How can fintechs *actually* uplift low income Americans?
Welcome to the Fintech Nerd Collective:
Each month we ask some of the brightest (and most curious) minds in fintech one key question. They can answer however they see fit. The goal is to crowdsource some knowledge, have a little fun, and maybe spark an idea or two for the fintech community. Have a question? Let us know here.
In this edition, we asked the collective:
How can fintechs *actually* uplift low income Americans?
Here’s what the collective had to say 👇
Jason is the writer of Fintech Business Weekly.
There are plentiful opportunities for fintech to make a positive difference in the lives of lower-income Americans. Often, this discussion starts with “financial literacy.” I think of this as necessary but not sufficient. It presupposes (1) that Americans are poor because they lack an understanding of their finances, which typically isn’t the case and (2) that they are rational-economic actors and, if empowered with “financial literacy,” they’ll make different/better choices and no longer be poor. The reality is that the markers of a ‘middle class’ life in the US — education, healthcare, and housing — have all increased in cost dramatically faster than the typical family’s real income. Thus, more than “financial literacy,” products and features need to promote financial health by encouraging users to earn more, spend less, save more, and invest more — and to charge them fairly for these products. Companies like Steady, which connects users to income earning opportunities, HMBradley, which incentivizes saving over spending, and Acorns, which facilitates investing. On the credit side, there’s a lot of opportunity in making credit scoring more equitable and inclusive, through new AI/ML modeling techniques, including alternative data, like rent and utility payments, and alternative ways of underwriting, like cash-flow based approaches.
John is the writer of his eponymous Medium on fintech and Twitter.
Fintech can *actually* uplift low-income Americans. But it will take altering business-as-usual (BAU) and bringing fresh, new ideas for fintech to make a difference. Let’s start with shaking up BAU. Fintech is coming for TradFi in three key ways: eliminating financial deserts, reducing barriers to entry, and rolling back punitive fees. When you can do your banking, trading, and loan applications on your phone, it doesn’t matter where the nearest brick-and-mortar branch is. Suddenly, millions of low-income Americans can access financial services just by putting a phone in their hands. And have you gone through the first time user experience of a fintech banking app lately? I wouldn’t be surprised if the industry-average onboarding time was under 10 minutes. Gone are the days of needing an hour-plus with a TradFi rep to get a simple checking account up. The third wave of disruption is radical, so feel free to take a pause: a business can generate revenue (even be profitable!) aligning its incentives with its customers’. Today, you’d be hard-pressed to see a banking fintech with overdraft or ATM fees and without payday advances and a greater-than-zero interest rate. These disruptive forces of fintech are boons to low-income Americans who don’t have the luxury of neither access, time, nor wealth implicitly required by TradFi.
Ok, what about innovation? What net-new uplift can fintechs deliver to low-income Americans? Disclaimer: I am not a poverty policy expert, nor am I intending any political bias or slant. But, I think we can look at the innovation piece in two ways. Firstly, we should ask ourselves the question of whether or not it should be the responsibility of fintechs to teach (better) home economics. If yes, then we should use the tools of technology, choice architecture and dopamine hijacking, to both educate and encourage good behavior. For example, Acorns makes investing a daily and automatic habit, Digit and Truebill make savings a daily and automatic habit, and Coinbase’s Earn feature and dollar cost averaging makes learning rewarding and smart investing an automatic habit. Make the right decision the easy one and reward it with a dopamine kick! Secondly, how can fintech improve on existing institutions and tools? There’s a great case for public-private partnership here — government provides the funding and policy framework while fintechs distribute to those in need. During COVID, the SBA deployed Paycheck Protection Program loans to SMBs in need with Kabbage. What if we distributed SNAP, CHIP, or other welfare support through Acorn, Digit/Truebill, or Coinbase, with the technology’s choice architecture and dopamine hijacking to educate and enforce good behavior?
Lex is the writer of The Fintech Blueprint.
Let’s take the maximal endpoints for the observation that lower income people often have lower financial literacy and are also structurally nickel and dimed by the financial system. Whether it is payday loans, or credit risk, or ATM fees, or account minimums, all of these are a regressive tax on the less fortunate.
The first thing fintech should do is build so much open software and price so low, that all retail finance becomes a public good. This has not yet happened. Looking at fantastic startups like Acorns and Stash, we are still seeing regressive pricing models. We are not yet close to a financial model at scale that survives entirely on economic profits trending to zero. The closest we get there is through global open networks with populist ownership.
Once such public goods are well established, we then need to work on default behavior that sets people up on a healthy path. This is not an individual decision problem, but a system design problem. What are people doing by default — gamed speculation or automated budget management? Machine agents will be able to do this for us in the long run, but we don’t know their shape yet.
Vaibhav is the Chief of Staff at Aven & host of Fintech Fridays on Clubhouse.
I don’t like “fintech” being pluralized, there I said it! On with the show…
One core issue in managing a portfolio of accounts with low balances or lower line sizes or low usage is extremely high transaction costs for identity verification, credit assessment, and payments that make it expensive to service these, resulting in regressive fees and high interest rates.
Fintech is tackling this: Alloy & Socure on identity & fraud; Vaya & BNPLs are atomizing credit; Atomic, Argyle, CitadelID, Pinwheel & Truework making income/employment verification instant; Array & Bloomcredit for credit. And of course, Chime, Current, Varo, Aspiration & First Blvd are doing away with fees, overdrafts, and provide early access to paychecks.
These are super impressive but have to use a obsolete & crumbling infrastructure — identity is still whack-a-mole problem, payments & bill payments require spaghetti of integrations, credit is inscrutably complex.
We need massive investment in creating low cost public utilities to dramatically reduce cost of intermediation — We need to learn from India payment revolution — Aadhar & OCEN to simplify identity and credit verification, single interface for all bill presentment, e.g. Bharat Bill Pay and extremely low cost instant payments, e.g. UPI/IMPS.
Can we create a DAO to buy Plaid (and while we are at it, MX and Moov) and convert it all into an open source infra for everyone?
