In consumer fintech, a lot of thought and emphasis goes into building solutions for financial inclusion (or financial literacy). This is the right problem for financial services to tackle. Even in markets like the US, where there is one bank branch for every 4,000 people, the availability of safe, healthy financial services is still radically skewed by socio-economic status.
And yet there are limits to what fintech can accomplish.
Even though new financial technologies can introduce powerful changes to people’s lives, many of those changes are incremental and compound over time. More savings capacity, lower borrowing costs, higher investment returns, lower financial services fees — these are all important marginal improvements to the products that are available to lower-income Americans. With that said, even though the poverty and inequality present themselves as financial problems, the financial aspect is often symptom, not cause.
To really be effective at driving financial inclusion, fintechs should (1) understand that the factors driving financial exclusion are often not themselves financial and (2) partner with companies and organizations that address those root causes. Family circumstances, health, education level, and job opportunities can all be much stronger determinants of stability than savings APY or a paycheck that arrives 2 days earlier.
This is a lesson that microfinance, which originally led me into fintech, learned over decades. In high school economics, we learned about Muhammad Yunus and the Grameen Bank. I was enamored with the idea that for-profit enterprises could be used to achieve social missions, and that their success could be self-enforcing (the more micro-enterprise borrowers pay back a loan, the more the bank can lend to other entrepreneurs).
In college, I lent out my (minimal) cash on-hand via Kiva and had a chance to work for the Opportunity Fund and the Stanford Center for the Study of Poverty and Inequality. It was that work, at the height of the financial crisis, that taught me about the limits of microfinance.
In the initial enthusiasm for microlenders and social lending circles, it was hailed almost as a panacea for poverty alleviation. Careful study, though, revealed that microfinance’s efficacy was context-dependent. Loans have very little ability to help the ‘hard-core poor,’ who struggle to pay them back; loan terms can be too rigid for businesses’ needs; sometimes recipients use loan proceeds for necessary personal consumption; sometimes a culture of credit-aversion gets in the way.
There are many ways that a well-intentioned financial product, built for a homogenous set of core users, can give those users the tool they need to create financial stability. But those products have limitations — a business loan cannot salvage a poor business idea — and in some cases drawbacks — it could, instead, deplete the savings and tarnish the credit of the business owner.
Fintechs should seek to better understand the factors that create financial pressure on their users. When they do, they should work to partner with organizations that can help them address those circumstances holistically. It’s possible that a business owner whose loan is paired with the right basic accounting course would be better equipped to understand their P&L and pay back their loan. It’s possible that a credit card lender could help a cardholder with a one-time medical emergency if they partnered with a healthcare provider to minimize the cost of that emergency. Or that a student lender could partner with vocational training platforms to make it easier for students to increase earnings and pay down their loans more flexibly.
Lastly, those of us working in fintech have to understand where policy failures require policy prescriptions. Financial technology cannot increase the minimum wage, it cannot reduce food deserts, it cannot re-train workers for new vocations, it cannot minimize the costs of healthcare. We need to understand the limits of fintech in order to pair good technology with good public policy, and truly enable financial inclusion for those most at-risk of never attaining it.
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