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An estimated one in four American adults remain underbanked in 2022, often relying less on established mainstream financial institutions and frequenting abusive alternative financial service influences as predatory payday lenders and check cashers. 

For underbanked and fully-unbanked consumers, getting a responsible small dollar loan lies between hard-to-get to next-to-impossible due to a lack of participatory history with established and reputable financial institutions and general financial literacy awareness. For those who actually possess a credit score, chances are it’s nowhere near high enough to qualify for small dollar loans. As a consequence, those consumers often frequent one of the unhealthy lending businesses mentioned above. 

Today’s underserved American consumers remain much less capable of advancing their financial health goals, only further perpetuating the all-too-prevalent cycles of poverty and debt in low-income communities across the country. In order to break these chains of financial instability and illiteracy, we must find a way to get consumers an equal opportunity to access traditional, mainstream financial services like those from their neighborhood credit union. 

As we have seen for decades, without the accessible and financially healthy tools needed to achieve financial wellness, every financial action, from paying one’s monthly bills to renting an apartment, is made that much more difficult to access and achieve. 

The expectations of today’s financial institutions as a whole are ever-changing, especially when figuring in the immediacy of 24/7 mobile access. A cooperative’s ability to serve its members by delivering the necessary products and services that meet individuals’ everyday needs represents a key factor in fulfilling a superior member experience and establishing a dependable brand. There are those who claim that meeting member needs is even more significant than data protection, security, or building personal relationships. It can be debated that both are one and the same.

Considering the rise of financial instability following COVID due to spending, responsible and reputable small dollar lending represents a key option in helping individuals and families stay out of debt while building a robust foundation to begin their journey back to financial health. 

Relational scoring with AI offers superior credit decisioning and faster access to funds

The use of traditional credit scoring continues to be a roadblock in accessing a simple small dollar loan for the underserved. 

Credit scores do not take into account financial data like consistent employment history or overall financial behavior, which represent core data points for evaluating credit risk. This relatively new fintech, artificial intelligence (AI), represents a new era for institutions’ services and transformative access for members of underserved communities. Consequently, however, it also makes the limited, one-dimensional credit scoring system increasingly obsolete. 

Relational scoring AI can benefit your credit unions’ core instantly by assessing member risk more accurately. By evaluating all the subtle data not included in a traditional credit score – their frequency in doing business with the cooperative, or how well or how poorly the member spends their money – AI provides lending executives the ability to see the formerly unseen or less obvious risk factors, like whether a given member is using too much of of their available credit.

Ultimately, this incredibly advantageous fintech provides the opportunity for financial institutions to ditch traditional credit scoring altogether in the near future. This leap in financial inclusion would give many American consumers, including those completely unbanked, an opportunity to gain access to mainstream financial institutions like their local credit union and secure responsible and fast-acting services like QCash CUSO’s Life Event Loans. In addition to such member advantages, relational scoring AI helps lessen the risk of default, which in turn suggests lower interest rates and less fees.

Relational scoring
Photo: Mikotoraw | Pexels

Paving a path to financial inclusion with AI

One of the most transformative aspects of relational scoring AI is its ability to empower the underserved by offering them financially-inclusive access to traditional financial services. By doing so, this in turn helps break the cycle of hardship and enhances the capabilities of the underserved to take advantage of accessible financial assets. 

 In fact, research analysis from the World Bank found that offering financial access to traditional financial services enhanced the presence of businesses in those respective areas by 7.6 percent, while correspondingly driving higher the local income levels of residents. A leading reason for that development is introducing traditional services into the area that enable savings rates to go up for individuals and families, contribute revenue to local businesses, and make upwardly-mobile purchases they couldn’t otherwise make. 

Financial inclusion can and will certainly take a leading role in increasing economic growth, both on a local and national scale. A study by the International Monetary Fund discovered that, for countries with a low level of financial inclusion, just improving financial inclusion to the 75th percentile would lead to a two to three percent increase in GDP growth. This finding suggests that when more individuals have access to traditional and stabilizing financial services, they are more likely to engage with their local economy more fully and contribute to those GDP numbers. 

Will the switch to AI-based fintech from existing traditional credit scoring occur immediately? Surprise, many financial institutions and credit unions are already there, while others are most assuredly coming around. AI is a world-changing technology, particularly in finance, and has the potential to provide an estimated 1.7 billion individuals worldwide the ability to quickly acquire access to the financial services and funds they require in the moments that matter most. 

If your credit union would like to inquire about QCash CUSO’s Life Event Lending platform, feel free to contact us or view our product demo!