Fintech’s great promise
Fintechs. If any businesses best represent the era of digital transformation, it is fintechs.
Before the world of financial services got serious about technology, we relied wholly on a small cluster of corporate and banking giants to manage our money. The relationship between these entities and us, the customers, changed very little as generations came and went. It was an industry held up by established structures and traditional practices.
The advent of the internet, however, along with the exponential growth of new technologies, marked the beginning of a different era. Smaller, nimbler players, born digital-native, began to redefine the customer experience. Today, fintechs are altering the delivery of financial services. According to Accenture, investment in fintech ventures hit $53 billion last year.
But despite the irrefutable rise of tech-powered financial services and products, the human race is still confronted by big issues in this area. Financial exclusion has reduced in the age of fintech, but the most recent figures suggest 1.7 billion people globally remain unbanked. And while work is ongoing to close this gap, many groups in society still feel underwhelmed by the quality of financial services on offer, even if they have access.
Are those steering the ship doing enough? Is the financial services ecosystem, rich with talent and technology, on the way to solving these problems?
Tech For Good sought out a selection of experts to chart the fintech revolution. The first was Merlyn Holkar, a Senior Research Officer at the Money and Mental Health Policy Institute. MMHPI is a UK charity which aims to break the link between mental health problems and money problems.
According to the institute, an individual suffering from mental health issues is three-and-a-half times more likely to run into financial trouble. MMHPI, which was founded by journalist and campaigner Martin Lewis, conducts research and develops policy solutions on this topic. It has done a lot of work around the potential of fintech to support those with mental health problems, and Holkar sees a “massive opportunity”.
“When people are unwell, they tell us that they find it harder to manage their finances in a practical sense,” he says. “This is an area where fintech, and better designed financial products, could make a huge, huge difference.”
A report from MMHPI, titled “Fintech For Good”, took a deep dive into how fintech could serve this section of society. Among other proposals it suggested better tooling around money management, more development of products with stringent control settings and the utilisation of data to spot problems early.
By working with a pool of 5,000 people who have directly or indirectly been impacted by poor mental health, MMHPI is able to keep on top of what is needed to support sufferers.
“We see some progress, and generally I’m hopeful,” says Holker. “When it comes to fintech and mental health, it’s not a minority issue. One in four of us each year experience a mental health problem. There’s a massive opportunity for fintechs or banks if they can understand those issues and try and address those needs.”
Holkar goes on to say that the design of tailored tools for those suffering with mental health problems could be helpful in supporting other groups. The capacity for fintechs to cater to smaller population segments with niche services is widely acknowledged, with these groups – the LGBT+ community and migrants in this instance – often dissatisfied with the standard of support on offer.
Elias Ghanem is Global Head of Capgemini’s Financial Services Market Intelligence Group, and echoes the point. He introduces the example of Be Money, which is set to become the first LGBT+ challenger bank in the United States when it launches next year. According to Be Money’s co-founder Rob Curtis, only 20% of LGBT+ people can rely on financial support from families and friends. Separate research from Iowa State University also found that same-sex couples were 73% more likely to be denied a mortgage than heterosexual couples with the same socio-economic background.
“This is a fintech that has adapted its business model, its risk profile and its approach to serve this population,” says Ghanem. “This is ‘fintech for good’, because this group as an example needs specific support, it needs specific funding, and it needs specific networks.
“Another group would be migrants. Migrants have several problems: language, cash, and even temporary IDs. If a migrant goes with a temporary ID to a traditional bank, there’s no way they would accept them as a client. But I know another fintech that has adapted its approach to better tackle this situation. These are two examples where tech for good isn’t changing the world in one shot, but it’s changing the world, block by block.”
Marta Zaccagnini knows all about the struggles migrants and refugees face when trying to access financial services. As Europe programme manager for Village Capital, she co-authored a report on the availability of fintech solutions for refugees. The report referenced a recent survey of European banks that found many were not equipped to deal with the “specific needs” of refugees. Zaccagnini cites an example from Germany, where the financial system fell short in supporting this population.
“N26 became the default bank for migrants and other vulnerable populations in Germany when it started out, because they could pass their KYC [Know Your Customer] requirements,” she says. “But then when N26 became a licensed bank, they couldn’t use them anymore because they then had to go through the German Postbank. So the refugees were back in the situation they were in before.
“Other reports have shown that the majority of traditional financial institutions have just not been interested in refugee clients. It’s definitely about an interest and willingness there. Fintechs do have the opportunity to be those more nimble players and cater to more niche client segments. But there has to be the intention.”
Zaccagnini actively supports the fintech ecosystem at Village Capital, which is one of the world’s largest venture capital firms for seed-stage startups. She manages initiatives that aim to support young companies and entrepreneurs. Village Capital’s goal is to “democratise entrepreneurship” and it is focused on solving major global problems, like financial inclusion.
Finance Forward is a fintech accelerator set up by Village Capital which Zaccagnini has been heavily involved in since it launched last year. With programmes running in the United States, Latin America, MENA and Asia as well as Europe, Finance Forward offers training and access to grants for fintechs with products tailored to low and moderate income populations.
The programme is supported by PayPal and the MetLife Foundation, and the top selected startups receive a MetLife Foundation Social Entrepreneurship Grant of up to $75,000. Fintechs that made this year’s shortlist in Europe include PiP iT, which enables migrants to send cross-border payments, and Elifinity, which uses AI to predict future financial challenges. Zaccagnini believes the strength of the accelerator is that it goes beyond the surface issues in the battle against financial exclusion.
“We recognise the limitations to financial inclusion, which can become a bit of a tick-box exercise. Like with opening bank accounts; you can say x number of people now have bank accounts, but it doesn’t say much about their financial wellbeing,” she says. “This accelerator is about taking a broader approach to financial health. Beyond fintechs, we’ve got insuretech products, wealthtech products… it’s about taking that broader look at financial inclusivity.”
The Europe programme this year attracted more than 80 applications alone. There is clearly no shortage of fintech entrepreneurs out there, even if their efforts to break through into the mainstream might have been hindered by the COVID-19 outbreak. But is it fair to place all our hope for solving these issues in these ambitious but early-stage companies?
Ghanem believes not. In his work at Capgemini, the entire financial ecosystem comes under the microscope. Capgemini’s “World FinTech Report”, published in June, stressed the need for traditional financial institutions to embrace collaboration with fintechs in order to become more agile and meet the demands of a wider cross section of customers.
“Banks can’t do it alone. They have skills shortages, they have technology challenges and they have cultural challenges to move fast,” says Ghanem. “Skills are in the fintechs, agility is in the fintechs, the only thing the fintechs don’t have and what banks have is scale. If we can orchestrate this ecosystem, it’s a win-win for everybody. Capgemini wants to play the role as the orchestrator of an ecosystem that aims to deliver innovation at scale.”
It is now generally accepted that collaboration holds the key to the umbrella objective of bringing more people into the financial system. And collaboration is happening, with one new initiative in Latin America being a perfect example of financial players coming together for a greater, social good.
In September, Mastercard announced that it is joining forces with a number of institutions to launch the Tech for Good Partnership, a first-of-its-kind private sector agreement to accelerate digital and financial inclusion in the Latin America and Caribbean region. PayPal is one member of the group, which also includes Bancolombia, Banco Galicia, Citibanamex and Mercado Libre. In Latin America, 45% of the population is financially excluded.
“That leaves tremendous growth and opportunity for every single one of these companies,” says Kiki Del Valle, Mastercard’s SVP of Digital Partnerships in the region. “Through the partnership with these players, we can believe we can create new ideas and new innovative platforms.
“We need to develop new products to appease different segments. Think about gig workers, think about women, think about the agricultural sector – they could all benefit from tailored products. This is one of the areas that we need to focus on. The other area is around education. We need to drive greater trust in the financial ecosystem, but education also because we want to drive greater use of financial solutions. It’s not enough just to give somebody access to a card.”
The partnership, which is hoping to deploy initiatives before 2020 is out, will first focus on expanding basic financial services. Over time, Mastercard hopes to be able to share best practices and outcomes with the wider financial services community. This is an important programme for the company, which earlier this year committed to bringing 500 million people globally into the digital economy by 2025.
“That is a commitment we don’t treat lightly, and we realise we can’t do it alone,” Del Valle adds. “We need to do it in partnerships. We’re part of a connected system. There will be competition between fintechs and traditional banks, but there will also be collaboration between the two. And I think it’s our role to make sure that we allow everybody to succeed, but most importantly we allow society to develop and to grow.”
Mastercard’s aspirations around collaboration and the free sharing of learnings and data are only made possible because the financial services sector is slowly beginning to embrace open innovation. A movement that has gathered momentum after the introduction of open banking, open innovation, or as Capgemini terms it “the open experience”, is a “super-accelerator” for fintechs according to Ghanem.
“It has never been accepted delightfully by banks, let’s just say. But it was maybe day one of fintech – I’m exaggerating, but it’s a super-accelerator to fintech. Now, instead of me building my database, I can tap into yours. You have spent billions of dollars building yours, and now with consumer consent, I have access to it.”
Perhaps open banking will prove to be the catalyst that finally ushers in a new dawn for the financial excluded? Ghanem is hopeful, but he still sees plenty of challenges.
He believes technology remains an issue, with many influential organisations still failing to successfully integrate the platform-based approach he deems so essential to digital excellence. And he also believes regulators must be more inclusive when setting the rules frameworks, and that they should learn the lessons from how organisations have had to react speedily during the coronavirus pandemic. But the greatest barrier, he thinks, will be culture.
“Many traditional players have grown into the mindset of, ‘I am big, I am strong and I don’t need to learn anything from anybody else. Who are you – small, young and nimble – to come and teach me how to do it?’” he says. “So bridging this cultural gap is critical, and you need to bring in an orchestrator to make it happen. That’s the role Capgemini wants to play. We want to sit at the table, and level the playing field and make them work together.”
Zaccagnini takes an optimistic view. She talks about Next Generation EU, Europe’s pandemic recovery plan that has seen digitalisation placed front and centre of a funding programme worth €750 billion. With social issues like financial inclusion high on government agendas because of COVID-19, she thinks we stand on the cusp of change.
“I think we’re in a really exciting place right now where we’ve had the money agreed upon and it’s going to focus on digitalisation. So if not now, then when? There’s going to be, for the first time, the ability to channel it and develop digital products for everyone. I think the possibilities are there.
“After all, it’s in the interest of governments to make sure that all of their populations are included in the financial system.”