Fintech, Wealth Disparity, and Socioeconomic Bias: Examining All Sides of the Coin

Critics of fintech—financial technology—suggest that emerging technologies like cryptocurrencies spread socioeconomic biases by limiting accessibility, while proponents tout the social good implications of the many technologies currently in development like blockchain and open banking.

By Stephanie Walden, Contributor

When fast-casual salad chain Sweetgreen announced in 2016 that it was transitioning all of its U.S. locations to a card-and-mobile-only payments model, some applauded the act as a future-minded step toward a convenience-fueled, cashless society.

Others, however, lamented the brand’s decision, citing the move as a problematic barrier to entry for those who rely on cash for day-to-day purchases. The policy, they argued, would discriminate against customers lacking access to credit cards or smartphones. In response to the heated backlash, last April Sweetgreen announced it would be scrapping the policy and accepting legal tender in its stores once again.

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The Sweetgreen debacle is just one example of a fissure within the field of fintech—financial technology—between those who extol its virtues as a potential equalizer of the masses and those who snub emerging platforms as just another launchpad for the rich to get richer.

Both sides present thought-provoking arguments. Critics of fintech suggest that emerging technologies like cryptocurrencies—which require electronic hardware and internet access to mine, purchase, and use—propagate socioeconomic biases by limiting accessibility to tech-savvy (and, typically, already affluent) users. A 2018 New York Times piece notably cited that around 95 percent of Bitcoin wealth is in the hands of just 4 percent of owners.

On the other hand, proponents of fintech tout the social good implications of the many exciting technologies currently in development. Beyond the “Bitcoin billionaire bro” stereotype, this side argues, there are plenty of entities demonstrating best case scenarios for how cryptocurrencies may support philanthropic causes. In 2017, for example, an anonymous donor created The Pineapple Fund to funnel $55 million in Bitcoin earnings to more than 60 charities around the world.

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Looking at the broader, foundational implications of fintech, there is great opportunity for positive social impact. In particular, emerging systems like blockchain and open banking have potential to lessen the wealth gap by offering accessible services to under- or unbanked consumers. Here, we explore how a few new technologies are being deployed with social good causes at their core.

Fintech for Social Good: Use Cases and Future Potential

From artificially intelligent algorithms that provide more accurate creditworthiness snapshots than traditional score reporting, to blockchain and smart contract transactions that create a more even playing field for both merchants and consumers, fintech presents an opportunity to update antiquated financial infrastructures.

The concept of “open banking,” for instance, which encourages development and integration of third-party APIs into traditional big banks’ products, professes to open doors for previously underserved populations. Citi is just one corporation offering such a platform in an effort to expand its services to larger swaths of the population. Other large institutions are working alongside fintechs to better serve their customers: JPMorgan Chase & Co., for example, has backed fintech startups such as EverSafe, a tool that uses intelligent data analysis to help seniors avoid scams and, in turn, improve their financial literacy. The app’s algorithm scans users’ financial accounts to identify erratic or suspicious activity, and it sends alerts when something seems amiss.

Mobile transaction is another overarching trend making waves in the fintech sector. Despite Sweetgreen’s failed experiment with going completely cashless in the U.S., on a global scale, mobile payments are prolific. In developing countries, phone-based banking can be especially impactful, as more than two-thirds of people in these areas lack access to a traditional bank account. In Kenya, up to 96 percent of the population uses the decade-old, Vodafone-sponsored platform M-Pesa to conduct mobile transactions. And in Mexico, a program called CoDi is attempting to help unbanked citizens achieve greater financial autonomy.

Beyond Bitcoin: Blockchain and the Future of Payments

Cryptocurrency and blockchain take the possibilities for mobile transactions a step further. When it comes to the viability of such technologies on a mainstream scale, companies like Flexa are making inroads. The startup, which provides cryptocurrency payments services to retailers and consumers, is on track to roll out to approximately 100 merchants around the U.S. and half a million users by the end of this year.

Flexa co-founder Trevor Filter, who comes from a background in traditional finance, stands firmly in the pro-crypto camp. He points out that smartphone proliferation now outpaces that of credit cards in the U.S.—noting in almost the same breath that credit cards are about 20 years older than the internet. “We believe the existing payments ecosystem is stuck in the Stone Age,” he says.

A flaw in the credit card rewards programs, says Flexa co-founder Trevor Filter, is that merchants typically offset the higher fees associated with premium credit cards by rising prices.

In the U.S., Filter explains, credit card rewards programs are a major factor as to why consumers choose one payment instrument over another. A flaw within this system, he says, is that merchants typically offset the higher fees associated with accepting “premium” credit cards by raising the overall prices of products.

“If an affluent person goes into a mom-and-pop grocery store with a high-rewards credit card, and a less-privileged person goes in and buys the same thing [with a debit card], both of those people are going to pay the same price, but the cost for the merchant is different,” Filter explains. What ends up happening in this scenario, essentially, is that the debit card user pays more to cover the affluent spender’s credit card rewards.

“I don’t know if there’s a better example of the income gap getting stretched. It’s a system we’ve built but haven’t had a chance to break down or correct over the past couple decades,” says Filter.

“Mobile devices are actually now so densely distributed around the world that the average number per person is greater than one. And that’s really all you need to participate in cryptocurrency: a smartphone that’s capable of running apps.”

—Trevor Filter, co-founder, Flexa

Cryptocurrency, Filter posits, the first digitally native form of payments, is a more appropriate fit for today’s quickly evolving, tech-infused world. “The ecosystems we can build if we start from scratch can be a lot more accessible and inclusive,” he says. “With Flexa, we can not only make payments more accessible to all kinds of consumers, but also lower the cost for merchants and rebuild rewards around efficient incentives. If we do that, maybe we have a chance to make commerce more equitable for everyone involved.”

Filter acknowledges that cryptocurrency isn’t exactly a paragon of accessibility just yet—users still need some form of a traditional account to purchase from Coinbase, assuming they aren’t going to mine cryptocurrency themselves. But he believes the ecosystem is growing at such a clip that it won’t be long before crypto is an attractive, accessible, and realistic option.

“Mobile devices are actually now so densely distributed around the world that the average number per person is greater than one,” he says. “And that’s really all you need to participate in cryptocurrency: a smartphone that’s capable of running apps.”

Tackling the ‘Poverty Premium’

The concept of the “poverty premium”—or the undue costs associated with being poor—was first outlined in the Harvard Business Review in 2002. This phenomenon remains a problem both in the U.S. and around the globe today.

Incuto, a U.K.-based fintech startup, is taking an inventive approach to tackling this systemic issue. Company CEO Andrew Rabbitt explains his impetus for launching the startup: “There’s a huge market for payday lenders—short-term, high-cost loans—but these services prey on people who are in a disadvantaged state,” he says. Credit unions and community banks can combat this nefarious practice by offering loans to the same people at a much more reasonable rate, he explains.

“The problem is that these organizations are heavily inaccessible; they tend not to have a digital presence; they tend not to have the slickness and the good marketing that the payday lenders have,” says Rabbitt. “Incuto’s primary mission is to provide the credit union sector with all the tools to be able to actually [compete].” Such tools currently include things like automation, a strong mobile presence, and aggregating volume across multiple branches to reduce overall costs.

Though Incuto has spent the past three years playing catch-up—”the application stack right now is sort of bringing people up to [speed] from somewhere in the 70s,” says Rabbitt—in the next year to 18 months, he hopes to begin integrating more advanced technologies including blockchain and AI-based personalization into Incuto’s suite of offerings.

“For us, the fintech revolution is about how you enable organizations to better serve people.”

—Andrew Rabbitt, CEO, Incuto

“When we start to bring in the world of automation [for decision-making] and credit risk assessments and fraud prevention, that’s where we start to get into the real exciting stuff around using big data, AI, and looking at the way we can augment the customer journey with more intelligent design,” Rabbitt says.

He’s also excited about the potential for blockchain to help small fish like credit unions and community businesses “leapfrog” big banks. “There are 75,000 credit unions globally,” Rabbitt notes. Uniting these organizations via platforms like distributed ledger technology would create “the largest, most sustainable global network of branches,” he says. “I could walk into a credit union in the U.S. and transact as if I were standing in my local one here in the U.K., and be able to even potentially take a loan.”

Data-based, custom-tailored financial services are another feature that Rabbitt envisions being part of Incuto’s future. Using AI-backed systems, he says, can help customize financial services to individual users or families. “If we can take someone on a user journey who is potentially financially excluded or may have struggled to get credit in the past, and use all the data points that are available, which may not just be the traditional kind of credit score route … [we can] build a product almost dynamically around that individual,” he says.

Getting to this stage will be a gradual revolution. Currently, most credit unions are “multiple steps away from banking integration,” Rabbitt notes. For one thing, many customers are still uncomfortable with the concept of letting a machine make judgment calls about their finances — even when those decisions are favorable compared to traditional avenues of financial reporting. “We have a learning journey to go on before [emerging technologies like AI/automation] become really embedded—but we’re building the foundation now,” says Rabbitt.

Incuto’s ultimate objective is to bring the functionality and features of the exciting fintech field to the people who need it most. “It’s not about what we’ve done—it’s about who we’re doing it for that we see as being the real shift,” Rabbitt says. “For us, the fintech revolution is about how you enable organizations to better serve people. It’s really exciting and will change the world at some point—but it has to change the world for someone whose world needs changing.”