Federal Reserve Governor Lael Brainard addressed barriers to financial inclusion at a conference hosted by the Boston Fed and the Aspen Institute in Boston on Oct. 17.

“The combination of smartphone apps, big data, artificial intelligence, and cloud technology holds out intriguing possibilities in financial services,” Brainard said in her keynote speech. “But no single app is likely to be a silver bullet for the complex challenges faced by underserved households and small businesses.”

Achieving inclusion, she said, will require a better understanding of the challenges faced by unbanked or underbanked groups.

Brainard referenced a survey by the Federal Deposit Insurance Corporation (FDIC) that found 7% of U.S. households in 2015 were unbanked, nearly a percentage point lower than the prior survey in 2013. She said access to a banking account is an important indicator of financial health but only a small step toward actually achieving financial health, as many accounts hold little to no balance or sit inactive for long periods of time.

She said while access to credit can also be an indicator of financial health, there are obvious pitfalls. But one thing is clear, fintech lending has moved beyond niche and into the mainstream.

In 2010, fintech lenders made only 1% of personal loan originations in the U.S. By mid-2017, fintech lenders, often in conjunction with bank partners, were responsible for nearly a third of the personal loan market.

“It is not clear how much of this fintech lending is making a significant dent in financial inclusion, as opposed to serving prime and near-prime consumers in the United States,” Brainard added.

The bottom line, she said, is that account access and credit are not a complete solution on their own.

Garry Reeder, VP of innovation and policy at the Center for Financial Services Innovation, a nonprofit focused on improving America’s financial health, told Bank Innovation that traditional banking is exclusionary by nature.

“The banking system really wasn’t set up to include people,” he said. “That’s not at its heart. Its heart is, ‘we take deposits, we make loans,’ and if you have consumers who don’t have a deposit base, or who can’t borrow traditional products, then a bank wasn’t designed for that.”

Reeder said the result is tens of millions of people who need access to the types of safe and cheap financial services typically found at a bank, but who are unable to engage in those services on a regular basis.

“A lot of these things come down to fixed business models that are not sustainable to provide access to transaction accounts for people who basically keep a zero or negative account balance,” Reeder said. “Banks just can’t make that work.”

Still, he said solving the problem of financial inclusion can be a profitable venture for fintechs and banks.

“People are already paying for access to financial services, whether it’s through check cashing or prepaid cards or other products,” he said. “The question is, could those services be provided cheaper and safer? I think some of the technology does help that.”

Reeder said a real-time payments system would make a tremendous difference for people trying to manage their cash flow on a daily basis. 

“We have a payments infrastructure managed by the private sector and the Fed that is too slow, and we’ve got a lot of workarounds, like prepaid cards, that require 4-5 counterparties,” he said. “It doesn’t take but one piece of that chain to come undone and suddenly the whole thing halts.”

Meanwhile, there may be signs of shifting attitudes among industry leaders and regulators about their role in facilitating financial inclusion.

“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,” Brainard said in her speech. “Our challenge as 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.”

Reeder said it’s not in the interest of regulators to oversee a system competed out of existence.

“The banks play such an important role,” he said. “All the innovation in the world can’t play the same role that banks do in terms of liquidity and safety and soundness. There’s a realization that we need to help with this transition.”