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Is Your Marketing Biased? Financial Regulators Are About To Start Checking

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Federal regulators are planning to more aggressively probe the marketing of financial products for discrimination.

Let’s say you’re a lender seeking to market a new credit card. You decide to buy ads on MSNBC, a TV network whose viewership is around 70% white and 8% Hispanic (in contrast to the overall U.S. population, which is 59% white and 19% Hispanic). Alternatively, you decide to use an audience builder that results in the targeting of disproportionally middle-aged consumers to the exclusion of those above the age of 62.

Would these marketing decisions be fair?

If you haven’t considered questions like these, now is the time to start: federal regulators are planning to more aggressively probe the marketing of financial products for discrimination.

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What’s more, this heightened regulatory focus on marketing fairness may extend to companies that are not generally regarded as being a part of the financial industry, such as outside marketing firms.

In March 2022, the Consumer Financial Protection Bureau (CFPB) announced that it had modified its supervisory procedures and will now examine, “financial institutions’ decision-making in advertising, pricing, and other areas to ensure that companies are appropriately testing for and eliminating illegal discrimination.”

Then in June, the Department of Justice settled with Meta regarding the discriminatory use of an ad feature called the Lookalike Audience tool, which allowed landlords to exclude people of color from seeing property listings. The settlement required Meta to pay the maximum penalty under the Fair Housing Act.

Finally in August, the CFPB issued an interpretive rule warning that digital marketers must comply with federal consumer protections when they are involved with the marketing of financial products.

What are the sources of discrimination in marketing?

Marketing, in some sense, is inherently discriminatory. Marketers have to identify the specific audience that is most likely to buy a product, and then communicate effectively with that audience. To be effective, marketers have to distinguish the people who might buy from those that can’t or won’t.

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So how can financial product marketers comply with anti-discrimination laws if discrimination is the defining characteristic of marketing?

There are generally four categories of potential marketing discrimination in financial services:

  1. Target audience bias: Targeting customers using protected status attributes (or proxies) like race, gender, or age;
  2. Digital Redlining: Limiting the digital marketing of financial-services related offerings to a group defined by impermissible demographic information;
  3. Steering: Deliberately guiding protected class consumers toward or away from certain types of financial products; and
  4. Unfair Offers: Advertising higher prices or other more-onerous terms, conditions or requirements to protected class applicants;

How will discrimination in financial marketing be measured?

Financial regulators haven’t detailed which tests they’ll use to assess marketing discrimination. Any test comes with complications. For instance, the MSNBC example described above is likely not, on its own, enough to be evidence of discrimination if it’s merely one of many marketing channels that result in a demographically balanced portfolio.

It’s likely therefore that marketing fairness reviews will likely be triggered when regulators find evidence of potentially unwarranted disparities in lending outcomes – for example, if a lender’s applicant pool isn’t representative of the market segment for its products, a regulator might scrutinize the lender’s marketing practices to see if and how they contributed to the problem.

How can financial institutions and their marketing partners test for bias in their advertising and lead generation?

When evaluating the source of unfair lending outcomes, regulators often look for “drivers of disparity” — the factors causing one group to experience a different outcome, like approval for a loan, from another group.

In the case of marketing, these disparities arise from bias in data, models, strategy, budgets and creative content, and can manifest in any of the reach, frequency and response rates of a marketing program.

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Specific metrics regulators might use to test the fairness of financial marketing include:

  • Data Fairness: the extent to which the data inputs of a marketing model predict protected status;
  • Target Fairness: a comparison of demographic characteristics of a target audience with other audience benchmarks such as the demographics of the communities a lender’s products and services serve, the demographics of its overall customer base, and/or the demographic composition of current users of the advertised product.
  • Target/Reach Ratio Fairness: a comparison of demographic characteristics of the reached audience with those of the target audience;
  • Frequency Ratio Fairness: the number of ads delivered to each protected group;
  • Spend Ratio Fairness: the cost of ad delivery or click-through for each protected group;
  • Response Ratio Fairness: the ratio of responses by each protected group;
  • Offer Term Disparities: a comparison of various statistics (mean, median, min, max and sigma) for each protected group;

More in-depth marketing fairness analyses may also include:

  • Drivers of Disparity: determining which data points make a difference in outcomes for protected groups;
  • Fair Marketing Search / Less Discriminatory Alternatives: a comparison of multiple marketing campaigns with a breakdown of relative tradeoffs between projected response rates and fairness for protected groups;
  • Redlining: a ratio of responses from low- and moderate-income and majority-minority tracts relative to control tracts.

How exactly regulators will assess and enforce fair marketing remains to be seen. But, without doubt, firms should expect stepped–up reviews of their marketing and potentially stiff penalties for unjustifiable disparities.

How can I manage this new regulatory risk?

Right now, the best action lenders can take is to initiate a practice of testing their marketing for unwarranted disparities and looking for a way to mitigate them.

For lenders who take this step sooner rather than later, there are dividends beyond just avoiding regulatory penalties: fair marketing can increase profitability in the form of reaching new customers and bolstering your brand by showing the world your commitment to financial inclusion.

Source: Fox Business

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