A Force for Good in Financial Services
For 5+ years, we’ve discussed the power of finance and technology to drive financial innovation. The premise coming out of the Financial Crisis (of 2008-2009) was for better, easier, and lower cost options in banking. Many individuals unable to pay/qualify for traditional banking (the ‘unbanked’) had new alternatives via financial technology (FinTech).
FinTech is a broad term that covers the tech layer that enables financial services to be offered virtually on an automated basis — outside of financial institutions and in-person transacting. Modern infrastructure and new products offer innovative ecosystems for money movement, budgeting, payments, and savings. Expanding financial access for all helps close the global gap of individuals that don’t have a bank account or the ability to transact digitally.
Financial innovation coming from FinTech is paving a path of financial inclusion. A conscious effort with financial inclusion makes financial products both accessible & affordable for all, regardless of assets, income, or credit profile of customers. Access to a bank account is the initial step to improve how individuals and companies transact on an ongoing basis.
Building upon financial inclusion, there is a “FinTech for Good” movement emerging in which founders, companies, and investors are collaborating to deliver new products and platforms benefiting users.
CONSUMER DEMAND FOR FINANCIAL INCLUSION
People and firms across the world are pushing for increased financial inclusion in their communities. In the UK, nearly 65% of UK financial companies surveyed are expecting to invest in new services that promote financial inclusion this year.
This trend for empowering and supporting consumers is visible with large financial institutions (such as Bank of America and Wells Fargo) becoming more user-friendly in their products and policies. Over the last 2 years, the majority of US banks and credit unions announced the elimination of overdraft fees — some are even allowing for overdraft protection for free. Banks are taking plays from fintech firms to address consumer pain points and improve financial wellness.
Fintechs themselves are positioned to be inclusive from the start. Many are vocal on this value and make it a priority in their company vision, mission statement, and product roadmap. These startups & mid-sized firms continuously launch next gen banking products for all. Fintechs start out by serving smaller groups with tailored products that have no user cost, and then expanding their scope to include other customer demographics.
Many fintech companies are also leveraging Banking-as-a-Service (BaaS) providers to bring their platforms to market at a faster rate and lower total cost (than going directly to a bank). Adding the connectivity from open banking (being able to view transaction data from a user’s accounts at their existing bank) is further powering custom built solutions that leverage customer data.
WHAT IS FINTECH FOR GOOD?
Financial inclusion is already part of the United Nations Sustainable Development Goals (SDGs), a shared vision from countries focused on improving the development and prosperity of global citizens. Being able to increase financial well-being, minimize inequality, and support environmental initiatives are all themes that are part of the SDGs. Progress has already been made in the last 11 years in helping the underbanked as 1.2B adults opened a new account, but 1.7B still lack this foundational need.
‘FinTech for Good’ goes beyond providing everyone a bank account. It’s about providing access to a broad array of products and services that are affordable and improve the financial health of users. This movement extends to credit, budgeting, debt consolidation, insurance, and wealth-building products provided through fintech platforms.
For lending products in particular, customers can check their eligibility first. If they choose to apply, there’s an upfront online review & decision. After approval, terms and repayment plans are confirmed and customers can receive loan proceeds within minutes. These fintech credit offerings are priced to avoid interest and fees (such as Buy-Now-Pay-Later) or cost less than traditional products.
Investors and top VC firms are also getting in on the action by funding these initiatives at a higher pace. In 2020 alone, there were 71 deals that totaled over $3B. The financing was spread out across companies of all stages (from early to late stage) — mature fintechs also raised mega rounds coming out of the pandemic as consumers responded favorably to improved access to banking services and the launch of customized products. For VCs that are focused on environmental, social, and governance (ESG) issues, ‘FinTech for Good’ is a welcomed niche that benefits global change and sustainability initiatives.
HOW CAN COMPANIES BE MISSION-DRIVEN & PROFITABLE?
There needs to be more than just a vision statement of companies using technology to improve the lives of others. The founders going beyond financial inclusion are building platforms based on their own experiences as immigrants, newcomers, and individuals overlooked by traditional banking. Seeing their family live paycheck to paycheck or lose their home due to foreclosure was critical in their desire to build an alternative landscape.
The key components in building a mission-driven organization with a positive, long-term impact:
Delivering what’s needed in a rapid and low (or no) cost way: Traditional options and expensive alternatives (such as payday lenders) don’t have the best interest of customers top of mind. Companies with a ‘FinTech for Good’ mindset operate with the priority of addressing financial challenges of clients first — this means removing credit checks, monthly minimums or maintenance fees, etc. The importance of a financially sustainable business model is equally weighed to the positive impact on customers;
Minimizing fixed infrastructure or overhead costs: Due to decades of legacy structures, processes, and IT, traditional financial institutions carry immense pressure to cover maintenance costs in their operating models. Adding customer acquisition, onboarding, and servicing expenses requires banks to have clients clear a minimum revenue threshold. The underserved typically maintain no balance or secondary products with banks, which makes them more of cost than revenue opportunity. Today’s fintech companies don’t have the ongoing legacy or tech burdens of banks since they’ve been built on with API-first infrastructure. Eliminating high-fixed costs, a wider demographic of users can be served without account fees;
Dynamic partnerships: Working with banks is still necessary for most fintech platforms to offer depository, lending, and other financial products. Many community-minded regional banks and credit unions actively work with fintechs through partnerships that serve the unbanked & underbanked. Card networks (such as Visa and Mastercard) and accelerator/incubator programs also provide resources and support in reaching teams that lack the fintech expertise to launch a new platform.
Financial institutions are also embarking on their own mission-driven initiatives that push for financial change. Organizations, such as the Global Alliance for Banking on Values, are advocating for environmental, social and economic responsibility as a consortium of 50+ global banks.
COMPANIES EXEMPLIFYING ‘FINTECH for GOOD’
Here are examples of platforms with products and business models that deliver on this theme:
Nova — A platform for newcomers to the US to transfer credit history from their home country and open US-based loan products;
Dashly - helps consumers looking for mortgages and home loans navigate get educated, save on fees/interest, compare custom offers, and apply from anywhere;
Wagestream - provides employees access to earned wages as needed (daily/weekly) before standard payroll cycles, in order to cover unexpected expenses (and avoid payday lenders);
Goalsetter - an education-based banking platform for families to teach finance and budgeting through games and activities;
Lendio - a business lending platform with multiple financing options that fit the needs of small and medium-sized businesses (SMBs) struggling to qualify for bank loans;
Numerous other companies around the world and across multiple sectors (deposit, credit, crypto, employee benefits, e-commerce, insurance) could be listed above. The synergy between profits and purpose through FinTech is evident in the financial services industry.
BUILDING A BETTER FINANCIAL FUTURE FOR ALL
Technology and innovation have the power to drive positive change across the globe. We’ve seen this first hand in the last 14 years (since the Financial Crisis) with traditional banking alternatives growing in popularity and usage. For millennials in particular, this has been a challenging time — first entering the workforce in a bleak economy (2008-2009) with high student loan debt and now having to delay life goals (such as buying a home, starting a family, etc.).
The modern banking platform built through financial technology is succeeding in lowering bank costs, increasing speed & access, and delivering custom solutions to reach long-term financial goals. Financial institutions can also do their part by improving products to various segments of customers OR working with fintechs focused on financial inclusion.
Making profits and having a positive impact are not mutually exclusive. Sustained financial well-being yields long-term growth and new opportunities for generations to come.
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