Sarah Sauceda

Sarah Sauceda
Associate General Counsel, Compliance Alliance

The balancing act of fair lending & targeted marketing

With the rise of smartphones, self-parking cars and fintech, there is no question that technology is becoming more integral to our lives. Advancements have not only been made in the gadgets and their convenience but also in advertising, specifically advertising based on updated data collection methods.

Fintech firms are among the major players in what we are seeing as a surge in technological progress. These firms are devising new methods in data collection and virtually changing the way companies and banks look at data.

This forward motion is certainly progress in as far as a bank reaching its customers; however, with many strides forward, there are inevitably elevated risks that arise. As Uncle Ben says to Peter Parker in Spiderman, “With great power, comes great responsibility.” Keeping this in mind, let’s dive into advertising and how targeted marketing comes into play with respect to the current banking environment.

First, what is “targeted marketing”? The term is generally defined as the process of (1) identifying certain customers or persons and (2) promoting products or services that are likely preferred through a platform or medium that is aimed at reaching that person or customer.

For example, have you ever been scrolling through Amazon, accidentally clicked on a scuba gear listing and then been hit with a flood of ads on social media for deep water diving, despite having an intense fear of the ocean? That scenario happened to me. As a result, I was identified as a certain customer with an interest in scuba diving, and products like oxygen tanks and masks were thrown my way through a platform I frequent.

This practice of targeted marketing has been on the rise, and banks are taking advantage of new technology and data garnered from fintech firms. When utilizing this new data to advertise, one of the main risks for banks comes in the form of a fair lending violation.

Fair lending is a collective concept involving various rules and regulations that, for the most part, state: A creditor shall not discriminate against or discourage an applicant on any prohibited basis regarding any aspect of a credit transaction. Prohibited bases include race or color, religion, national origin, sex, marital status, age, handicap and familial status, among a few other protected classes.

The new influx of personal data makes it much easier for banks to identify potential customers and then advertise appropriate products to them. However, in tailoring a bank’s advertisement to certain individuals, there is an enhanced risk of a violation. More specifically, it was found that in targeting certain products to certain consumers, steering often occurred, higher prices were shown to certain groups or even certain groups were left out of advertisements entirely.

The concern is that instead of giving consumers expanded access through tailored bank products, these consumers are being given access to and only shown less favorable products or services. Thus, these consumers are ultimately being discouraged from obtaining products.

For example, let’s say that your bank hired a fintech firm to gather data for your bank. The data was only tailored to look at factors relating to income; i.e., the firm collected data on where persons shopped, the places they ate, etc., to create a rough estimation of income.

In your bank’s area, there could be a large gap in terms of income between minorities and non-minorities. Using this data, the bank advertises a product to all persons in its area, but the persons with higher income get lower rates, whereas the lower income individuals see a very high interest rate.

Although the data is generally race neutral, it is pretty apparent that minorities in this example are being discouraged from obtaining credit from the bank. Thus, the bank has violated the fair lending laws in this example. So, how can a bank use targeted marketing to its advantage?

In contrast to the aforementioned risks, there are many who are of the opinion that regulators clearly support targeted marketing to protected classes to ensure they have equal access to credit and housing. In other words, targeted marketing is viewed by some to be less costly and an easier way to approach traditionally underserved portions of the population.

In fact, the OCC even published guidance on reaching minority markets via targeted marketing. Some strategies addressed in this 2006 publication are “advertising in local establishments, like small grocery stores (bodegas) and barbershops” or “[engaging] in targeted radio and newspaper advertising, for example, when they introduce a new product or at a time of year when their customer base returns from extended trips to a home country …” It is apparent that the use of targeted marketing in these situations is viewed in a favorable light.

In summary, the addition of all this new data to use in marketing efforts is both a blessing and a curse. Yes, you can reach more customers, but you need to be extra vigilant. With a focus on fair lending and steering issues, banks are highly encouraged to keep a close eye on their advertising practices and to develop a strategy for dealing with any issues that may arise. At the heart of these suggestions is due diligence.

Finally, if you have any questions, Compliance Alliance is here to help! You can reach us at 888-353-3933 or hotline@compliancealliance.com.