The recent economic expansion has
proved gratifying in many respects. During the past five years, in
contrast to the preceding ten years, wages and labor income have
risen across the board for low- and high-wage workers alike.
Unemployment rates for minorities and for those without college
education have dipped, for many groups to historic lows. Long-term
unemployment is way down. State and local treasuries are flush
with revenue, limiting the cuts in social spending that
characterized earlier periods.
Access of low- and
moderate-income groups to credit has dramatically increased as
well. As a result of the good economy, technological change, and
innovative financial products, low-income credit has exploded in
recent years. Between 1993 and 1998, conventional home-purchase
lending to low-income borrowers increased by nearly 75 percent,
compared with a 52 percent rise to upper-income borrowers.
Conventional mortgages to African-Americans increased by 95
percent over this period and to Hispanics by 78 percent, compared
with a 40 percent increase in all conventional mortgage borrowing.
This expansion of credit has permitted many low-income and
minority borrowers to realize their dream of owning a home and a
chance to realize the capital gains that have so increased the
wealth of upper-income households.
Technology is at the root of
both the overall economic changes and the expansion of credit to
low- and moderate-income households. While technology holds the
promise of spreading benefits to all Americans, low- and
high-income alike, this spreading is not automatic. Until
recently, technology had seemed to increase disparities in wage
income. Lately that is no longer the case. Beyond this, many
observers justifiably worry about what is known as the
"digital divide," the gap between those who have the
resources and skills required to access and use technology and
those who do not. In a series of recent studies, the National
Telecommunications and Information Administration of the
Department of Commerce has found that location, income, and race
are the primary factors identifying the technologically
under-served. Households in rural areas are least likely to have
access to computers and the Internet, followed by low-income
minorities living in central cities.
Follow-on studies show this
divide more graphically. Census data from 1998 show that although
more Americans now have access to telephones, computers, and the
Internet, disparities in home-based Internet access continue to
increase. Households with incomes of $75,000 and higher are five
times more likely to have home computers than those at the lowest
income levels, a gap that expanded by 29 percent between 1997 and
1998. White households are roughly two and one-half times more
likely to have home-based Internet access than African-American
and Hispanic households, a disparity that increased by 38 percent
in the same one-year period. The gap between those at the highest
and lowest education levels who can access the Internet at home
increased 25 percent.
Recognizing that there are
enormous overall benefits to technology and the Internet and that
innovations will naturally be adopted first by those with high
incomes and educational achievement, one can still worry about
this digital divide. As more and more routine business and
interacting is done on the Internet, it becomes more likely that
those who are not connected will be excluded from opportunities
that are available to others. In this sense it is critical that
public, private, and nonprofit sectors collaborate to design
policies and programs that will enable all segments of the
population to reap the benefits that technology offers. Today I
want to discuss some challenges in this area, and also recount
some positive experiences.
Increased Competition,
Broader Markets
Technology has enabled free-market forces to operate at
unprecedented levels through the efficient delivery and use of
information -- the key to efficient market operation. Technology
has significantly increased our capacity to obtain, store, and use
data so we can make better decisions, both as professionals and as
consumers. As information becomes more readily accessible,
competition increases, resulting in more disciplined markets where
the providers of goods and services are required to operate more
efficiently in order to meet consumers' demand for the best
product at the best price. The Internet has demonstrated the power
of information on markets, and we have seen incredible
opportunities emerge as this communications system has been
transformed into a worldwide marketplace for delivering
information and goods.
Even the banking industry,
traditionally known for its conservatism, has used technology
effectively. For consumers, technology has fostered the creation
of new delivery systems for financial services that have
dramatically increased convenience and obliterated geographical
limitations. Through automated teller machines (ATM),
bank-by-phone services, and on-line banking, consumers can now
conduct nearly any banking transaction at any time of the day or
night, regardless of where their financial institution is actually
located. For financial institutions, technology has provided
complex databases that offer the ability to access and correlate
information on their customers' saving and spending patterns,
breeding new products and business strategies that have enabled
banks to respond to consumer needs and to identify new market
opportunities.
Credit scoring is one example of
how technology has revolutionized lenders' capacity for
underwriting loans. Sophisticated computer programs have enabled
creditors to quickly assess a borrower's creditworthiness by
processing key data through complex statistical formulas and
assigning numerical credit scores. This process has brought
benefits to lenders, consumers, and regulators alike. For lenders,
credit scoring decreases expenses associated with the time and
expertise required to make a credit decision, enabling lenders to
increase loans and reduce credit costs simultaneously. Since the
evaluation criteria are standardized, these loans can be packaged
and sold more easily in secondary markets, reducing an
institution's interest rate risk, improving its liquidity, and
further increasing its capacity to originate loans. Consumers
obtain much quicker responses to loan requests, and they may be
more likely to receive credit since computer models are much more
objective than loan officers. Regulators also benefit from credit
scoring. The predictive nature of the statistically based models
mitigates risk and promotes safety and soundness. Uniformly
applying underwriting criteria also promotes fair lending by
curtailing the influence of personal biases on credit decisions.
The Internet has played a
significant role in shaping the new economy by enabling firms to
communicate and conduct commerce on a global basis regardless of
their location or asset size. The banking industry is using the
Internet to expand customer bases, increase service, and reduce
operating costs. For community groups, the Internet has provided a
cost-effective medium for tapping into a multitude of resources,
both financial and informational, to fund new programs, identify
best practices, and recruit new partners.
Challenges
But there are challenges as well. One, particularly for a
relationship-intensive business such as banking, is the perception
that technology will become a substitute for personal contact.
When conducting financial transactions, consumers and bankers
often must interact personally. The Internet might seem hostile to
personal interaction, but in fact banks have used it to establish
and preserve interpersonal relationships, particularly for those
customers who need extra assistance. They can reach underserved
populations and build sustainable, mutually beneficial business
relationships. A recent article in the American Banker illustrated
the complementary roles that branches and the Internet play in
delivering financial services. One banker noted that 80 percent of
his Internet customers go to branches to purchase their financial
products, while another said that sales of on-line accounts
increased by five times when marketed through branch offices.
Findings like these illustrate ways that the industry can leverage
high-tech banking without sacrificing the personal touch.
Another challenge involves
credit scoring. While credit scoring has been instrumental in
extending credit to new markets, it has potential unintended
consequences. Bankers and regulators must recognize that strict
use of credit scoring models could result in the extension of
credit to only those clients whose financial lives fit neatly into
predefined boxes. Since personal financial management behavior is
influenced by culture and education, these formulas may not be
able to incorporate nontraditional information that could
demonstrate true creditworthiness. As regulators, bankers, and
community developers, we must continue to challenge these models
to ensure that they yield accurate predictions and remain free of
discriminatory biases.
A third challenge involves the
protection of consumers' privacy. Fundamentally, information
sharing is beneficial to markets and consumers. Data, when used
appropriately, can enhance competition and service by matching new
products and services to individual consumer needs and
preferences. But the easy transmission of information on the
Internet can lead to privacy abuses as well. Information sharing
and protection of consumers' financial privacy are not necessarily
mutually exclusive, but they can be. Again, vigilance is
necessary.
Rising to the Challenge
The digital divide presents challenges, but some have met these
challenges. The fundamental strategies used to address needs
related to affordable housing, welfare-to-work, and
microenterprise development have created new homeowners,
employees, and small business owners. This in turn has opened new
markets for financial services. These models can serve as the
framework for addressing digital divisions.
Community developers can play a
pivotal role in meeting these challenges. With your local
knowledge and leadership, you can help design programs that will
best serve your communities' education and access needs. In
addition to the traditional partners -- government, financial
institutions, community organizations, and foundations -- the
private sector should be enlisted to help close the digital
divide.
I would like to share with you a
few examples of programs that helped close the digital divide,
usually by bringing together many or all of these players. A
national initiative by PowerUP provides underserved youth with
computer access and training. It builds upon existing community
infrastructures such as schools, community centers, and affordable
housing communities. The goal is to establish 250 sites throughout
the country partnering with groups like America OnLine, the Case
and Waitt foundations, Sun Microsystems, Americorps, and the U.S.
Department of Education.
The National Urban League has
five technology centers where residents of underserved
neighborhoods can use computers and access the Internet. The Boys
and Girls Clubs of America, in partnership with Microsoft, has
established 15 technology centers housed in its local chapters.
In this Federal Reserve
District, Utah's American Express Centurion Bank has donated
computer equipment, including modems, to affordable housing
groups, shelters, youth resource centers, and self-sufficiency
programs that assist underserved populations. Such donations have
helped to equip a walk-in center and eight business offices that
provide Native Americans with information on affordable housing
and small business development. Here in San Francisco, OpNet, a
public-private partnership, offers media-related computer skills
training and job placement to provide career development
opportunities to low-income individuals. To ensure that this
training results in sustained employment, OpNet also provides
counseling and support services to its students.
The Greenlining Institute,
partnering with AT&T and McCaw Cellular Communications, is
creating a team of community leaders to develop strategies,
products, and services to meet the telecommunications needs of the
low-income, minority, and disabled communities. Projects include
the design and marketing of products to facilitate access by the
handicapped to wireless services, language translation facilities,
and the expansion of neighborhood technology centers.
The Digital Divide Network, a
web site created by the Benton Foundation, the National Urban
League, and several high-tech firms, plays a vital role as an
information clearinghouse. This site identifies public-private
initiatives that direct resources to communities in need of
computers and educational programs and shares best practices for
designing strategic collaborations. These are just a few examples
of successful partnerships. There are many more.
Conclusion
While computers, the Internet, and technology have been
responsible for enormous improvements in American life, there is
clearly a digital divide. If not properly addressed, the digital
divide can threaten a basic American goal-- equality of
opportunity
But potential problems also
suggest potential opportunities. The ability to share information
rapidly has led to notable advances for low-income and minority
citizens--increased lending, credit scoring, ATM machines, and
other specially tailored financial products. As the programmatic
examples I mentioned illustrate, many community groups have
recognized the challenges and risen to meet them. You and your
colleagues have done well in this regard, but much remains to be
done.
As one final matter, let me
encourage you to regard the Community Affairs Offices of the
Federal Reserve System as your partners. It is through this
network of twelve regional offices that we at the Fed seek to
support our economic growth objectives by fostering cooperation
among community organizations, government agencies, financial
institutions, and other community development practitioners. We
promote the flow of community development information through
training workshops, conferences, publications, and a recently
launched web site that links users to each of the Community
Affairs Offices across the country. The Federal Reserve is already
a valuable resource, and we hope to become even more so.
I look forward to the future
success of your partnerships.
