based market growth strategy based on analyses of market trends, competitive portfolios, technology advancements, customer needs and regulatory compliance.
