At the Fintech for Inclusion Global Summit hosted by Accion, Quona Capital and FMO, in the Hague last week, Peter van Mierlo, the CEO of the Dutch development bank FMO didn’t mince words: “The financial sector needs to be reinvented.” The Summit was attended by investors, development finance institutions and leaders of companies around the world that are doing just that – reinventing the financial sector – by growing social enterprises that are using Fintech to open new markets and serve new customers. Fintech is the intersection of finance and technology that seeks to “improve and automate the delivery and use of financial services.” And it is rapidly transforming the financial services sector as we know it. Mobile banking apps like Venmo and Zelle, robo-advisors and peer-to-peer lending services, crowdfunding campaigns and cryptocurrencies – these are all Fintech innovations.
Impact investors are particularly interested in Fintech’s potential to improve financial inclusion and quality of life for under-banked communities around the world. From household solar products for off-grid villages in remote corners of Sub-Saharan Africa to capital for a small business without collateral across the U.S., Fintech opens the door to opportunity for those who have been excluded from the financial system. Or, as FMO’s van Mierlo puts it: “In short Fintech can bring economies to life.”
Fintech advances are made possible through data and efficiency. Platforms use alternative data sources, such as utility bills and predictive information, to understand their customers financial lives and assess their ability to repay. Relying on this data, they can create products tailored to their customers, for example providing loans based on cash flow instead of collateral. This enables borrowers without significant wealth or assets such as a home or land to get a loan. And as operational efficiencies increase with improved technology, costs decrease and Fintech platforms can afford to serve harder to reach customers who need small loans – something that traditional banks won’t do.
But the same data and efficiency advances that allow new customers to be included can just as easily allow them to be exploited. Predatory lenders can target a larger, often less financially savvy audience, providing easy access to capital that comes with lots of strings attached like hidden fees and high interest rates, that lead to a cycle of over-indebtedness.
Fintech has tremendous potential, but as we’re seeing with many technological advances, there’s no guarantee that potential will be harnessed for good. We need to shape the Fintech market opportunity with the intention not only to reach under-served populations, but to ensure we are providing value to them.
We need activists working on the ground in low-income communities teaching financial literacy; we need entrepreneurs building Fintech platforms with consumer protection principles at the core; we need private, values-aligned investors helping to capitalize and grow these companies responsibly; we need bank executives who are looking at Fintech as a promising area of investment to think about the communities they are serving, not only the shareholders to whom they will return capital.
And we need to talk to each other. If we hold these conversations in silos– large corporations with large corporations, the public sector with NGOs, the users of products or services gathering together – we will not achieve market outcomes that account for all voices to scale sustainably.
It was valuable for me as the CEO of a leading global impact investment firm to sit, learn and listen at the summit in The Hague. The silos could be broken down if the CEOs of a few large banks like JP Morgan and Citibank were in attendance. Not on stage, but as a members of the audience, learning about the Fintech revolution from the ground up. They could listen to the voices of customers, hear directly from entrepreneurs and contribute questions like the ones I heard from the audience that were asked with passion and thoughtfulness such as “how do you think about strategic partnerships with commercial banks?” “How do you engage with regulatory bodies? “How do you define predatory?”
If we take the time to come together, to learn and listen, we can leverage the reinvention of the financial sector that is already underway to create a system that is more inclusive and equitable for everyone.