Boardroom conversations at the largest banks and financial institutions are no longer focused only on how they can beat each other; they are increasingly concerned about nontraditional competitors—Paypal, Venmo, Square. A strong negative perception of banks by potential customers doesn’t help—according to the National Journal, “Seventy-one percent of Millennials would rather go to the dentist than listen to anything big banks have to say.”
But another barrier to new customers is looming too. So-called FinTech start-ups—financial technology start-ups—are creating algorithms, online services, and peer-to-peer lending platforms that promise to disrupt the banking industry further. They are generally small companies run by young entrepreneurs, and they are tackling every aspect of financial services. Funding Circle, for example, is an online marketplace that connects small businesses looking for loans with individuals and institutions willing to lend money. Wave provides small businesses with online software to do invoicing, accounting, and payroll. Transferwise is disrupting the foreign exchange transfer service by offering more transparency to users and charging less through peer-to-peer transactions.
The question for the social enterprise community, of course, is: Will this new wave of financial tech companies be a boon or bane for businesses with social mandates and the customers they serve?
To their credit, financial technology companies are engaging with social enterprise audiences more than traditional banks are. Companies like Square make it easier for social enterprises to process payments, and peer-to-peer lenders make it easier to access social capital.
FinTech start-ups are also creating more products to serve financially underserved customers—a population that includes 68 million un- and under-banked customers. The Center For Financial Services Innovation (CFSI) describes these customers as “financially challenged due to a lack of access to traditional financial services, low or absent credit scores, or simply low incomes.”
According to research by Morgan Stanley, these same consumers spend $78 billion every year on high-interest, high-risk financial products such as check cashing services and loans from loan sharks.
Meanwhile, the digitization of financial services is finally lowering transaction and acquisition costs enough so that technology entrepreneurs can serve underbanked customers. According to a new report by CFSI on financial technology trends in the underbanked market: “The market for products used by underserved consumers grew by 7 percent in 2011 alone, but many of the credit, payment, deposit, and other financial services in this marketplace fail to integrate available technology, leaving tremendous opportunity for disruption through digitization of offerings and democratization of consumer access.”
But we have yet to see whether financial tech companies that serve the un- and under-banked will do so in an ethical way. We are concerned that as FinTech start-ups grow, they will focus on scaling to increase profit, rather than scaling to bring fair interest rates and financial empowerment to more customers.
The CFSI report speaks of a huge market opportunity—both to improve “the financial health of millions of Americans” and “generate healthy profit margins.” The report concludes with the line: “Savvy entrepreneurs and investors should keep a close eye on this dynamic and emerging marketplace.”
We recommend that FinTech start-ups adopt a shared value or triple-bottom-line approach from the start so that they can provide ethical financial services to underserved consumers. One example of this approach is MTN, a telecommunications company that’s worked closely with the Grameen Foundation to provide cutting-edge access to financial technology in Uganda, but in a way that treats consumers of all economic means in an ethical way. MTN and Grameen are committed to serving not only the middle class, but also the poorest of the poor, by providing mobile banking services in rural areas that were previously inaccessible. This, in turn, will give the rural poor access to social services such as education and healthcare.
The federal Community Reinvestment Act currently requires that traditional banks give a token amount of money to social causes, but most banks do the majority of their giving through the foundation arm of their organization. In other words, traditional banks give through their charities, rather than through their products and services.
FinTech start-ups have the opportunity to integrate “giving back” more directly into their business models. By designing ethical financial services for the un- or under-banked, they will not only tap into a new customer base, but also gain the respect of Millennial consumers and others who care about more than just the bottom line.