Fintech: Building the future of inclusive financial services
Stanford GSB Impact Fund: Our 2022 Fintech Thesis
Societies across the globe use financial wellbeing to define their communities that are most in need. Decision makers set median income thresholds to determine who qualifies for government programs, and they make direct cash transfers to citizens that trade off against other interventions in education, job training, environmental clean up and other impactful efforts. We know that financial arguments are among the most convincing to both government and private sector entities when incentivizing social impact efforts — helping people out of poverty is a widely-accepted and compelling goal.
It is clear that the GSB Impact Fund should explore tools improving financial management and literacy for underserved populations as part of our mission to invest in early-stage, for-profit organizations driving both financial and social returns. On the Fund’s 2022 Fintech team, we spent our first few weeks together digging into thesis development — below is our perspective on four of the most exciting impact-related themes in Fintech.
Our Perspective on De-Fi
The financial sector today is centralized — financial intermediaries facilitate the flow of resources in the financial system, and central banks (like the Federal Reserve in the US) are able to unilaterally control the supply of currency in the economy. While this level of centralization helps influence monetary policy to regulate global economies, it also puts an immense amount of power in the hands of a select few institutions. This means that certain populations may be excluded from participating in the global financial system if they do not meet the criteria of the centralized entities (e.g., credit scores, social security numbers, etc.).
With the prominent rise of blockchain technology in recent years, innovators are looking for opportunities to improve the global financial system. In particular, decentralized finance (or De-Fi) is a space we’re incredibly excited about given the opportunities that blockchain technology unlocks. De-Fi is able to democratize the financial system by removing middlemen, improving accessibility of financial products and services to underserved populations, and facilitating a more global financial system by reducing frictions across borders.
From a social impact perspective, disadvantaged communities (unbanked, underbanked, lower socioeconomic populations) that typically would be restricted from certain financial products (loans, mortgages, credit cards) will have greater access to these products and services. This will help improve socioeconomic mobility, drive better outcomes for individuals, and create a more inclusive financial system.
The Case for FinTech x The Future of Work
The working world is rapidly changing. The rise of the gig economy has introduced earnings volatility for many workers across the globe. One important effect of this shift is increased demand for quicker earned-wage access than the traditional 2-week paycheck model. Gig economy workers often need short-term credit to smooth earnings volatility, as well as access to financing for expensive upfront investment required for platform participation (e.g., purchasing or leasing a car in order to drive for Uber). These workers don’t receive health insurance through employers in the same way W-2 employees do and have to conduct their own tax withholdings and other financial protections while traditional employers provide this to employees. There is an opportunity to better serve this segment of workers, who tend to be lower-income and historically underserved by many industries, including financial services.
Turning to the unprecedented impact of COVID-19, the pandemic has accelerated a longstanding transition to online business This new way of working requires stronger cybersecurity protection via insurance as well as enhanced payments capabilities. Within this environment, we are also seeing a new crop of businesses emerging to serve consumers’ needs and wants. But starting a business is complicated, and owners often don’t have sufficient time or resources to access and manage best-in-class tools for running a business in 2022.
We believe in the opportunity to design and distribute better solutions at the intersection of financial services and the future of work.
Embedding Financial Services for Greater Accessibility and Equity
The next wave of fintech innovation is bringing financial services to the customer where they are. Embedded finance — also known as banking-as-a-service or financial services infrastructure APIs — is allowing non-bank companies to incorporate financial products into their existing offerings. Think paying for your Lyft through the app, or helping companies offer money to their employees between paydays. Users carry out personal or business transactions — such as making payments, securing credit, or purchasing insurance — through the platforms they already use. While this shift from banks (centralized) to customer aggregators (decentralized) represents a massive market opportunity, we also believe it brings significant benefits for individuals and businesses that are underserved by the existing financial services system.
First, financial services will become lower cost. Embedded finance providers do the heavy lifting for companies, with offerings including technology and payments infrastructure, card-issuing, partnerships, integrations, regulatory compliance, licensing, fraud analytics, and more. External providers typically provide better products at lower cost for business owners. This enables cheaper financial services without dampening financial incentives to do so, benefitting end customers.
Second, financial services will be more accessible. Lower costs unlock new products or customer segments that were previously not economically viable or not attractive to banking incumbents. In addition,, they can access customer data that enables greater personalization, and better credit decisions. This is especially true for individuals with poor or limited credit history and unbanked or underbanked populations in developing countries. There is an opportunity for low-income populations to leapfrog traditional banking systems that require lots of infrastructure investment and access digitally native financial solutions sooner.
Finally, financial services will enable a more equitable monetization model. The prevailing modes of user monetization are either paid (premium) or advertising. This tends to disadvantage low-income groups who cannot afford the premium offering and end up bearing the brunt of the advertising load. Financial products enable the platform to generate revenue that is more closely tied to the actual value realized by users.
The Need for Better Tools to Build Financial Literacy and Wealth
The U.S. is one of the world’s wealthiest nations, yet a majority of Americans are unable to cover a $1,000 emergency expense, household debt levels continue to rise, and four in seven Americans are considered “financially illiterate” according to Forbes and Possible Finance. These statistics, and many more like them, underpin our thesis that tools designed to create financial knowledge and help traditionally underserved populations start saving and building wealth are imperative.
This problem isn’t new: It’s a generational cycle that needs to be broken by disruptive solutions, and that process starts with financial education that the US school system, and many others across the globe, doesn’t provide. We are excited about partnering with startups driving literacy efforts for all ages, but in particular those targeting traditionally underserved audiences where this problem is most salient such as low-income communities, blue-collar workers, minority groups, and immigrant communities.
Along with education, we must also deliver accessible tools to build savings and wealth. The communities we seek to support via our investments have historically been excluded from tools that higher-income groups use to build wealth. We are excited about platforms bridging this gap, especially those focused on driving automated savings and alternative access to investing and real estate.
We believe that empowering people with both financial education and the tools to put this education to work is imperative to our mission — we are excited to partner with companies working on these problems!
If you, or someone you know, is building the future of inclusive financial services, please reach out! You can reach the GSB Impact Fund’s Fintech team at zifzaf@stanford.edu or by messaging any of our team members via LinkedIn. Learn more about the GSB Impact Fund here.
Fintech team: Ahmed Zifzaf, Cengiz Cemaloglu, Peter Coutoulas, Jamie Glavin, Rauf Khan, Kevin Liang, Mariama Mallah, Hannah Sears, Grant Wallace
