Are Fintech Startups More Ethical Than Banks?

OBSERVATIONS FROM THE FINTECH SNARK TANK

There’s a misguided notion permeating the banking industry: That fintech startups are somehow more ethical than legacy banks, or that there is a fintech “ethos” that distinguishes fintechs from banks (and somehow makes fintechs morally superior).

This perspective isn’t always explicit, but references pop up here and there:

• Abraham Tachjian, Head of Risk and Virtual Banking at Standard Chartered Hong Kong recently tweeted, “Cashless isn't all it's hyped out to be and goes against the #fintech ethos.”
• 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.”
• The Guardian cited a study that 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.”

These references don’t adequately capture the zeitgeist out there. I could point to tweets I’ve seen that allude to the “superior morality” of fintech, but they’re hard to find on Twitter.

Two Sides of the Coin

My response to Tachjian’s tweet was “The idea that fintech is more ethical or altruistic than existing financial institution is nonsense.” This led to some support, and some disagreement. Those supporting wrote:

• Travis Engebretsen: “Agreed. A company’s ethical compass comes from its leaders, not being a fintech company.”
• Sharon O'Dea: “There’s nothing inherently fairer about FinTech. In many respects the nature of startups encourages corner-cutting on things like compliance in favour of acquisition.”
• Rick Childs: “Fintech may be disruptive in the tech, but banks will always be superior on the boring things like .... oh you know... internal controls!”

Those dissenting wrote:

• Dexter Cousins: “Ron, is your post a joke? You might want to check out the Australian Royal Commission. As much as fintech have made some mistakes, they don't charge dead people or get fined $600m for money laundering. In defense of Fintechs at least they try to fix their mistakes. The Big 4 banks still show utter contempt even after record fines.”
• Sergei Miller-Pomphrey: “Fintech is not just a tech revolution, but one that brings ethics to the core and adds transparency. Many will fail at this, yes, but many will also succeed.”
• Dharmesh Mistry: “Ha! Comparing these guys with what traditional bankers have done still makes them angels.”

Fintechs Are No Angels

The view that romanticizes fintech as having some “ethos” or “ethical superiority” conveniently overlooks fintechs like:

• Lending Club. In April 2018, the Federal Trade Commission charged LendingClub 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 August 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 leadership team at SoFi.”
• Revolut. A March 2019 report in The Drum said that Revolut has faced “accusations of ad theft, fabricating data, having a money laundering loophole, of cultivating an exploitative workplace culture and most recently misplacing a £70,000 money transfer.”
• Wealthfront, According to RIABiz, “Wealthfront's ‘move fast and break things’ business model broke things, again, forcing the firm to apologize to clients for bungling tax data—a misstep that could lead to higher tax bills, potential fines and lawyers scratching their heads over liability.”

One Bad Apple Don’t Spoil The Whole Bunch, Girl

A Twitter account with the handle @OdinMoney tweeted:

“The only way that fintech neobanks can truly disrupt banking is through ethics, transparency, honesty, and accountability.”

If that’s all the tweet had said, it might have been seen as support for the fintech superiority sentiment. But the tweet went on to say, “Chime needs to be better, and Revolut needs new management. Otherwise, all of fintech could be at risk.”

That tweet needs to unpacked.

Why does Chime “need to be better”? Because of its recent technical outage? If that’s the case, we need to separate technical glitches from “ethics, transparency, honesty, and accountability.”

Chime will face challenges going forward, but those challenges are business model-related, not necessarily ethics-related.

Odin Money’s comment that “all of fintech could be at risk” is a step too far, however.

With apologies to Donny Osmond (and his brothers), one bad apple don’t spoil the whole bunch, girl.

Alex Gillette, Director of Business Development at Even Financial, captured this in a tweet when he said, “Using ‘unethical’ to describe an entire industry based on a select few dodgy individuals seems like a stretch.”

Spot on. Unfortunately, Gillette fell into the same trap as Odin Money when he continued in that tweet, “Call me back when SoFi or Lending Club destroy the entire financial system...and then does it again.”

Thousands of ethical, transparent, honest, and accountable banks and credit unions had nothing to do with “destroying the entire financial system” last decade, Alex.

Why Do They Say These Things?

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:

1. They work for fintech startups and want to feel good about what they’re doing.
2. 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.

The other reality is that if so many social issues still exist, then that’s proof that fintechs haven’t had much impact to date in the US (there are great examples of impact from fintechs like Kiva and M-Pesa outside the US).

So, to echo Alex Gillette’s comment...call me back when the fintechs start making a dent in societal shortcomings (and can prove the improvement was because of their actions, and not due to improvements in overall economic conditions).

Could Fintech Startups Be LESS Ethical Than Banks?

Fintechs often claim to be more tech-driven than legacy banks (as did that Medium.com 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 should have replaced “institutions” in that sentence with “fintech companies.”

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 fintech startups.

The Last Word

I recently learned of something called Betteridge's Law of Headlines which states, “Any headline that ends in a question mark can be answered by the word no.”

But please draw your own conclusion about the answer to the question in the headline of this article.