Fintechs Were Supposed Improve Equality – What Happened?

This piece was originally published for Forbes.

Fintech has revolutionized key aspects of our day-to-day lives.AFP VIA GETTY IMAGES

Separate and unequal. This was one of the key findings of the 1968 Kerner Commission, which was assigned to investigate the underlying causes of the 1967 race riots. In many ways, this report portended the gruesome displays of inequality that have punctuated recent history.

While overall median wealth for an American family increased from $83,000 in 1992 to $97,000 in 2016, this growth was limited to a specific swath of the country’s population. A 2019 study from McKinsey titled “The Economic Impact of Closing the Racial Wealth Gap” highlighted how, in the years since the Great Recession of 2008, the income gap between white and black households has escalated. As per the report, “the racial wealth gap between black and white families grew from about $100,000 in 1992 to $154,000 in 2016, in part because white families gained significantly more wealth…while median wealth for black families did not grow at all in real terms over that period.”

One cannot underestimate the economic ramifications of such a disparity. The same McKinsey study goes on to estimate that roughly $1.5 trillion could be added to the US economy by 2028, if the racial wealth gap were closed. The consequences of systemic biases, ironically, do not discriminate.

People look at protest posters posted at a contruction site across the street from Lafayette Square near the White House in Washington, DC, on August 16, 2020. (Photo by Daniel SLIM / AFP) (Photo by DANIEL SLIM/AFP via Getty Images)AFP VIA GETTY IMAGES

Advancements in technology and innovation were touted as having the potential to stymie this economic divergence. One area that we see the disparity in how people of color are treated is in mortgage lending. A study titled “Consumer-Lending Innovation in the Fintech Era” found that lenders charged African American and LatinX borrowers between 3.6 and 7.9 basis points more for mortgage purchases and refinances.

By removing the human element and introducing algorithms to automate lending decisions, disruptors argued that such biases would be a thing of the past. Furthermore, as new companies were formed, additional jobs would be created. Surely these new firms would focus on hiring diverse talent and avoid the errors of their archaic predecessors?

In the decade since the fintech boom has kicked off in earnest, results have shown that the truth lies somewhere in the middle. This is the first part in a series that will explore how fintech companies have succeeded in reducing inequality in certain areas, while falling short in others. Part two will discuss areas where systemic imbalances exist, and part three will highlight industries and communities where fintech has successfully improved access and equality.

Why should we care about inequality and fintech?

Inequality is expensive.

As the McKinsey study cited above clearly illustrates, we all pay a severe price for economic disparity. COVID-19 has disproportionately affected communities of color, in terms of numbers of cases and economic consequences. It robs us all of better financial futures – on national and individual levels.

We must all hold companies accountable.

Ensuring that corporations adhere to their stated mission and principles is a hallmark of good governance. As consumers, we can encourage accountability by choosing to invest with, purchase from, or support companies that we believe in. Identifying fintech firms that are succeeding or lagging in their stated missions is the first step in making an empowered decision as a customer.

Measuring progress is critical.

While the findings of the 1968 Kerner Commission may not have been flattering, it established a key metric to compare and contrast against. If we want to look back and and examine how fintech firms have evolved since 2020, we must first establish this preliminary foundation. Only after a baseline is established can we truly assess whether we have exceeded or fallen short of our expectations.

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