Fintech Doing 'Good' Can Turn Into Something Bad For Poor People

Fintech, or financial technology, has become the latest area to expand the tech industry. Trading systems, expanded credit analysis, online banking and lending—companies use technology to compete with traditional financial services companies or to expand the capabilities of that industry.

Financial services as always practiced can become staid and leave consumers and businesses with fewer choices while driving up prices. That's particularly true for those who are not well off.

Storing money, getting loans, sending cash to family members, investing over a phone app. All provide flexibility, convenience, and immediacy never before available to many. One of the advantages, as I've heard from various people pitching ideas and products, is that those in need will suddenly have the attention they deserve.

Except, it doesn't quite work that way. Fintech companies typically have the same motivation as any financial services firm. They want to make money from others. Not to be overly disparaging, but it can be a pure rent-taking experience, in the economics definition of the term.

Taking rents means extracting portions of transactions. A bit here, a bit more there can lead to tremendous amounts of revenue generated with high margins, meaning big profits.

But does fintech generally deliver on its promise to those of low income? Depends on whom you ask. Boston Review ran an article on perpetual debt in Kenya due in significant degree to the promise of fintech. Here's one paragraph, although the entire piece is worth the read:

"Indeed Kenya’s new experience of debt is worrying. It reveals a novel, digitized form of slow violence that operates not so much through negotiated social relations, nor the threat of state enforcement, as through the accumulation of data, the commodification of reputation, and the instrumentalization of sociality. Kenyans are being driven into circuits of financial capital that are premised not—as the marketing would have it—on empowerment, but on the profitability of perpetual debt. The eruption of over-indebtedness in Kenya marks the intersection of a faith in finance to ameliorate the lives of the poor and a recognition by techno-capitalists that those same populations are the source of runaway profits."

Ximena Escobar de Nogales of private equity firm Bamboo Capital Partners described some of the potential problems last year in the Stanford Social Innovation Review:

"Moreover, when a digital loan is granted through a mobile provider, there are no longer just two but three parties involved. None of them sees the other. Proponents of algorithm-based lending argue this eliminates the subjectivity factor in decision-making, replacing it with data-based decisions. But digital transactions with automated on-boarding may result in excessive standardization. The repayment capacity analysis may be lax or replaced by AI-driven algorithms. Which of the two delivers a better, fairer judgment: an algorithm or a loan officer? What we know is that debt burden and repayment capacity must be adequately scrutinized. If this is not the case, it can lead to over-lending and customer over-indebtedness, or rejection of a loan based on opaque reasoning, including arbitrary profiling based on factors such as location."

The issue is a double-edged one. When people can't offer that much in profit, financial service companies may not be able to afford face-to-face meetings. And yet, technology can easily go awry.

Or sometimes the underlying focus is off, as Greta Bull, CEO of CGAP (Consultative Group to Assist the Poor), which focused on issues of financial inclusion for the poor, wrote about two fintech conferences in Asia:

" At the same time, I was really struck at both meetings that although the term financial inclusion was used quite liberally, I can’t remember the words, “the poor” being used much at either event. Certainly, there were a few companies at both events focused on serving the poor, but the poor were definitely not the focus, even in the context of financial inclusion. Despite M-Pesa generating some initial inspiration for how financial services could be delivered differently to the mass market, financial inclusion has moved way beyond its origins as financial services for the poor. My sense is that today people mean very different things when they talk about it. Given all the enthusiasm and money flooding into fintech for financial inclusion, I think it is important for the development community to pause and reflect on how our work fits into this fast-moving new universe. To my mind, poor people are the critical piece of this equation. They remain central to the story but are easy to lose sight of in the excitement around technology and innovation."

For many in fintech, though, the central piece is profits, not people. Profits are of course understandable in a for-profit organization. But when the customers are economically disadvantaged, the potential is high that technology only smooths the path for old exploitative practices that use the disadvantaged as disposable fuel to make money.