OBSERVATIONS FROM THE FINTECH SNARK TANK
In an article titled 4 consumer trends every fintech should be watching closely, Sifted lists “let’s get ethical” as its number two trend and states that “today’s consumer is all about ethics, social media shopping and subscription-style services.” According to Tom Lambert of Square:
“Ethical fintechs have a better shot at getting to the coveted ‘top of wallet’ position.”
So what’s an example of “ethical” fintech? Lambert explains:
“For someone who’s ethically conscious, [carbon] offsetting or something similar can be great for driving usage and adoption.”
Seems to me that a fintech could offer carbon offsetting and still be completely unethical.
Fintech’s [Alleged] Ethics and Ethos
There’s a misguided notion permeating the fintech community that fintechs are ethical, either because they claim to be, or because they do something (like carbon offsetting) that they equate with ethical behavior.
Some claim that there is a fintech “ethos” that distinguishes fintechs from banks (and somehow makes fintechs morally superior). These perspectives aren’t always explicit, but references pop up here and there:
- 9to5 Mac reported, “Americans paid $113 billion in credit card interest to banks last year, nearly 50% more than five years ago. So adopting the new fintech ethos of zero fees and transparent pricing makes for thinner profit margins.”
- A study from Ethical Consumer claimed that “Monzo is one of the best ethical current accounts” and found “the vast majority of companies in the personal finance sector score badly on ethics.
- An article on Medium.com asserted, “Fintech is better than traditional financial companies because challenger banks focus on securing the data of their clients using technology. Traditional banks are slower than challenger banks especially the issue of adopting cybersecurity measures.”
Then there’s this tweet:
Does the CEO of a fintech that provides a service that encourages impulse spending, includes late payment fees, and can adversely impact someone’s ability to get loans, really think that the purpose of that service is “doing good”?
I’m No Angel
The view that romanticizes fintech as having some “ethos” or “ethical superiority” conveniently overlooks fintechs like:
- Lending Club. The Federal Trade Commission charged LendingClub in 2018 with falsely promising consumers they would receive a loan with no hidden fees, when, in actuality, the company deducted hundreds or even thousands of dollars in hidden up-front fees from the loans.
- SoFi. In 2017, a former SoFi employee filed a lawsuit claiming he’d witnessed coworkers sexually harassing female employees. A Forbes article reported that “the culture of male bravado filters down from the SoFi leadership team.”
- Revolut. The neobank has faced accusations of ad theft, fabricating data, having a money laundering loophole, of cultivating an exploitative workplace culture, and most misplacing a £70,000 money transfer.
- Wealthfront, The brokerage’s ‘move fast and break things’ business model broke things a couple of years ago forcing the firm to apologize to clients for bungling tax data which may have caused higher tax bills and fines.
- Wirecard. The German payment processor filed for insolvency after revelations that €1.9 billion was “missing.” Its CEO was fired and arrested.
- Robinhood. The digital brokerage’s list of transgressions might take up more pages than the Obamacare act. That didn’t get read by anybody, so I doubt you’d read a list of Robinhood’s legal (and ethical?) lapses.
Then again, maybe these are the things that “ethical” companies do (this is the Fintech Snark Tank, you know).
One Bad Apple Don’t Spoil The Whole Bunch, Girl
With apologies to Donny Osmond (and his brothers), however, one bad apple don’t spoil the whole bunch, girl. Or six, for that matter.
To their credit, SoFi and Lending Club have replaced their management teams and turned things around from the days of their unethical misdoings.
People who support the fintech superiority premise surely understand the “one bad apple” principle. So why would they cling to the false belief? Two possible reasons:
- They work for fintech startups and want to feel good about what they’re doing.
- They’re upset about what they see in the market and want to see changes brought about.
Both points are understandable–but neither justifies maintaining (and broadcasting) a slanderous position against thousands of honest, ethical institutions with tens of thousands honest, ethical employees.
It’s admirable that many fintechs aim to be altruistic and want to address social issues. But so do thousands of credit unions and community banks.
Could Fintechs Be Less Ethical Than Banks?
Fintechs often claim to be more tech-driven than legacy banks (as did the Medium article). Therefore, could fintech startups be less ethical than legacy banks?
A study from Brett Scott, a Senior Fellow with the Finance Innovation Lab, raises some interesting ethical issues about the advancing use of technology in banking. His study, titled Hard Coding Ethics into Fintech, asks:
- Does automation reduce the ethical awareness and responsibility of financial professionals? According to Scott, “It is plausible that as decision-making processes are increasingly automated, [providers] may feel increasingly less responsible for the decisions, or perhaps will not even be aware of the decisions.”
- Does automation reduce customer awareness of ethics? Scott conjectures, “Fintech companies put a positive spin on the speed, ease and frictionless nature of digital finance, but does frictionless finance increasingly detach the customer from deeper awareness of what lies behind?”
- Does automation lead to financial surveillance? Scott warns, “Digitisation increases personal data trails. Financial data reveals very deep insights into how people act in the world, and–when combined with other data sets–potentially allows institutions to know you better than you know yourself.”
Since the general consensus is that fintechs are doing a better job of capturing consumer data–and with “automation” more broadly–Scott could have replaced “institutions” in that sentence with “fintechs.”
Scott closes his study with the following comment:
“I have speculated on some potentially negative ethical implications of fintech. Unless we actively embed awareness of [these questions] into our innovations, we may sleepwalk into an increasingly ethically-disabled financial system.”
And that “financial system” encompasses both traditional institutions and fintechs.
What is “Ethics” Anyway?
The dictionary defines ethics as “moral principles that govern a person’s behavior.”
If you accept that definition, then fintechs aren’t more ethical because they say they are or because they claim to be “mission-driven” (a completely overused term). They could only be ethical if they demonstrate moral principles.
So what is–and isn’t–a moral principle?
Not charging fees is not—in and of itself—a demonstration of a moral principle. Neither is providing carbon offsetting.
Ethics is Like Porn—You Know It When You See It
And, generally speaking, there are a number of things you see when you think you’re seeing it, including fairness, transparency, and compassion.
The prevalent use of AI among fintechs threatens the fairness and transparency aspects of the equation.
Recognizing the growing concerns regarding the ethical use of AI, two university professors, in a study titled Why Talking About Ethics Is Not Enough: A Proposal For Fintech’s AI Ethics, call for the formation a fintech association to create:
“…a ‘social license’ that will allow early-stage fintechs to participate in the creation of a ‘dynamic ethical code’ governing their use of AI.”
Without a more concerted attempt to define and demonstrate ethical behavior, the romanticization of fintech’s alleged moral superiority is going to backfire on them.
As adoption and usage of fintech continues to increase, there will be a growing number of examples and instances where fintechs will fail the ethics “know it when I see it” test.
Even if the percentage of instance is lower among fintechs than of legacy financial institutions, it won’t change perceptions. It’s not a “three strikes until we consider you unethical” kind of a thing.
Fintechs would be doing themselves a favor by dropping the “ethics” rhetoric and get back to solving consumers’ and customers’ problems.
