How SMBs can help remove bias from consumer lending

Mark Carney, the former Governor of the Bank of England, observed, “Capitalism either learns how to be inclusive or it fails.”

To achieve this inclusivity everyone needs to be treated equitably and given equal opportunities to build financial stability. Yet in a world where the police can be called when an African-American tries to deposit a legitimate check, we have a long road to travel.  (The horrifying irony? The check was a settlement for a discrimination lawsuit.)  For capitalism to be inclusive, we need to build a level playing field. 

At Sage, we’re so convinced of this that we’ve made it our purpose to Knock Down Barriers so that everyone can thrive. That purpose is reflected in the technology solutions we bring to market for small and mid-size businesses which we believe, as the backbone of many global economies, could be key to mitigating the human bias ingrained in decisions about consumer lending.

Today, homeownership is synonymous with building wealth and financial stability, but mortgage applications are not decided on a level playing field. The latest Home Mortgage Disclosure Act (HMDA) data makes it clear that women pay more than men for their mortgages in every state in the U.S. except Alaska. Arguably this is because they have generally weaker credit yet, analysis shows, that these weaker credit characteristics do not accurately predict how well women pay their mortgages.

People of color have historically been shut out of homeownership due to bias in the lending system. Latino, Asian/Pacific Islander, and Native American applicants are more likely to be denied mortgages at higher rates than White ones, even when they have the same financial characteristics. Fifty-seven percent of Black adults were denied or approved for less credit than requested, compared with 24% of white adults according to LendingTree.

This bias can impact psychological and emotional well-being and work productivity too. Research by The Centre for Economics and Business Research (CEBR) concludes ‘worrying about money is the biggest cause of distraction and lower productivity at work’.  50% of all workplace absences can be attributed in some way to money problems.

The bias behind credit decisions is pernicious. It is also extensive, impacting individuals, society, and businesses. Thankfully, change is afoot. Blackrock CEO Larry Fink in his 2022 letter to CEOs advocates that CEOs embrace a more ethical form of capitalism that considers a broader group of stakeholders than just shareholders. One that is “driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities.”

Examples of this new type of capitalism are increasingly common. At Sage we partner with ACE in Atlanta and North Georgia to provide low-cost loans and educational resources to disadvantaged business owners as we recognize that being your own boss is a key route to economic stability.  Our three-year-long program will provide individuals with clear advice, business support and help them unlock up to $1,750,000 in low-interest loans.

These types and scales of programs are often the preserve – and I would argue the duty - of large businesses. But given that SMBs account for roughly half of the jobs in developed economies, it is essential that bias is removed systemically, for all and not just in areas where big business decides to focus.

For this reason, we have partnered with Experian to launch an Employment Verification service in the UK. This enables employees to consent to share their verified income and employment data automatically from their employer’s payroll database when they apply for a loan.

Since the data flows digitally and directly from employer records via the Sage Digital Network, it’s highly trusted. After all, it’s the same payroll data that companies use for tax reporting and compliance. The service aims to level the playing field by enabling third parties to base a credit decision on hard data rather than human judgment since when data is verifiable and trusted, lenders are more likely to lend based on that data and bias is less likely to be a decision-making factor. Less than two months after launch, 394kcompanies and 4.4 million employees had already signed up for the service.

In line with our principle of building trust by giving data ownership to individuals, once employers opt in to the program, decisions about who can access an employee's data are made entirely by the employee. As more employers sign up to give their staff access to digital lending that reduces “the time to yes” with better rates and fairer access to capital so they help create the opportunity for staff to build better living arrangements, avoid poverty and build financial stability. In addition to being catalysts for the economic inclusion that Carney advocates, these SMBs benefit from a less stressed, more productive, and arguably more engaged workforce in the process. Truly, a virtuous cycle.

Employment Verification is a small but important win for eradicating bias from lending decisions with the help of technology. It is easy to see how consensual data sharing in this way could address bias in other areas. For example, employees who have worked for companies using Sage's HR solutions could opt into sharing with potential employers their personal HR performance data drawn directly from their employer's HR records. Future employers benefit from access to verified data on an employee's past performance and which should in turn encourages hiring decisions based on merit rather than perception – a helpful but not complete solution to removing bias from the recruitment process.

Of course, such services are just one piece of the bigger puzzle of how we remove bias from our businesses and our society and build financial stability for all. But they show how, with the right ethics and the right intention, data can be used for societal good, to make capitalism more inclusive and more likely to work for all of us.