Engaging with Fintech to Build an Equitable Economy: Part I

This series documents the development and early implementation of Change Machine’s fintech assessment and recommendation process. It also marks the launch of #TechForEquity with our community of practice — a movement of practitioners wielding fintech to build financial security with their participants, and holding the fintech sector accountable to their success.

Part I – A New Standard of Fintech Equity: Developing Our Seal of Inclusivity

For as long as it has existed as an industry, fintech — financial products and services powered by technology — has developed solutions that primarily serve white men and the upper middle class. It’s of little wonder when you consider the lack of diversity within the industries fintech is built upon. From overt redlining to the lack of representation in today’s financial services C-suite, financial products across platforms have not been designed with Black and Brown people in mind.

 

From overt redlining to the lack of representation in today’s financial services C-suite, financial products across platforms have not been designed with Black and Brown people in mind.

 

When it comes to tech, dominance of white men is as long-standing as the discovery of bits and bytes themselves; even with diversity, equity, and inclusion (DEI) efforts, progress has been incremental. According to Google’s most recent annual diversity report, 5.5 percent of employees identify as Black or Black and any other race; 6.6 percent as Latinx, and 32.5 percent as women. Fellow big-four firm Facebook reported a meager rise in Black employees, to 3.8 percent from 3 percent, over the five years ending in 2020. Industry-wide, according to a Harvard Business Review report, just 1.9 percent of tech executives and 5.3 percent of tech professionals overall are Black. 

The lack of diversity is equally stark in the financial services industry. According to a recent study done by McKinsey, women accounted for more than 50 percent of entry-level positions in financial services, 21 percent of those being women of color in early 2021. At the C-suite level, only 27 percent of executive positions were held by women and only four percent of those were women of color.

The Fintech Equity Gap

The problem is amplified when you combine the inequitable legacies of these two industries into one sector, fintech, created to serve the financial security needs of our online existence. As full participation in our economy demands greater digital engagement, inequity when it comes to real fintech solutions for low-income communities continues to fuel the existing racial and gender wealth gaps. 

With a few welcome exceptions, the system’s stakeholders have failed to address the problem in a meaningful way. Funders still favor white male-centric ventures, with just .06% of the $424.7B in total tech venture funding since 2009 raised by Black women-led startups (“The State of Black Women Founders”). Those funded businesses are structured as platforms aimed at solving problems of convenience, not access, disincentivized to put their data to work equitably for all. Nonprofits including the American Civil Liberties Union have fought the fight for digital civil liberties, while others have let their interdependence on cloud computing and other spoils limit their public advocacy. The public sector could compel fintech companies to build trust and utilize data to develop products tailored to the needs of those who could benefit the most. But regulation has not kept pace with the explosive growth of fintech, and is plagued by the same lack of diversity as fintech itself; a review by Georgetown law professor Dr. Chris Brummer found that only ten Black Americans (of 327 total regulators) have served on a financial regulatory agency since the New Deal. 

 

regulation has not kept pace with the explosive growth of fintech, and is plagued by the same lack of diversity as fintech itself

 

In light of Change Machine’s commitment to meeting the needs of our customers, the importance of establishing inclusivity and marketplace standards in fintech, and the absence of initiative from either the private or public sector in creating such standards, we set out to establish them ourselves via a Seal of Inclusivity (SOI). In the summer of 2019, we launched a process to identify a set of criteria for the rigorous vetting of fintech products in order to admit qualifying products to our recommendation engine. Helmed by customers and nonprofit leaders, the SOI is intended as a gatekeeper, filtering products through an equity lens and elevating only those that are inclusive of and equitable to low-income communities. In this way, we seek to ensure that fintech products actually build financial security for those who have the most to gain.

Our Development Method

To create an SOI that is comprehensive and customer-centric, we engaged in deep research investigating various, existing product vetting standards. We compared 15 product selection frameworks used in the financial security field — including nonprofit and fintech markets — to build the most comprehensive and relevant model for our customers. Frameworks from the Cities for Financial Empowerment Fund, Financial Health Network, and Flourish provided important comparisons and principles. While we drew from their experience and incorporated insights from these tools, we found ourselves wondering beyond the perspective of product-makers and intermediaries.

Our SOI took shape through the identification of core elements missing from these existing evaluation models, namely:

• Other criteria offer generalized goals that are difficult to measure or standardize — such as those related to fairness and trustworthiness. Our SOI, in turn, needed to provide a more tangible and nuanced understanding of the products that we recommend at Change Machine.
• While other providers surely conducted market research, most were not speaking directly to the best interests and needs of the customer; rather, they were geared toward policymakers, regulators, lenders, and/or other fintech developers. Our SOI needed to be an advocate for the everyday customer, identifying those products that work first and foremost for Black and Brown women who navigate financial insecurity.
• Though other frameworks use principles such as “accessibility” and “affordability,” they lack an explicit equity lens. They do not include clear language and criteria around lived experience and multi-cultural norms. Customer experience is of increasing importance when evaluating models and customer outcomes that should drive the business model. Our SOI would explicitly address equity — i.e., reducing racial and gender gaps — so that fintech does not merely accelerate the inequities of existing financial systems and services.
• Only one framework Change Machine reviewed explicitly stated that financial services should be aligned and designed to help customers achieve their financial goals: “Flourish Ventures is an investment firm that supports entrepreneurs whose innovations help people achieve financial health and prosperity.” Our SOI features this principle prominently, building on our rigorously tested financial coaching model that centers customers’ goals as the driver of greater financial security.
• Other models have accessibility gaps in the areas of language, culture, and assistive technology — which our SOI would need to overcome in order to achieve its promise.

Defining Principles

By identifying gaps in other models, and leaning on Change Machine’s history and expertise as practitioners, we extrapolated the following defining principles for our SOI.

Recommended products:

Are inclusive and accessible: Products intentionally seek out underserved communities and are designed to serve low-income customers, for example, by removing barriers and increasing access to relevant financial security tools and resources.

Examples of products that would not pass the SOI:

• Any product that has eligibility requirements that disproportionately limit access to specific groups or communities (low-income or populations facing barriers, such as immigrants, returning citizens, those with ChexSystems history, etc).
• Products that assume or require a certain level of wealth or knowledge (student loan products that base loan rates on GPA or quality of the educational institution, or products that don’t provide supportive or definitional language).
• Products that assume or require access — only accessible on iPhones, or products that require a link to a bank account or require a credit report pull.

Are fairly priced, with low fees and flexible payment models, and provide an equal value exchange. Their models are unlikely to have a disparate downstream impact that results in negative effects on financial outcomes.

Examples of products that would not pass the SOI:

• A product that requires a high initial investment (e.g., many stock market apps) with no clear indication that the customer will make up their investment by receiving value for that initial cost.
• A product that charges fees for things that other, similar products don’t, without a clear explanation for the fees.
• A product that provides minimal service for free, but has several options for actual services that are priced higher than similar products in the marketplace.

Offer customers safety, transparency, and control over their data, with clear consent agreements and terms of use. People understand how and for what purpose their data is used, and are aware of whether the company derives profit through the use of that data.

Examples of products that would not pass the SOI:

• Products that sell or share customer data, especially those that aren’t upfront about the practice.
• Products that are not transparent about partners or parent companies.
• Products that do not provide the means for customers to ask questions, dispute fees or transactions, or otherwise manage how they interact — or not — with the service.

Build financial security: Services and products are geared towards individuals’ real-world needs and daily financial lives; products can demonstrate that they materially impact and improve financial security of the populations they serve.

Examples of products that would not pass the SOI:

• An investment app that does not provide definitional explanations or supportive information could lead to a customer inadvertently invest their savings or income in a way that yields little to no return on investment, and even increases their financial vulnerability
• An app or website that provides financial tips or financial advice without providing opportunities for the customer to link accounts or interact with real data from their lives (e.g., a spending/saving worksheet) will not build a customer’s financial security in practicality, even if it provides confidence/interest.
• A service that gives customers the option to sell their home equity or other investments in the short term with the hopes of a long-term payoff does not instill confidence that using it would build a customer’s financial security.
• Early wage access products, especially those that charge a fee to access earned income without any access or frequency guardrails, are wealth-stripping models that do not build financial security over time.

The SOI At Work

We knew that our SOI’s unique value would be in the form of on-the-ground insight from customers and practitioners. It fills a critical gap in the financial security field by providing a set of standards that not only centers the experiences of customers and practitioners but explicitly incorporates “financial security” as a core principle. The SOI is specifically designed for customers, as opposed to banks and lenders, and is also operationalized to hold product makers accountable to customer outcomes. It functions in a way that government regulation should, by offering guideposts for protection from harmful and predatory products, while also holding other developers accountable — ensuring that their products continue to strive for the principles espoused by our framework.

 

Simply applying our SOI has made our product pipeline more diverse — with 45 percent of products born out of companies that are BIPOC founded or led — than the fintech field as a whole.

 

Moving forward, we will further enrich the efficacy of our SOI framework by applying key learnings along the way. For example, as we’ve reached out to more fintechs, it has become apparent that fintechs developed by Black, Indigenous, People of Color (BIPOC) or women, specifically those with an explicit mission, are more inclined to be designed in a way that meets our customers’ needs; we will therefore prioritize and examine the impact of BIPOC- and women-led products. By establishing benchmarks such as these, we believe we can ensure that the recommendation engine is inclusive, and that a diversity of experiences are represented, which will only improve the quality of products offered. 

Finally, we will continue to track the outcomes of customers driven toward selected products based on our SOI assessment, in order to confirm that our method is helping them achieve our shared goal of building financial security.

Change Machine’s Seal of Inclusivity (“SOI”) is a comprehensive, customer-centric framework for the evaluation of consumer fintech products using an equity lens. It’s based on our unique perspective as practitioners and champions of the solutions urgently needed within the marketplace to help Black and Brown women navigate toward financial security.

The framework is informed by copious research into previously existing product vetting standards. With defining principles including safety, accessibility, and transparency, the SOI provides, for the first time, a set of standards that not only center the experiences of customers and practitioners but explicitly incorporate financial security as a core principle. These standards provide fuel for fintech practitioners to further #TechForEquity movement-building on behalf of the low-income customers we serve. 

Access Part II of the series. To learn more about our efforts to explore the impact of fintech on customers’ financial security, contact Megan Bolado, Assistant Director of Fintech Partnerships.