The History of Lending and Unnecessary Exclusion

The problem with lending money is that “borrowers know much more than lenders about their own ability and willingness to repay,” yet, history (and present reality) would demonstrate lenders do not believe this to be true.

No one disputes a person or organizations right to protect their wealth or financial interests and their right and/or obligation to make prudent decisions…but how do we hold lenders accountable (beyond CRA) to a blended approach of financial return and social impact?

Let’s be 100% honest, the entire process of lending money is to exclude…it was designed as (in many situations) an algorithm to determine character (if that’s truly even possible) and to minimize loss and to get as close as possible to a guarantee of repayment. Therefore, by design, the system of lending is looking for a way to say no.

Now in order to understand how we might have gotten here as a society, put yourself in the shoes of a lender. What would your own approval process entail, and how would you avoid unnecessary exclusion – would that even be a consideration? Would you require proof of ability to pay someone back? If so, how might a person provide that proof? What if they’ve yet to borrow money, or there is no formal record of past payments? How might you ensure that your own bias is not limiting the flow of capital? Is it your responsibility to ensure that scoring methods are accessible for anyone who wishes to establish a credit history?

As would-be-borrowers seek to inform lenders of their ability (and willingness) to repay, they’ll inevitably encounter the following two barriers:

1. Obtaining the collateral, experience and credit history required for pre-approval.
2. Each lender’s unique criteria for pre-approvals, which often contains bias.

History has proven that the demand for capital is never ending, which makes it a very odd product. Those who possess the most, tend not to run out; and those who need it, find themselves at the mercy of the biased efficiency of credit scoring. What community lending was decades ago, a relationship with a local lending institution that allowed for subjective factors, has been lost with hyper-consolidation of banks and an over-reliance on an algorithmic equation to define credit. What was intended as one point of consideration (the credit score), has become the arbiter of truth as it relates to a person’s character in lending. What began as a tool to improve efficiency in lending, has become the unfortunate gatekeeper for those hoping to access critical capital. For the sake of efficiency, credit scores have become the de facto assessment of character in lending.

What began as a tool to improve efficiency in lending, has become the unfortunate gatekeeper for those hoping to access critical capital.

So long as lenders are able to efficiently lend money with little risk, their incentives will be misaligned with optimizing the exchange of money between investors, lenders and depositors. This misalignment results in unnecessary exclusion as the challenges in overcoming these barriers are disproportionately high for the poorer individuals, regardless of the effort they put forth.

Yes, credit scores are an efficient way to de-risk capital but they are merely the first step. They should, however, only be considered a first attempt at harnessing the power of the information age to increase access to capital. Because capital is an odd product, having unlimited demand, it is far easier for customers to experience rejection based on non-disqualifying factors… otherwise known as exclusion. These customers may be ready and willing to repay, but lack access to collateral, experience, and credit history due to systemic failings. In fact, credit scoring can be so impersonal that barriers to developing a credit history (and other potentially compensating factors) are hidden.

If we are to solve for unnecessary financial exclusion, we must examine the entire system with the goal of greater access and prosperity for all. It is not enough to make decisions under the guise of inclusion when the system is front-loaded with many exclusionary barriers. This is a solvable problem for those who are willing to try.

It is not enough to make decisions under the guise of inclusion when the system is front-loaded with many exclusionary barriers.

At Access Ventures, we have been attempting to do just that for the past 5 years. We started with a deep partnership to expand access to capital through small loans on Kiva’s growing US platform. We then built a regional revolving loan fund called the Growth Loan that lends up to $35,000 at below-market interest to borrowers that have been excluded from traditional sources. Over the past 2.5 years we have made over 25 loans and lent over $650,000 from an original pool of $350,000, with a 97% repayment rate.

Now we are taking those lessons learned to build a platform for community lenders to simplify small business lending and empower borrowers. Spearheading these efforts over the past 5 years has been David Taliaferro, a Principal at Access Ventures. Deeply passionate about accessibility of capital for everyone, David is now leading the way as co-founder and CEO of Lenderfit, a new SAAS product we are excited to beta-launch this year in Louisville (April), Kansas City (May), and a third city in June. Stay tuned to our blog for more details and reach out to hello@lenderfit.io if you would like to learn more about bringing this exciting project to your city!