Financial markets can bring people together or create inequality.
Finance is essential in our everyday lives, yet often difficult to understand if you don’t have a strong foundational knowledge.
And when it comes to creating systems that benefit consumers at all socioeconomic levels, it often falls short.
We’ve seen how well-functioning finance helps people improve their lives. But we’ve also seen how poorly managed financial systems can exclude and harm those who need them most.
So what’s missing?
An inclusive financial system that empowers people. Where business models that serve people’s interests succeed over models that exploit them.
But that system can only be built when we - citizens, businesses, investors, policymakers, and regulators - actively shape it. We all have a role to play. It starts with an understanding of how the financial system works today and how it should work to serve everyone tomorrow.
There is no universal roadmap. Market conditions will differ across geographies. New opportunities and unforeseen challenges will emerge. And we’ll have to adapt to them.
Through Fiat Ventures’ involvement in the Fintech startup world, we're exposed to new solutions to the financial equity problem. As investors, we use our best judgment to support only those ventures who share our view of a fair financial future. And, as individuals who care deeply, we aim to positively influence its evolution.
We identified five keys to building a fair financial future. Let’s take a look at each element and the critical factors necessary to reach this goal.
1. Financial services must help achieve life goals.
Almost all of life’s goals require money. In some capacity, whether it’s furthering your education, buying a car, managing credit, investing, or getting healthcare, you rely on financial services to help you gain access to these wants and needs.
And while these services should be empowering, they are often complex, hard to understand, and difficult to use. A single financial setback can have ripple effects across every facet of your life.
On the other hand, when people properly receive financial services designed to improve their circumstances, their economic prospects improve.
The following factors are critical:
Easy-to-understand financial services, designed for lay people, not experts.
Financial services suited and connected to people’s real-world needs: managing cash flow, seizing opportunities, and minimizing risk.
Financial services both relevant to and built into people’s daily activities: payments, savings, credit, and insurance are integral elements in the nonfinancial aspects of everyday life.
2. Business models are built on consumer trust and trustworthiness.
When was the last time you heard someone praise a financial service provider? It’s probably been a while.
Historically, financial institutions have had a reputation for being greedy at the expense of the consumer. They’re known for lacking the human element, especially in times of great economic stress, such as during the housing crisis in 2008.
Only when new Fintech brands emerged to help underserved populations did the incumbents start to make changes.
Trust was, and still is, largely missing.
That’s not to say it can’t be developed. But to trust financial providers, people need proof to believe that these brands truly serve their interests. Which is challenging because traditional financial providers aren’t typically that transparent in their messaging and their actions. Leaving consumers to fill in the gaps themselves.
For example, revenue practices are a major source of confusion. The fine print for overdraft fees, credit card interest, etc. isn’t always clear. Therefore, making business models that are aligned with customers’ interests is key to gaining and maintaining trust.
Fiat Ventures’ investment criteria includes:
Providers deliver “value clarity” to customers. There are no hidden fees or undisclosed third-party payments. People know how much they pay and what they receive.
Business incentives are designed to help customers succeed. Their revenue models and customers’ financial health are mutually supporting, reinforcing trust.
Financial firms are transparent with customers about their decision-making.
3. People have meaningful control over their financial data and how it’s used.
Since the 1970s, consumers have been worried about how their data is being collected and used. And understandably so, with critical pieces of financial information being used for everything from identity theft to targeted marketing.
Financial service providers increasingly rely on individual financial and nonfinancial data, creating new opportunities and concerns about privacy, security, and trust.
A fair financial system will give people control over their data, increasing their level of trust. Designed properly, this is possible. While also allowing businesses to use the data necessary to customize their services.
Here’s the way forward:
People must have a clear understanding of what data is captured, who owns it, with whom it's shared, and how it's used.
A robust, effective permissions system giving people the right and ability to control access to their financial data. Including easily moving financial accounts among providers.
Security protocols to protect people’s financial data and any party holding consumer financial data.
4. Financial infrastructure is open, low-cost, and drives competitive markets.
A closed financial ecosystem benefits the few. An open financial ecosystem benefits everyone.
To engage in the modern, digital economy, Fintech entrepreneurs need access to financial infrastructure. Expensive, hard-to-use technology discourages innovation and competition. As a result, costs are transferred to customers.
Enter an open infrastructure. Making new solutions more readily available to a greater population, faster and cheaper.
A more equitable approach:
Modern financial infrastructure with open API tools, reducing barriers to entry, and promoting competition.
New digital infrastructure striking the right balance between public and private ownership to maximize innovation and accountability.
Private-sector providers using a common, low-cost stack of infrastructure technologies and focusing on creating new applications with distinct customer value propositions.
5. Digitally native regulation protects consumers and promotes innovation.
Regulations and policies are hard to update as technology changes. Regulators are less likely to respond in consumers’ best interests when they don’t understand the risks and benefits of new technologies and data-driven services themselves.
As a result, regulators may not practice urgency in response to market failure and abusive practices, or in enabling customer-friendly innovation. Regulation and supervision need to evolve simultaneously with financial services as these services become digitally native.
Here’s how to protect consumers:
Policymakers and regulators enact the principles of consumer benefit, value clarity, and open systems’ architecture.
Regulators use the same digital technologies and approaches they regulate and supervise.
Regulation and supervision are consumer-centric, adaptive, and based on consumers’ personal needs, rather than the organizational structure of the provider.
Key Takeaways
Leaders in the Fintech market have an opportunity to create a fair financial future by focusing on these five keys:
Financial services must help achieve life goals.
Business models are built on consumer trust and trustworthiness.
People have meaningful control over their financial data and how it’s used.
Financial infrastructure is open, low-cost, and drives competitive markets.
Digitally native regulation protects consumers and promotes innovation.
At Fiat Ventures, we take a careful look at each potential portfolio company before we invest to ensure we meet all the elements covered above. This is one way we put our money where our mouth is. And do our part in helping achieve a fair financial future.
For more information on how Fiat Ventures is supporting the future of equitable Fintech, subscribe to our newsletter.