The Fintech Faultline

Fintech, is a nebulous term that could perhaps be mistaken for a technological innovation that can make aquatic sea creatures swim faster. Unfortunately for dolphins, but fortunately for consumers, Fintech stands for Financial Technology and the rapid advancement of that technology to produce new ideas, mobility and creative solutions in the financial services space.  Fintech improves the speed and efficiency of the way consumers bank and borrow, while powering nearly every aspect of investment in the financial services sector. In the simplest terms, fintech is technology that seeks to supplement and occasionally compete with traditional financial industry methods in the delivery of financial, banking, or investment services. Fintech companies are focused on bringing new products and services to the market by utilizing the latest technology and reenvisioning legacy ways of servicing financial customers. Fintech has enabled amazing growth, ease of use, visibility, and in many cases lower costs.

But unfortunately, there is also a serious potential adverse impact that might be caused by all of this great technology.  The unintended consequences of new technology such as machine learning and the tyranny of strict algorithms can eliminate many groups from benefiting from this revolution.

Many people are familiar with fintech, but might not have known what to call it. The mobile banking apps on your smartphone, personal financial management services and online lending platforms are just a few examples of fintech solutions that are currently taking over the financial services sector and recent trends have indicated that the fintech industry will only continue to grow in the years to come.  

According to reports:

• In 2016 alone, investment in fintech firms jumped by 10% to around $23 billion.
• Investment in U.S. fintech companies rose to $14.2 billion during the first half of 2018.
• 82% of US commercial banks have pledged to increase fintech investment over the next three years.

With numbers like these, the future of fintech looks bright. However, it has become increasingly clear that while innovation is moving quickly, potentially polarizing challenges should not be ignored. The Fintech Fault Line can be defined as algorithmic bias, lack of workforce diversity, and limited protections against discriminatory practices which is casting a shadow on all of this bright innovation.

Take fintech lending, for example. In August 2018, a Congressional investigative report determined that fintech lending services provide a unique opportunity to allow historically underserved communities to start small businesses and participate in the “American Dream.” However, the report also identified numerous shortcomings that need to be addressed to ensure minority-owned businesses and consumers are protected from discrimination.  

Fintech lending became increasingly popular in the wake of the Great Recession as big banks and financial institutions were justifiably placed under the Congressional microscope and new regulations were brought forth to protect consumers from the harmful practices that contributed to the financial crisis. As a result, banks and financial institutions were less inclined to make small business and personal loans which provided a prime opportunity for alternative lending.

Fintech lenders have been disrupting the financial services sector ever since by bringing efficiency to the market and new sources of capital to small businesses that didn’t previously exist. Unfortunately, with disruption and innovation often comes drawbacks that can adversely impact underserved communities, such as algorithmic bias.

Fintech lenders use algorithms to determine the credit worthiness of a small business applicant. In determining credit worthiness, algorithms evaluate variables including how much capital the business has, who the investors are, and past success rates for business credit worthiness.

What they’re not considering are variables including the quality of the business idea, the entrepreneurial spirit of the firm, or the integrity and work ethic of the applicant. Reliance on algorithms that do not paint a full picture of the applicant’s history can have a harrowing impact on minority-business owners. As a result, minority-business owners could end up paying more than their white counterparts for the same small business loan or experience other forms of unintentional discrimination.

One might wonder how algorithms that power online lending platforms create the same biases as traditional lenders when they are meant to limit error-prone human influence and process information more effectively. Simply put, algorithms are computer programs built by people and algorithmic bias occurs when data used to teach a machine learning system reflects the implicit values of humans involved in that data collection, selection, or use.

Algorithmic bias has been widely evaluated for its impact on search engine results, social media platforms, privacy, and racial profiling; and potential real-world instances of algorithmic bias have already been identified.  

For example, the Harvard Business Review reported that, “Algorithms deployed on the front line of HR decision-making may cut costs and streamline vetting in busy departments or companies with large hiring needs, but the risk is that they end up excluding applicants based on gender, race, age, disability, or military service — all protected classes under employment law.”

Additionally, the Atlantic reported, that “facial-recognition systems are more likely either to misidentify or fail to identify African Americans than other races, errors that could result in innocent citizens being marked as suspects in crimes. And though this technology is being rolled out by law enforcement across the country, little is being done to explore—or correct—for the bias.”

The more that algorithms are the basis for critical financial services decisions like the interest rate a consumer or small business owner is charged, the more we are going to see a social polarization effect, unless there is a conscious effort to address the issue of algorithmic bias early on as opposed to dealing with the consequences for generations to come.

Additionally, the fintech industry must address other factors that play a role in social polarization including the lack of racial diversity in its workforce. In order to bridge the divide created by flawed artificial intelligence, it is important for individuals who reflect the diversity of fintech consumers to participate in the decision-making process. A diverse workforce will also allow companies to more appropriately identify and remedy the structural challenges that put underserved communities at a disadvantage.

The fintech experience will continue only to be beneficial for exclusive segments of the population if industry leaders do not address its fault line by implementing practices that are fair and inclusive so that innovation and emerging technologies can be the great opportunity equalizers they were meant to be.

John H. Jones has served on Capitol Hill for over 15 years.  John currently serves as a chief of staff to a senior member of congress and on his off time serves as a thought leader and strategist for Democratic policy makers in Florida. He holds an MBA from the University of Minnesota’s Curtis L. Carlson School of Management and is one of a very limited number of people with policy expertise in the intersection between the financial services and technology industries. John’s main focus is on developing solutions to ensure these new industries function in a manner that improves the lives of marginalized communities. Connect with him on Twitter or LinkedIn.