Board of Governors of the Federal Reserve System

February 2020

Technological Innovation and Discrimination in Household Finance

Adair Morse and Karen Pence

Abstract:

Technology has changed how discrimination manifests itself in financial services. Replacing human discretion with algorithms in decision-making roles reduces taste-based discrimination, and new modeling techniques have expanded access to financial services to households who were previously excluded from these markets. However, algorithms can exhibit bias from human involvement in the development process, and their opacity and complexity can facilitate statistical discrimination inconsistent with antidiscrimination laws in several aspects of financial services provision, including advertising, pricing, and credit-risk assessment. In this chapter, we provide a new amalgamation and analysis of these developments, identifying five gateways whereby technology induces discrimination to creep into financial services. We also consider how these technological changes in finance intersect with existing discrimination and data privacy laws, leading to our contribution of four fron tlines of regulation. Our analysis concludes that the net effect of innovation in technological finance on discrimination is ambiguous and depends on the future choices made by policymakers, the courts, and firms.
Accessible materials (.zip)

Keywords: Discrimination, fair lending, statistical discrimination, FinTech, taste-based preferences, algorithmic decision-making, proxy variables, big data

DOI: https://doi.org/10.17016/FEDS.2020.018

PDF: Full Paper