Federal Reserve Official Calls for Responsible Innovation to Advance Financial Inclusion

Michelle W. Bowman, a Federal Reserve official, addressed the Board's third annual Financial Inclusion Conference to discuss how innovation and responsible banking practices can expand access to financial services for all Americans.

Bowman emphasized that banks play a central role in promoting financial inclusion. When banks innovate responsibly, they can create faster and more efficient payment systems, reduce costs, expand product offerings to underserved consumers and businesses, and increase market competition. These developments make affordable financial services more accessible to broader segments of the population.

The Federal Reserve's Role

According to Bowman, the Federal Reserve's responsibility is to foster a supportive regulatory environment while maintaining banking system stability. The agency can encourage innovation by being receptive to new technologies and providing clear expectations. However, individual banks and their management should ultimately decide when and how to innovate. Regulators should establish transparent guidelines rather than micromanaging specific business decisions.

Artificial Intelligence in Banking

Bowman highlighted artificial intelligence as a rapidly expanding area of bank innovation. AI applications have significant potential to expand credit access for low- and moderate-income consumers and the unbanked or underbanked populations. For instance, AI can help financial institutions use alternative data sources and refine creditworthiness assessments for borrowers with limited or no credit history.

However, using AI to make individual credit decisions raises substantial legal and compliance challenges. Bowman stressed that the goal should be supporting responsible AI adoption with appropriate oversight levels tailored to different applications.

The Federal Reserve recognizes that smaller banks may lack the resources of larger institutions but still need modern technology capabilities. Supervisory guidance should not hinder smaller banks' access to innovation. Lower-risk AI applications should receive appropriately calibrated regulatory oversight, and financial institutions should adapt their existing risk-management frameworks with controls specific to each AI use case.

International Guidance

As chair of the Financial Stability Board's Standing Committee on Supervisory and Regulatory Cooperation, Bowman prioritized AI oversight work. The FSB recently published a report on responsible AI adoption that examines both benefits and risks, drawing on real-world examples of successful bank implementation. Rather than imposing uniform requirements, the guidance allows institutions to adapt recommendations to their specific circumstances. The FSB opened the report for public comment through July 22.

Bowman concluded by affirming that responsible innovation and financial inclusion are interdependent. Clear regulatory expectations and targeted supervision enable banks to innovate and serve more Americans with affordable services, while unnecessary complexity risks limiting beneficial innovation.