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Is the Flood of Bank Digitization Leaving Women Entrepreneurs High and Dry?

Closing branches and taking banking operations digital has been touted as cutting costs and streamlining operations, but are customers, specifically women, paying an unexpected price? New research from Malin Malmstrom and Joakim Wincent for the Harvard Business Review shows that banks overall are approving fewer loans to small- and medium-sized businesses, and this change is disproportionately affecting women.

The total number of bank branches in the U.S. has dropped by 8.2 percent since 2013, and in 2017 alone, more than 1,700 branches closed their doors. (Europe has seen similar shrinkage with more than 9,000 branches closing in 2016, as has Asia.)

Fewer branches means banks are turning away from the traditionally embraced relationship-based lending model and increasingly turning to transaction-based models. Relationship-based lending allowed younger entrepreneurs and smaller ventures — those lacking historical financial records — to make a case in-person for granting the loan. Bankers could assess the business model, future prospects, willingness to repay the loan, current and previous behaviors and ambitions. However, it also required both lender and recipient to be in close proximity to one another.

Transaction-based models rely on financial reporting information, credit scoring and the quality of accessible assets to serve as collateral. Citing studies showing that women have lower access to capital and often face more demanding credit terms than men when approved for a loan, Malmstrom and Wincent wrote, “Early in our research process, we suspected that gender might matter when it comes to who is approved and who is denied based on this type of report.”

Previous studies have shown that even seeing on paper that an applicant is female can trigger gender bias, with men being perceived, sight unseen, as more ambitious and having more entrepreneurial potential. So, Malmstrom and Wincent decided to investigate how moving from relationship-based lending to transaction-based lending affected banks’ lending practices, specifically in terms of gender disparity.

“At the core of the study, we analyzed the extent to which the entrepreneurs were forced to engage in a total of 20 different informal economic activities to handle their need for financing,” they wrote.

“Our results show that women face increased difficulty in accessing bank financing and specifically that women’s entrepreneurship suffers heavily from the recent transformation among banks,” the researchers concluded. “In short, women entrepreneurs showed more of a need to engage in informal economic activities than men.”

While the pair acknowledges recent literature argues that digital lending practices may reduce human bias, they maintain that their findings refute these ideas. Malmstrom and Wincent suggest that banks examine how the rapid changes in decisioning models may have affected their rates of lending to women as compared to men, and they further suggest that women carefully consider how banks make loans when choosing a financial institution with which to do business.

“What is clear is that we need to know more about what business opportunities are lost — as well as how and why this loss occurs — when banks adopt transaction-based models,” the researchers concluded.

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