Fintech Equity: Part III - Change Machine
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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.

If you haven’t already, access Part II of the series.

Part III – Highlighting Harmful Fintech Products

Change Machine’s Seal of Inclusivity (SOI) is designed not only to elevate products that build financial security, but also to highlight harmful and exclusive practices in the fintech space. Having conveyed our SOI’s vetting standards for products that advance equity, we now turn to identifying those practices and products that harm customers — including, and especially, those targeting vulnerable populations.

What Makes a Product Unsuitable?

Our SOI’s ability to recommend products that build financial security is only one half of the equation. Equally important, the SOI is uniquely architected to identify practices and products that exacerbate financial insecurity by stripping — rather than building — wages and wealth, and to recommend against them. 

 

Equally important, the SOI is uniquely architected to identify practices and products that exacerbate financial insecurity by stripping — rather than building — wages and wealth, and to recommend against them.

 

The SOI is built on the principle that products that inhibit wealth-building and do not prioritize customers’ financial interests and well-being should not be recommended. It outlines the methods used to exclude products that are inaccessible, unsafe, unfairly priced, do not build financial security, and in fact can inflict financial harm on customers. This includes products that lack underwriting practices or privacy protections, pose no credit minimums, are difficult to access, and generally provide costly band-aids while exploiting customers’ financial insecurity. 

Our approach can help ensure that customers are equipped to avoid unsuitable products, while guiding policymakers, nonprofit leaders, and fintech developers to identify problematic trends and areas that require further study or regulation.

Questionable Products: Hiding in Plain Sight?

Though they differ in form, the products our SOI weeds out are predatory, many of them deceptive, and generally designed to create consumer dependence.

Earned and early wage access

Earned wage access products serve as a benefit to employees, enabling them to access their earned wages prior to a standard payroll waiting period. These products tend to be employer-based versus direct-to-consumer, and are available as either subscription services or on a fee-per-use basis.

Early wage access products allow workers to borrow against future earnings without going through their employer. These products often come at a very high cost of credit that outweighs any consumer benefit in the long-term, accompanied by harmful fees and interest rates. 

In the case of both earned and early wage access, products share a target audience with payday lenders—workers with insufficient wages to meet their day-to-day financial needs. According to the National Consumer Law Center, “A $100 advance taken out five days before payday with a $5 fee or “tip” is equivalent to an annual percentage rate of 365%.” In addition, they often hook consumers on apps or services that are expensive or don’t have their financial interests front-of-mind. According to an April 2021 study of several earned wage access companies from the Financial Health Network, “more than 70% of users took advances in consecutive semi-monthly periods in one year of observed time.”

Buy-now-pay-later (BNPL)

Essentially consumer installment loans, BNPL products can put customers on a slippery slope. As the CFPB recently noted, “people can quickly become regular users of BNPL for everyday discretionary buying, especially if they download the easy-to-use apps or install the web browser plugins.” 

In its inquiry, the CFPB also raised concerns around data harvesting practices—noting that BNPL companies have access to valuable payment histories of customers that can be exploited—and the regulatory gray area that many BNPL companies operate within. “The Bureau would like to better understand practices around data collection, behavioral targeting, data monetization and the risks they may create for consumers,” it wrote, adding that some BNPL companies may not be adequately adhering to certain consumer protection laws that apply to their products. 

High-interest fintech loans

Some fintech lenders have been known to blatantly deceive their customers. Consumers may not understand the price of a loan or, according to advocacy groups, fintech lenders sometimes charge three-digit annual percentage rates, in some cases evading state laws. In addition, a recent rise of fintech lenders known as “rent-a-banks” target vulnerable consumers with predatory practices, including interest rates that top 100 percent, by partnering with banks to avoid fair lending laws. Two recent court rulings dismissed the attempts of attorneys general in key states to challenge the practice, giving fintechs the green light to continue partnering with banks to avoid state interest rate caps.

Multi-level marketing companies

A handful of multi-level marketing companies, such as MWR, are focused explicitly on wealth-building. MWR promises a “Financial Makeover” for a monthly membership fee, then the opportunity to earn passive income by inviting others to do the same. One practitioner using our platform reported that their low-income customer was drawn in to pay the $120/month fee based on the company’s claim that it is a “business payment.” Despite MWR’s promised access to “financial experts,” this customer returned to the practitioner for help in remediating debt. 

Such multi-level marketing platforms prey on LMI customers’ desire for freedom in order to tend to family needs while flexibly earning income. In an equitable economy, in which everyone is paid a living wage, such claims by multi-level marketing companies would be less likely to gain traction in attracting customers. 

New rent-to-own services

Built on the concept of traditional rent-to-own purchase options, newer models such as rent-to-own services serve as third-party lenders offering consumers with “less than perfect credit” access to a greater array of products for lease. The hidden costs of these offerings are insidious—including high overall cost of ownership, late fees and penalties.

Data collection & unfair pricing

Unfair pricing structures disadvantage the customer by charging fees for services other products offer for free, or requiring a high initial investment. Even if a product is technically “free,” it can still prey on the customer’s best financial interests by collecting data that is eventually used against the customer. Selling customer data to third parties is a major component of fintech business models — yet customers may have very little idea of the data they’re signing away. 

 

Even if a product is technically “free,” it can still prey on the customer’s best financial interests by collecting data that is eventually used against the customer.

 

Practitioners using Change Machine’s platform report that many of their customers focus on the immediacy of the benefit offered by a product or service, with few expressing privacy concerns. They are primarily motivated by the need to overcome an acute financial barrier or receive short-term assistance. That is the reason behind our SOI’s transparency requirement; customers should rest assured that products and services are transparent and meaningfully building their financial security, as opposed to taking advantage of them.

Breaking Bad: Positively Impacting the Industry

As products emerge, our SOI analysis identifies those products that don’t build financial security and thus should not be recommended, helping to reveal truths and offer direction for the industry. Beyond just connecting customers with the services and products they need, the SOI also plays a crucial role in highlighting the potentially harmful practices of fintechs. It flags certain features that could have a negative impact on long-term financial health, so low-income customers can make informed decisions.

Our goal is to utilize the SOI to steer the industry and fintech space toward the principles of building financial security, fair pricing, inclusivity, accessibility, and safety and transparency, by:

  • Identifying problematic trends. The SOI can help distinguish between products that are purely exploitative and products that meet an actual need but are too costly, inaccessible, or have engaged in poor practices that may qualify them as bad actors. Change Machine can then play a role in exploring how to enhance or further develop the high-potential products, and partner with other organizations to steer the marketplace toward standards established by the SOI.
  • Identifying bad industry practices. By highlighting the ways in which certain products prey upon vulnerable customers, we can uncover opportunities for nonprofits and organizations to steer these individuals away from predatory products and services. We can also identify opportunities for legislation to curtail exploitative practices and other policy opportunities to regulate fintech, which often avoids regulation. 

For example, direct-to-consumer wage advance apps avoid lending laws because they claim to not be true loans. The SOI can help identify areas where fintechs are potentially avoiding regulation that might otherwise apply, while offering solutions—such as employers underwriting fees or “tips,” capping wage access amounts, and marrying products with budgeting tools and other resources—that serve the customer. Our advocacy and market analysis around payday lending offers an example of such an effort.

In an article outlining the workings of buy-now-pay-later (BNPL), the CFPB points out: “Just because you qualify for BNPL, or any other credit product, doesn’t mean you should use it.” The same should be said for fintech developers: Just because the code exists, does not mean that they should build a product with it. 

 

Just because the code exists, does not mean that they should build a product with it.

 

Our work to understand and communicate the risks and benefits of fintech products to customers—especially vulnerable groups—continues. The essential question in the evaluation of any product is, does this product exploit loopholes or inequalities to make a buck? Or, does it meaningfully and equitably improve financial security and overall well-being?

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 consumers we serve.

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

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