How Fintechs Can Help Advance Financial Inclusion

Last year, the coronavirus pandemic swiftly shut down the U.S. economy. Demand for manufactured goods stagnated while restaurant activity fell to zero. The number of unbanked and underbanked persons looked likely to increase, after years of decline. However, federal legislation has created incentives for community banks to help those struggling financially. Fintechs can also play an important role.

The Covid-19 pandemic has affected everyone — but not all equally. Although the number of American households with bank accounts grew to a record 95% in 2019 according to the Federal Deposit Insurance Corp.’s “How America Banks” survey, the crisis is still likely to contribute to an increase in unbanked as unemployment remains high. Why should banks take action now?

Financial inclusion is critical — not just for those individuals involved, but for the wider economy. The Financial Health Network estimates that 167 million America adults are not “financially healthy,” while the FDIC reports that 85 million Americans are either unbanked or “underbanked” and aren’t able to access the traditional services of a financial institution.

It can be expensive to be outside of the financial services space: up to 10% of the income of the unbanked and underbanked is spent on interest and fees. This makes it difficult to set aside money for future spending or an unforeseen contingency. Having an emergency fund is a cornerstone of financial health, and a way for individuals to avoid high fees and interest rates of payday loans.

Promoting financial inclusion allows a bank to cultivate a market that might ultimately need more advanced financial products, enhance its Community Reinvestment Act standing and stimulate the community. Financial inclusion is a worthy goal for all banks, one that the government is also incentivizing.

Recent Government Action Creates Opportunity
Recent federal legislation has created opportunities for banks to help individuals and small businesses in economically challenged areas. The Consolidated Appropriations Act includes $3 billion in funding directed to Community Development Financial Institutions. CDFIs are financial institutions that share a common goal of expanding economic access to financial products and services for resident and businesses.

Approximately $200 million of this funding is available to all financial institutions — institutions do need not to be currently designated as a CDFI to obtain this portion of the funding. These funds offer a way to promoting financial inclusion, with government backing of your institution’s assistance efforts.

Charting a Path Toward Inclusion
The path to building a financially inclusive world involves a concerted effort to address many historic and systemic issues. There’s no simple guidebook, but having the right technology is a good first step.

Banks and fintechs should revisit their product roadmaps and reassess their innovation strategies to ensure they use technologies that can empower all Americans with access to financial services. For example, providing financial advice and education can extend a bank’s role as a trusted advisor, while helping the underbanked improve their banking aptitude and proficiency.

At FIS, we plan to continue supporting standards that advance financial inclusion, provide relevant inclusion research and help educate our partners on inclusion opportunities. FIS actively supports the Bank On effort to ensure Americans have access to safe, affordable bank or credit union accounts. The Bank On program, Cities for Financial Empowerment Fund, certifies public-private partnership accounts that drive financial inclusion. Banks and fintechs should continue joining these efforts and help identify new features and capabilities that can provide affordable access to financial services.

Understanding the Needs of the Underbanked
Recent research we’ve conducted highlights the extent of the financial inclusion challenge. The key findings suggest that the underbanked population require a nuanced approach to address specific concerns:

  • Time: Customers would like to decrease time spent on, or increase efficiency of, engaging with their personal finances.
  • Trust: Consumers trust banks to secure their money, but are less inclined to trust them with their financial health.
  • Literacy: Respondents often use their institution’s digital tools and rarely use third-party finance apps, such as Intuit’s Mint and Acorns.
  • Guidance: The underbanked desire financial guidance to help them reach their goals.

Financial institutions must address both the transactional and emotional needs of the underbanked to accommodate the distinct characteristics of these consumers. Other potential banking product categories that can help to serve the underbanked include: financial services education programs, financial wellness services and apps and digital-only banking offerings.

FIS is committed to promoting financial inclusion. We will continue evaluating the role of technology in promoting financial inclusion and track government initiatives that drive financial inclusion to keep clients informed on any new developments.

ESG Principles at Work in Diversifying Governance

Before environmental, social, and governance (ESG) matters became commercially and culturally significant, the lack of diversity and inclusion within governance structures was noted by stakeholders but not scrutinized.

The shifting tides now means that organizations lacking diversity in their corporate leadership could be potentially subjected to shareholder lawsuits, increased regulation and directives by state laws, investment bank requirements, and potential industry edicts.

Board and management diversity is undoubtedly a high-priority issue in the banking and financial services sectors. Numerous reports establish minority groups have historically been denied access to capital, which is mirrored by the lack of minority representation on the boards of financial institutions.

Some progress has been made. For example, for the first time in its 107-year history, white men held fewer than half of the board seats at the Federal Reserve’s 12 regional outposts. This was part of an intentional effort, as Fed leaders believe a more representative body of leaders will better understand economic conditions and make better policy decisions. However, further analysis reflects such diversity predominantly among the two-thirds of directors who are not bankers, while the experienced banking directors are mainly white males.

Board Diversity Lawsuits
The current pending shareholder suits have been primarily filed by the same group of firms and targeted many companies listed by a recent Newsweek article as not having a Black director. None of these suits involve financial institutions, but it is not hard to foresee such cases coming in the future. The lawsuits generally assert that the defendants breached their fiduciary duties and made false or misleading public statements regarding a company’s commitment to diversity. The Courts have summarily dismissed at least two suits, but a legal victory may not even be the goal in some cases.

Recently, Google’s parent settled its #MeToo derivative litigation and agreed to create a $310 million diversity, equity, and inclusion fund to support global diversity and inclusion initiatives within Google over the next ten years. The fund will also support various ESG programs outside Google focused on the digital and technology industries.

Regulatory, Industry, and Shareholder Efforts
Federal and state regulatory efforts preceded these recent lawsuits. The U.S. Securities and Exchange Commission has issued compliance interpretations advising companies on the disclosure of diversity characteristics upon which they rely when nominating board members and is expected to push more disclosure in the future. Additionally, the U.S. House of Representatives considered a bill in November 2019 requiring issuers of securities to disclose the racial, ethnic, and gender composition of their boards of directors and executive officers and any plans to promote such diversity.

These efforts will likely filter into boardrooms and may spur additional board regulation at the state level. In 2019, California became the first state to require headquartered public companies to have a minimum number of female directors or face sanctions, increasing 2021. In June 2020, New York began requiring companies to report how many of their directors are women. As other states follow California’s lead regarding board composition, we can expect more claims to be filed across the country.

At the industry level, the Nasdaq stock exchange filed a proposal with the SEC to adopt regulations that would require most listed companies to elect at least one woman director and one director from an underrepresented minority or who identify as LGBTQ+. If adopted, the tiered requirements would force non-compliant companies to disclose such failures in the company’s annual meeting proxy statement or on its website.

In the private sector, institutional investors, such as BlackRock and Vanguard Group, have encouraged companies to pursue ESG goals and disclose their boards’ racial diversity, using proxy votes to advance such efforts. Separately, Institutional Shareholder Services and some non-profit organizations have either encouraged companies to disclose their diversity efforts or signed challenges and pledges to increase the diversity on their boards. Goldman Sachs Group has made clear it will only assist companies to go public if they have at least one diverse board member.

Concrete Plans Can Decrease Director Risk
Successful institutions know their diversity commitment cannot be rhetorical and is measured by the number of their diverse board and management leaders. As pending lawsuits and legislation leverage diversity statements to form the basis of liability or regulatory culpability, financial institutions should ensure that their actions fully support their diversity proclamations. Among other things, boards should:

  • Take the lead from public and private efforts and review and, if necessary, reform board composition to open or create seats for diverse directors.
  • When recruiting new board members, identify and prioritize salient diversity characteristics; if necessary, utilize a diversity-focused search consultant to ensure a diverse pool of candidates.
  • Develop a quantifiable plan for diversity issues by reviewing and augmenting governance guidelines, board committee efforts, and executive compensation criteria.
  • Create and promote diversity and inclusion goals and incorporate training at the board and management levels.
  • Require quarterly board reporting on diversity and inclusion programs to reveal trends and progress towards stated goals.

As companies express their commitment to the board and C-level diversity and other ESG efforts, they should create and follow concrete plans with defined goals and meticulously measure their progress.

Top 25 Bank Boards for Women

In early December, Nasdaq filed a proposal with the Securities and Exchange Commission that would require its listed companies to disclose diversity statistics about their board’s composition. Boards must include at least one female and, at minimum, one minority or LGBTQ board member. While the exchange recently made some changes to the proposal - to address the concerns of small boards with five or fewer members, for instance — there’s no denying that pressure has been mounting when it comes to improving diversity on corporate boards.

Just look at 2020 alone: Institutional Shareholder Services reiterated that it would vote against the nominating chair of Russell 3000 and S&P 1500 companies that lack female representation. Goldman Sachs Group announced that it will only take companies public if they have at least one diverse board member. And California and Washington both had gender diversity requirements in place for companies headquartered there.

“Diversity of thought forces [boards] to look at solutions in a different way, to look at problems in a different way,” says Kara Baldwin, a partner at Crowe LLP. “It’s simply good business to make sure you have those differing viewpoints.”

But corporate boards often do the bare minimum when it comes to adding women: An analysis of Russell 3000 boards by 50/50 Women on Boards finds that only 5% are gender-balanced, meaning women hold roughly half of board seats.

In a new analysis using its proprietary database of the nation’s 5,000 public, private and mutual bank boards, Bank Director identified the 25 bank boards with the highest representation of women. We focused on banks above $300 million in assets, given the lack of data on very small, private institutions. Only 11 of the banks we examined would meet the goal set by 50/50 Women on Boards.

Women, it should be noted, comprise 51% of the population and 58% of the workforce, according to the U.S. Census Bureau.

Both big and small banks, public and private, topped our list, showing that diversity is not exclusively a big bank issue. Webster Financial Corp. of Waterbury, Connecticut, with $32.6 billion in assets, and The Falls City National Bank, with $456 million in assets out of Falls City, Texas, top our list. Both boast boards with a membership that’s 56% female — well above the normal balance typically found on corporate boards. Rounding out the list are $1.9 billion First Bank of Highland Park, in Highland Park, Illinois, and Principal Financial Group, the holding company for $4.5 billion asset Principal Bank in Des Moines, Iowa. Both 12-person boards include five women, comprising 42% of membership. Last year, 50/50 Women on Boards found that women held 23% of board seats at Russell 3000 companies.

About six years ago, First United Corp., which has $1.7 billion in assets, started to intentionally focus on its composition, both in terms of skills and backgrounds. “We want to be more relevant to our customers and to our communities, for our shareholders, looking at that whole stakeholder group [including] employees,” says Carissa Rodeheaver, the Oakland, Maryland-based bank’s chair and chief executive. That includes representing diverse backgrounds, in terms of gender, race and ethnicity, and age.

This year, First United will begin using a skills matrix — a practice that helps boards map their directors’ expertise and backgrounds to identify gaps. A diversity and inclusion policy, put in place by the nominating and governance committee, will ensure the board considers a diverse slate of director candidates. “The pool has to be diverse, and that will continue to naturally lend itself to keeping that diversity of thought on the board,” says Rodeheaver. “It’s a great formula that leads to a well-rounded board.”

First United brought on three new directors in the past year — all women, it turns out, who are skilled in regulatory compliance, finance and project management, says Rodeheaver.

Lisa Oliver, the chair and CEO at The Cooperative Bank of Cape Cod, a $1.2 billion mutual bank headquartered in Hyannis, Massachusetts, places a high value on the “lived experiences” often uncovered when building diverse boards.

While the traditional executives and professionals often found on corporate boards — current and former CEOs, accountants, regulators and attorneys — still provide valuable insights, banks “have to think about the new needs of banking, and how that aligns with a whole different genre of people and the pipeline we need to cultivate,” says Oliver. For example, boards often seek technology and cybersecurity expertise; these skills aren’t often found at the top of an organization. Or a board might look for someone who can represent an industry that’s important to their bank, like healthcare.

C-suites are still predominantly male and predominantly white: Looking further down an organization chart might serve up an experienced candidate who also brings a diverse perspective to the table.

“You have to work harder; you have to expand that group of who you know,” says Baldwin. “You must be intentional — that’s really important.”

Oliver also wants to attract and retain younger directors to the board at “The Coop,” as the bank is called locally, but has struggled to retain young women as board members and corporators during the pandemic. (Corporators elect board members, but the position can also serve as a training ground of sorts for board candidates.)

“The pandemic has created great stress for young people to [serve] on the board,” says Oliver. One director, a business owner and single mother with a child at home, had to resign, she says. Oliver believes boards should consider how they can structure meetings to make the role more manageable for younger board members who are building their careers and businesses. “Not death by committee meeting, but what are the critical four committees we need to have?” she says. “There’s an art and a science to creating the agenda within that and providing the data to analyze risk, make it manageable.” A 400-page board packet can be difficult to fit into anyone’s schedule, much less that of a Gen X or millennial professional balancing family and career.

Oliver wonders if today’s more remote environment — with boards meeting virtually — could help them attract candidates from nearby Boston — a technology hub boasting a highly educated workforce.

Boards should consider looking outside their local community to find diverse, qualified board members, says Baldwin. Nearby cities, as Oliver posits, could be a valuable well of talent.

Both First United and The Coop are putting practices in place to help make room for new views: First United will declassify its board this year, and Oliver says her bank is putting term limits in place.

And both CEOs tell me that building the board their bank needs is a continuous process. “We need to constantly be looking and identifying individuals that make sense [for our board] and backfill that pipeline,” says Rodeheaver.

“We have to reflect the community around us, or else we’re not able to hit on some of the challenges that we face,” Oliver adds. “It takes effort, and it takes time, and it has to be a constant process.”

Top 25 Bank Boards For Women

Bank Name (Ticker) State Total # Directors % Women on the Board
Webster Financial Corp. (WBS) CT 9 56%
The Falls City National Bank TX 9 56%
Lead Financial Group MO 9 55%
First United Corp. (FUNC) MD 12 50%
The Cooperative Bank of Cape Cod MA 14 50%
First National Bank Alaska (FBAK) AK 8 50%
Boston Private Financial Holdings (BPFH) MA 8 50%
New Triplo Bancorp PA 6 50%
Andrew Johnson Bancshares TN 8 50%
Johnson Financial Group WI 10 50%
Minnwest Corp. MN 16 50%
GSB, MHC MA 15 47%
Cambridge Bancorp (CATC) MA 17 47%
First Capital (FCAP) IN 13 46%
Mascoma Bank VT 13 46%
Ledyard Financial Group (LFGP) VT 11 45%
First Seacoast Bancorp (FSEA) NH 9 44%
Orbisonia Community Bancorp PA 7 43%
Stearns Financial Services MN 7 43%
Lockhart Bankshares TX 7 43%
National Cooperative Bank OH 14 43%
MidFirst Bank OK 7 43%
Olympia Federal Savings and Loan Assn. WA 7 43%
Principal Financial Group (PFG) IA 12 42%
First Bank of Highland Park* IL 12 42%

Source: Bank Director internal data, plus bank websites and public filings, as of February 2020. Banks under $300 million in assets weren’t examined given the scarcity of data about these institutions.
*First Bank of Highland Park was left off this ranking when it first published. Bank Director regrets the omission.

Embracing Gender Diversity as a Pathway to Success

A prolonged flat yield curve, economic contraction, increasing compliance and technology costs, not to mention the pandemic-induced pressure on stock valuations, have left banks in a difficult operating environment with limited opportunities for profitability.

Yet, there is an untapped opportunity for banks to capitalize on a strong and growing talent pool and profitable customer base: women. Research repeatedly shows that increasing gender diversity on bank boards and in C-suites drives better performance. Forward-thinking banks should look to women in their communities for growth inside and outside the institution.

Women now receive nearly 60% of all degrees, make up 50% of the workforce and, prior to the pandemic, held more jobs in the U.S. than men. They are the primary breadwinner in over 40% of U.S. households and comprise more than 50% of stock owners. A McKinsey & Co. report found that U.S. women currently control $10.9 trillion in assets; by 2030, that could grow to as much as $30 trillion in assets. Women also started 1,821 net new businesses a day in 2017 and 2018, employing 9.2 million in 2018 and recording $1.8 trillion in revenues. Startups founded by women pulled in $18.6 billion in investments across 2,304 deals in 2019 — still, lack of capital is the greatest challenge reported by female small business owners.

Broadly, research also supports a positive correlation between a critical mass of gender diversity in leadership and performance.

A study of tech and financial services stocks found a 20% increase in stock price momentum within 24 months of appointing a female CEO, a 6% increase in profitability and 8% larger stock returns with a female CFO. And they may achieve better execution on deals. In a review of 16,763 publicly announced M&A transactions globally over the last 20 years, boards that were more than 30% female performed better in terms of stock price and operational metrics than all-male boards.


Note: Performance metrics are market-adjusted
Source: M&A Research Centre at Cass Business School, University of London and SS&C Intralinks: “Gender Diversity and M&A Outcomes; How Female Board-Level Representation Affects Corporate Dealmaking” (February 2020)

But as of 2018, women held just 40 CEO positions at U.S. public banks, or 4.31%. Nearly 20% of banks have no women board members; the median is just over 16%. Banks should start by gender diversifying their boards; gender-diverse boards lead to gender-diverse C-suites.

Usually, boards feature an “accidental” composition that results from social norms: board members source new directors from their social and immediate networks. An intentional board, by comparison, is deliberate in composing a governance structure that is best equipped to evaluate and address current demands and future challenges. Boards can address this in three ways.

  1. Expand your networks. The median male board member has social connections to 62% of other men on their boards but no social connections to women on their boards. Broaden the traditional recruitment channels to ensure a more qualified, diverse slate.
  2. Seek diverse skill sets. Qualified female candidates may emerge through indirect career paths, other sectors of the financial industry or are in finance but outside of financial services. Women with nonprofit experience and small business owners can bring local market knowledge and relevant experience to bank boards.
  3. Insist on gender diverse slates. A diverse slate of candidates negates tokenism, while a diverse interviewer slate demonstrates to candidates that your bank is diverse.

But diversity in recruiting and hiring alone won’t improve a bank’s performance. To be effective, a diverse board must intentionally engage all members. Boards can address this in three ways.

  1. Ensure buy-in. Support from key board members when it comes to diversifying your board is critical to success. Provide coaching for inclusive leadership.
  2. Review director on-boarding and ongoing engagement. Make sure it’s welcoming to people with different connections or social backgrounds, builds trust and facilitates open communication.
  3. Thoughtful composition of board committees. Integrate new directors into the board’s culture and make corporate governance more inclusive and effective.

The long-term performance benefits of a gender diverse board and c-suite are compelling, especially in the current challenging operating environment for banks. Over time, an intentional board and C-suite that mirrors the gender diversity of your bank’s key constituents — your customer base, your employee base and your shareholder base — will out-perform banks that do not adapt.