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Melissa Koide has described herself as a “policy entrepreneur,” and she is the founder of a relatively new research organization called FinRegLab (2018), an independent non-profit working rigorously to test the technological tools used by the world of financial services. Most specifically, they have been looking at the use of data in credit underwriting. By examining the opportunities and risks in new technologies and data tools, FinRegLab hopes to better inform both policymakers and financial institutions, helping to create a more inclusive, and safe, marketplace.
Previously, Melissa served as the Deputy Assistant Secretary for Consumer Policy at the U.S. Treasury Department, and before that she was Vice President of Policy at the Center for Financial Services Innovation. At the Treasury Department, Melissa was involved in building the first pre-retirement savings product offered by the U.S. Government, the myRA. And she also established the Innovation Fund, a five million dollar fund to drive research and strategies for improving consumer financial health through access to safe and affordable financial services.
It was while working in government that Melissa saw a critical need for an independent research organization, an honest broker of sorts to test financial methodologies and new technological tools. When she left government in 2017 she reached out to federal and state regulatory agencies, consumer protection groups, and the financial industry. What she learned helped define the parameters of what would became FinRegLab. Major funding comes from Flourish Ventures, a spinoff of the Omidyar Network, the family investment firm of Ebay founder Pierre Omidyar, and the Milken Institute. One major upfront goal was to work on issues of financial health and inclusion, both for consumers and small businesses. She has spoken of the 26 million people who have no traditional credit history, and the 15 million sole proprietors who lack access to affordable credit to grow their businesses, and how they might all be better served.
Highly wonkish and an advocate of leveraging technological solutions, Melissa’s work aims to better inform the institutions that provide us with financial tools and protections, whether civic or corporate, policymakers or lenders. She has also worked at New America and been a fellow at the Urban Institute. She is originally from Kentucky.
Insights and Inspirations
- Melissa describes herself as a “policy entrepreneur” and her team as “small and mighty.” Together they are tackling mighty big policy issues.
- Policy makers need an independent, non-advocacy driven resource to turn to for empirical evaluation of data and technology. That’s what FinRegLab provides.
- FinRegLab has preformed cash flow research in underwriting credit.
Information and Links
- If you want to dig deeper, listen in to FinRegLab’s podcast series.
- Or read their cash flow research in underwriting credit
Read the podcast transcript here
Eve Picker: [00:00:09] Hi there. Thanks so much for joining me today for the latest episode of Impact Real Estate Investing.
Eve: [00:00:15] My guest today is Melissa Koide, the founder of FinRegLab, a pretty new research organization. Melissa describes herself as a policy entrepreneur. While working in government she saw the critical need for an independent research organization, an honest broker of sorts, to test financial methodologies and new technological tools. Through FinRegLab, Melissa hopes to inform policymakers and financial institutions. Their ultimate goal is to advance financial inclusion.
Eve: [00:00:58] Be sure to go to rethinkrealestateforgood.co to find out more about Melissa on the show notes page for this episode. And be sure to sign up for my newsletter so you can access information about impact real estate investing and get the latest news about the exciting projects on my crowdfunding platform, Small Change.
Eve: [00:01:21] Hello, Melissa and thank you so much for joining me.
Melissa Koide: [00:01:24] Good morning. Thanks, Eve, for reaching out to me. I’m looking forward to our conversation.
Eve: [00:01:28] Yeah, me too. So you launched a company called FinRegLab with the goal of helping to create a more inclusive and safe financial marketplace and I’m wondering how Fintech – because I think that’s what FinRegLab does, financial technology – helps to meet the unique needs of the unbanked and the underbanked.
Melissa: [00:01:52] Absolutely. I’d love to tell you a little bit about why I stood up FinRegLab, if you’d like to hear a little bit of the origination story.
Melissa: [00:02:02] I was in the U.S. Treasury Department, in the Obama administration, and my office was the Office of Consumer Policy. And I jokingly say, being the head of the Office of Consumer Policy meant that I got to engage in virtually any and all policies that touched people, which meant that we had an important role to play across lots of important policy areas, which was a priority for Treasury and the administration at that time, which was really around financial inclusion and thinking about how public policy and the financial sector could be ensuring support of access, or financial inclusion, for households and families and small businesses who lack access to safe and affordable financial products and services. So that might show up in our financial inclusion agenda, it would very much show up in the work that we were doing looking at some of the consumer protection policies that were being developed. This was after the creation of the CFPD, but there were still a lot of developing policies that the administration was very thoughtful about in the consumer protection area, whether it was housing and mortgages, auto financing all the way to the other end of the spectrum that Treasury focused on, which was making sure that our financial system was safe from bad actors, whether it would be bad actors trying to use a financial system for fraudulent purposes all the way to really bad actors who, you know, would potentially be trying to fund things like financing for terrorists through the financial system. All of those different policy areas were under the purview, or are under the purview of the Treasury Department and all of them, in fact, have real implications for people because people are clearly who make up and who use our financial system.
Eve: [00:04:13] Probably, you know, Small Change and what I built it on comes right out of those policies.
Melissa: [00:04:20] Say more.
Eve: [00:04:21] Oh, the Jobs Act, I mean, the Jobs Act of 2012 and the Regulation Crowdfunding which allows access to anyone over the age of 18 to invest, is pretty much part of opening up that whole financial system to everyone.
Melissa: [00:04:36] That’s exactly. Yep, that’s absolutely right. And you’re putting your finger on another important aspect of what the work we were doing at Treasury and then what was the impetus for creating FinRegLab. So this was back in 2012, 2011, when this notion of something called Fintech was really just coming online and it was post the Dodd-Frank Act but it was definitely something that was thought about in the Jobs Act. And that was: wait a minute, how can new technologies and new data uses potentially enable the creation of access to financial products and services that can be delivered to individuals who may be harder to serve, may be more non-traditional? I can talk about examples around this, but, whereas tech and data potentially able to level the access to the financial sector especially for individuals who may, for a variety of reasons, not be able to get into the more mainstream financial system. And whereas tech and data enabling the innovative and creative new providers of financial products and services who may not be banks, they may not be depositories. We saw the rise of new marketplace lenders who are generally non-bank financial institutions, who in the beginning, and it sounds like you know this well Eve, really doing a level of matchmaking with data between those who were interested in providing resources and funds for borrowers and then the borrowers on the other side who were in need of funds for a variety of purpose. And it was these intermediaries that really, sort of, were at the forefront of this onslaught of new types of non-bank actors. What we now, shorthand is Fintech firms, who are bringing in access to things like credit where that kind of access hadn’t been available especially, I think it’s an important distinction, credit that is affordable and non-predatory. And it doesn’t mean that there aren’t predatory marketplace lenders, there are some of those out there, but the use of the technology and the data, I think, helped to really create a ecosystem of providers of credit that are doing it at a much more affordable price for consumers. And small businesses, actually.
Eve: [00:07:17] Yes. That’s been your background and then, how does your organization FinRegLab play a role in all of this? You launched 2017, right?
Melissa: [00:07:28] Yeah, and so the punch line in terms of, you know, what I was doing at Treasury and what’s FinRegLab is, what we didn’t have while I was sitting at Treasury for four and a half years, was any independent organization that didn’t, frankly, have a particular advocacy agenda. While sitting at Treasury we would hear from the banks, we would hear from consumer advocates, we would hear from merchants, we would hear from Fintech. And everybody had a vested interest in how policy evolves in light of any particular data or technology use. And that’s completely reasonable and understandable. But as policymakers, what we needed, and what policymakers still require, is an independent, non-advocacy, empirically-driven resource or answers that are empirical and non-advocacy driven. That really help to evaluate what are the implications? What are the implications for people from a new type of data use? What are the implications for the financial sector when a new data use might be brought online? And what does that then mean for public policy? What does it mean for the existing rules and laws that we already have in place that may need to evolve and may need to change in light of what a particular new data application may mean for consumers, small businesses and the financial market? And so, while sitting at Treasury, we didn’t have any independent organization to turn to to just get that empirical evaluation.
Melissa: [00:09:09] And so after leaving Treasury at the end of the Obama administration, I spent some time for about six or seven months talking to my policy colleagues who I had worked with, especially the regulators, about this idea of standing up. Would it be valuable to them and what would they like to see evaluated? But to stand up a non-profit research organization that could go about, in a fairly sophisticated way, creating actual empirical evaluations of particular data or technology applications and then, importantly, providing a space for the dialogue for all of the different stakeholders who both need to learn from what the empirical research offers, but then they have a dialogue about what does that data use, now that we understand from an empirical standpoint, what does that mean in terms of the evolution of our policies and our laws? And so that’s, after six months talking with the regulators in particular and identifying a host of particular data applications or technology uses that would be of value for us to study, I then began to explore some of the different philanthropic funders who would be interested in supporting this kind of organization. And we found the Omidyar Network was particularly interested in being supporting for a non-profit to do this kind of research.
Melissa: [00:10:45] I then stood up FinRegLab to go about, frankly year one – and it sounds like, Eve, you’ve run a nonprofit too – year one, what sort of proof of concept is the idea that we’re putting forth, you know, will it succeed? Can we deliver what we’re promising to deliver? And so year one, year one and a half was really first test case. Can we get industry to share the type of data that we need in order to do a genuinely independent empirical assessment? Will we be able to get the regulators to join in the dialogue discussions and all of those industry stakeholders, consumer advocates, the big banks, the Fintechs? And so it was a really exciting year for both building this new organization and undertaking that research. And I’m pleased to say it was a really productive project.
Eve: [00:11:38] I want to maybe know in a little more detail how these projects work. What happens in your lab?
Melissa: [00:11:42] Sure. I’ll tell you some of the projects that we’ve done and some of the things that we have underway that I think are pretty important for the moment that we’re in today. The way that we work is, again, we engage the regulators, consumer advocates and the broader financial market to identify what are emerging data or emerging data uses or emerging technologies that those may have real scale effects for the financial sector? But importantly, and this is FinRegLab, our true north, but that also may have real benefits and power for advancing financial inclusion. We are talking to the financial sector, the Fintechs, the banker, the investors, the regulators constantly to really keep tabs on what are trends in the market in terms of data that are being used or that are being thought about being used, or that present as having real scale effects potential? And then we go about essentially constructing a research project that would enable us to be able to then get the level of data or the access to the technology that we need in order to then evaluate it. And so I’ll use our cash flow research as a sort of tangible way to explain it. So there is a lot of conviction, for very good reason, that we need more affordable and safe credit access. There’s also a fair bit of, I think our research bears this out, concern that our existing credit evaluation process may not sufficiently evaluate the credit risk of underserved consumers and small businesses. And so this may be, in this country alone we have between 40 and 60 million Americans who are considered, that they have insufficient credit history or they have no credit history at all. And therefore, because we rely on credit history, the current approach for underwriting isn’t able to successfully evaluate their credit risk.
Eve: [00:14:00] I actually went through this years ago because when I moved from Australia a long time ago, we just didn’t use credit cards there in the way that they were used here. We didn’t have any credit history.
Melissa: [00:14:11] Exactly.
Eve: [00:14:12] And the mortgage lenders were completely baffled. They didn’t know what to do with us. It was a bizarre experience.
Eve Picker: [00:14:17] How did you find your way through that?
Eve: [00:14:20] I think, my husband had a job with the university and they were supportive in the background. They provided some hand money. You know, this was a long time ago. So somehow we convinced the lenders that we were a reasonable risk. And honestly, part of that is we’re white. I think that when you’re a minority in this country, perhaps that convincing isn’t as easy, right?
Melissa: [00:14:49] Yep, yep. Yep. There is definitely, you know, we see a lot of access issues, especially among low to moderate income communities and individuals who also happen to be minority. So, it is absolutely a need in this country to make sure that financial access is extending to minority communities and minority communities, especially who are low and moderate income. So, absolutely.
Eve: [00:15:18] And that redlining goes away, because it still exists. It exists strongly. And it’s astounding to me that it still does. But there it is.
Melissa: [00:15:28] Well, just to digress on that point for a minute, back in the 70s, we had significant redlining in Chicago, across the country. But there was research that, empirical work, that clearly identified the type of redlining that had been happening in this country. And we ended up with a law put in place, the Community Reinvestment Act, which, in essence, it sounds like you’re familiar with it, says, you know, if you are going to be taking deposits from these communities you need to be serving these communities. With credit, in particular credit access. And I think it’s a really interesting question to bring it back to technology and data today. There is a general belief that that law is too dated in light of how financial products and services are delivered now, where people are going to get and sign up for bank accounts to credit access. And there’s also important questions around, that law specifically covers are depositary, our banks. Should that law be updated so that some of these new types of financial service providers are also included, right? I mean, there are questions around should non-banks who are providing financial products and services have some obligation around that. There’s a lot of complexity and things that have to be considered but I think the general notion of where people are getting their financial needs met, what then are the obligations in terms of the financial system and making sure that people are fairly served and accessing credit and other, ultimately what are wealth building opportunities, right? Credit and your…
Eve: [00:17:16] Yeah. But the problem is, the poorest people who need that credit, it costs them the most. So the opportunity to build wealth becomes even harder. Whereas the more you have in this country, the less it costs you to make more money and to get better credit. And that’s that’s really scary.
Melissa: [00:17:40] Yeah. Yeah. We thought about this a lot while sitting at Treasury and we thought about it, I think it’s important also to be thinking about it, quite holistically. For one, in the financial sector, in the credit decisions, as I said, we’ve got 40 to 60 million people who are quite possibly credit-worthy, but we just can’t tell from the existing way that we evaluate them. And that’s what that cash flow research looked at. And we actually did find that other types of data, in particular bank account transaction information, is able to distinctfully evaluate credit risk, distinct from using a FICO Score or a VantageScore. So just put a pin in that, right? That there are other ways to evaluate people who really are credit-worthy, who haven’t been able to get the credit under traditional means. But this bigger, real problem that is in front of us is, it’s not just the credit system that has to be astute in tackling access issues, we also have much bigger, more foundational needs that would help to lead down the path, if we could fix these issues, for equality. And that means thinking about our higher education, and what does it take to get a good education? And can we deliver a good education with how…strapping people down with debt that may encumber their ability to then be able to acquire other things like a home, as a for instance. Income. Huge issue, right?
Eve: [00:19:21] Right.
Melissa: [00:19:21] Are people getting their basic needs met, are they able to do so with the income they make? And that list would go on. I mean, there is that tax system to think about. We spend a lot of time thinking about how we could be potentially driving savings in a way that is very efficient, very streamlined at virtually no cost. And when I was sitting at Treasury we built a product called the myRA, which was the starter retirement account. This was a Roth-structured IRA product that we set up for the millions of households who aren’t able to save in a traditional employer-sponsored retirement plan. So I think that there are other really important levers like retirement, like higher education financing, like really focusing on income that are so critical to giving everybody the opportunity to have some financial security and financial stability, which, let’s face it, all our families need.
Eve: [00:20:27] Small business lending and I consider, you know, small real estate development to be small, small business as well, is very difficult and really geared towards a very distinctive population. White men. You know, all these businesses that are built on credit cards, which is very expensive, you know, by women and minorities or immigrants. I know we’ve tried to shift that, but that is a really big hairy goal. Like, I’ll give you an example. My parents were immigrants to Australia, and when they arrived, they were refugees from the war. They had absolutely nothing. You know, I grew up with these people who worked really hard to build a life and to make sure their kids had a good education. In a sense, immigrants like that are self-selected because they are driven enough to pick themselves up and go to another country and make something happen to better their lives. So I’m puzzled why we treat them so badly, you know, and that’s around lending for small businesses. Is that a credit issue? Is that, you know, is… I don’t know.
Melissa: [00:21:41] Yeah. I think that there are some presumed limitations on being able to serve immigrants and undocumented individuals that aren’t there but, you know, maybe sort of inhibitors that people decide to put in place themselves.
Eve: [00:22:03] Well definitely with undocumented, but there are plenty of immigrants who are documented, right?
Melissa: [00:22:10] Yep.
Eve: [00:22:11] Anyway, now we’re going down a very different path here. It’s the culture around lending and credit and everything that..
Melissa: [00:22:19] It sounds like you’ve actually, sort of, studied this particular area in terms of some of the decisioning and the culture around lending for small businesses.
Eve: [00:22:27] Well around buildings. But that’s a slightly different culture, you know, that is around…I don’t know enough about banking to really be able to understand this completely, but over the last 15 or 20 years, first of all, the number of banks has been greatly reduced in this country – I think it was 15,000 and now it’s under 5,000.
Melissa: [00:22:49] No, we’r a little under seven.
Eve: [00:22:51] In a sense, community banking has been a little squashed, right? And along with that, what I noticed in real estate, and I’m sure it’s true in business, is that if you’re doing a project that is slightly different in an underserved neighborhood, let’s say it’s the first 10 affordable housing units, or retail on a street that hasn’t had any new investment in 10 years. banks just really shy away from that. They want to appraise it. They want to see that it’s happened before, you know, at least three times. And they want to be really comfortable with a product that they completely understand. And in my mind, that squashes innovation and an improvement in our country, because if you keep supporting the same, how do you grow better?
Melissa: [00:23:43] Yeah, we haven’t studied the real estate market, but we did do a deep dive study looking at small business lending by marketplace lenders. And we did do some level of, sort of, where are the banks relative to the marketplace lenders? I think one of the interesting takeaways that has some resonance in light of the concerns you’re raising are, as we are moving to, and I think this environment with Covid emphasizes this even further, as we’re moving to a much more online and data driven decisioning process and even a more autonomous evaluation process, including for small business lending, I think generally it’s perceived that’s going to help in terms of any type of bias or explicit sort of discriminatory perspectives or behaviors that lenders would apply, right? Because it’s all about what’s the data tell you? On the other hand, it also puts a lot of pressure on, do the data tell you enough? And I think one of the things that I hear you’re asking is, is there enough openness and risk-taking by lenders and banks in the financial sector generally, to allow for and appreciate the diversity that may be coming through, depending upon what the particular small business may be selling, who that small business is, what the geography is that the lender is sort of evaluating. I think it’s a, I think you’re absolutely putting your finger on an interesting question is, you know, that sort of risk taking, are we clamping it down further? We may be mitigating some of the explicit discriminatory bias that we have seen historically, because now it’s really, you know, how long is that business been a business or what is that, sort of, expected small business planning to do? Now we have the ability for lenders to think about a small business idea of, look across the country to compare what’s that business endeavor look like in another marketplace? And what are the factors then that you would want to consider when making a decision to make a loan? On the other hand, is it further driving away the willingness to take risks? And clearly lending and small business is a lot about risk taking, right? I mean,
Eve: [00:26:26] Absolutely.
Melissa: [00:26:26] A lot of small businesses, you don’t make it. And no doubt we have, you know, too many small businesses right now struggling.
Eve: [00:26:34] Oh, it’s awful.
Melissa: [00:26:35] But yeah.
Eve: [00:26:36] And this is the rise of equity crowdfunding, which is really barely an industry at this time. It’s very nascent but, you know, the fact that people will take a risk in other people rather than a financial institution between them is, is a really direct and interesting idea because, you know, people in my neighborhood would band together and buy a house to stop it falling into the hands of a slum-lord.
Melissa: [00:27:03] In Australia?
Eve: [00:27:04] No, no in Pittsburgh, in Pittsburgh.
Melissa: [00:27:06] In Pittsburgh? That’s great.
Eve: [00:27:09] That’s a very direct relationship with a place you’re in. Maybe it’s a direct relationship with a developer. Maybe it’s a direct relationship with a business, you know?
Melissa: [00:27:19] Well, and what’s interesting about what you just said there is it’s all human relationships too, right? It’s your relationship with your neighbor, your sort of shared interest and commitment to taking a risk together all the way to having a relationship with somebody who’s a developer in the neighborhood who’s going to join you in, yeah, taking some level of risk. Yeah, it’s a good question, Eve, I think, you know, how do we make sure that we don’t both lose the sort of human aspect of this, the willingness to take risks because there is such importance and diversity of who the small business owners are, what they provide. Who gets to take advantage of whatever they happen to be building or selling?
Eve: [00:28:05] So what’s your big hope for, big hairy goal for FinReglab? How do you think, or how might you like to change the world?
Melissa: [00:28:14] Goodness. We know to be, we are a small and mighty team,
Eve: [00:28:23] Small and mighty, I like that.
Melissa: [00:28:25] But we are taking on, I think, some of the big and important questions when it comes to technology and data being used to make decisions in consumers financial lives. Our ambition is to sort of be looking around the bend and really, sort of, keep an eye on what are the technology or data applications that will have real scale impact for bringing more people into the financial system? And also being really careful in recognizing there are real risks, too, potentially. We want to grow up and we want to be effective at informing across the entire financial marketplace. I think we have been quite good so far. We’re still pretty little, pretty young. But I think we’ve been good at, sort of, being able to spot what are trends where there is real opportunity, but also the need to assess the risk. Cashflow data was one particular type of data. And I think we did a good job of that evaluation. We’re now actually turning to look at some of the technologies and in particular some of the algorithms, the more sophisticated machine learning algorithms that are being considered for credit underwriting, right? This gets to this whole question of, to what extent is the decision engine for who gets credit and who doesn’t q black box??And so we’re really honing in on this question of, well, is that black box explainable?
Melissa: [00:30:01] And so we’ve embarked on a research project. We’re partnering with a team from Stanford to evaluate some of the explainer technologies that may help to determine how was a credit decision made, if it was a machine learning algorithm that was applied? Is the information able to be explained to a consumer, right? How is the information, is it able to be explained to a regulator? And then, really importantly, how is what’s coming out of that machine learning algorithm understandable for making sure that we are not perpetuating bias? And differences between protected classes and non-protected classes. And so, again, there is, the academic literature suggests there’s real promise in using what I call fancy math. We also really need to make sure that we are able to assess it and understand what comes out of those black boxes so that our policy objectives, our societal objectives are able to be met. So one day at a time for us, but..
Eve: [00:31:18] It sounds like you’re shooting for the stars and I can’t wait to see what comes out of your…
Melissa: [00:31:24] Oh, thank you.
Eve: [00:31:25] …Small and Mighty Team next. And thank you, thank you very much for talking with me.
Melissa: [00:31:31] Absolutely. Thank you so much for reaching out to me. I’m glad we’ve done this.
Eve: [00:31:54] That was Melissa Koide. FinReglab is tackling a fundamental issue, the need to create a more inclusive and safe financial marketplace for everyone. Melissa believes that technology can solve some of the problems of the inequitable marketplace we operate in now. And she wants FinRegLab to be looking around the bend to identify technology that can advance financial inclusion. While her team is still small, they are tackling a mighty big problem. Small and mighty is how she describes them.
Eve: [00:32:36] You can find out more about impact real estate investing and access the show notes for today’s episode at my website, rethinkrealestateforgood.co. While you’re there, sign up for my newsletter to find out more about how to make money in real estate while building better cities.
Eve: [00:32:53] Thank you so much for spending your time with me today. And thank you, Melissa, for sharing your thoughts. We’ll talk again soon but for now, this is Eve Picker signing off to go make some change.