How Fintech can deliver on its promises of social impact

FinTech companies see huge investor interest behind the promises to provide services to the financially disadvantaged – a clear example of social activity that can do good by doing good. But while the industry has increasingly become synonymous with power potential, fintech companies and investors have little insight into whether the industry is actually living up to its big promises. Without more stringent approaches to identifying and measuring impact, investors will continue to guess at the impact these companies have. The authors provide more advice on how FinTech can better reveal their social consequences.

The financial technology (fintech) industry seems to be hitting investors’ golden dream of doing exceptionally well while creating exceptionally good. Based on the promise of positive social impact through financial inclusion, fintech has seen meteoric growth while capturing more impact-related investment funds than any other industry.

In the last year alone, equity funding raised by fintech companies around the world has almost doubled. To date, fintech companies have a total global market value of $ 5 trillion and industrial growth is expected to be over 23% over the next five years.

This growth is partly driven by fintech’s potential for large-scale social impact. Fintech executives promise to expand financial inclusion to non-bankers, while strengthening financial health and promoting digital security. Companies such as PayPal, Mastercard, Visa and Shopify embrace this promise, and position their products and services as tools for financial inclusion and fair economic growth. Investors are also embracing fintech’s impact potential: The industry currently receives about a quarter of all impact-oriented investments, more than any other industry, and represents nearly $ 250 billion in total assets.

But while the industry has increasingly become synonymous with power potential, fintech companies and investors have little insight into whether the industry is actually living up to its big promises. Without more stringent approaches to identifying and measuring impact, investors will continue to guess at the impact these companies have while fintech executives present their products as saviors to society without necessarily delivering on that pitch. In this piece, we describe how fintech companies and investors approach impact today and the strategic opportunity to do more. We also provide concrete solutions for power measurement and control.

Status in Fintech

The way companies design, produce, distribute and sell their products has an impact not only on the bottom line, but also on their consumers and society as a whole. One challenge, however, is that the product impact – the impact on consumers and communities from using a product – can be distinctive.

Through the Impact Weighted Accounts project at Harvard Business School, we have developed a framework for understanding and quantifying product impact as a means of meeting this challenge. The biggest barrier to implementation, however, is that few companies disclose information related to product impact, and focus more on initiatives with social responsibility than on impact from the core business.

This lack of information is particularly common among fintech companies, despite mission statements that promote positive effects for customers. For example:

• Visa has committed to digitally activate 50 million small and micro businesses by the end of 2023, but Visa does not disclose the progress or results of this initiative, and the latest impact report was published in 2020.
• FIS’s mission is to help businesses and communities thrive by promoting trade, but the revelations have also been insufficient, with minimal data on the reach of core products among underserved consumers (eg small merchants) and core product results.
• Mastercard has promised to connect 1 billion people (including 50 million micro and retailers) to the digital economy by 2025, but reporting has also been insufficient with minimal data on the reach of core products among underserved consumers and core product results.
• Both PayPal and Shopify have been more transparent, but barely. For example, PayPal has provided data on the reach of core products among small and medium-sized businesses, but lacks data on underserved individual consumers and core product results. And Shopify has released data on the reach of core products among sellers outside urban centers and in emerging markets, but has not disclosed data on other underserved groups (eg small and medium-sized businesses) and results.

What’s left on the table

In today’s disclosure landscape, it is much more common for companies to treat impact issues as potential risks as opposed to opportunities, so it is not surprising that mission statements and impact-related disclosures are misaligned. However, correcting this misalignment provides opportunities for companies to better align their mission with their operations and allows investors to make informed decisions.

For fintech companies, as capital becomes scarcer, product impact disclosures can enable differentiation, helping companies win customers and investors, especially in the fast-growing category of power investments. These companies can also improve power management on material issues as a means of driving growth, innovation and profit. This process creates a good cycle: productitization and innovation to support a more diverse and financially healthier customer base running the business.

Utilizes Fintech’s influence potential

The good news is that there are clear ways fintech companies and investors can begin to promote impact measurement and management, and these strategies can be applied outside the fintech industry to any company that wants to identify and strengthen its impact.

1. Analyze specific effect measures that are in line with income models.

Many fintech companies identify broad goals as fair economic growth without identifying the specific areas of influence that are best suited to their core products and services. For example, financial health may be more about disruptive products, while goals for financial inclusion may be more about affordability and large-scale delivery channels.

Similarly, there are few companies that identify and report on product results by demographic key groups (ie by race / ethnicity or gender). If the industry fails to track demographic data, it will lose out on both growth and impact opportunities.

2. Experiment with approaches to quantify social effects of products.

Based on the Impact Weighted Accounts project, fintech companies can begin to quantify product impact in ways that are rigorous and comparable. We have identified a preliminary approach for fintech-enabled transactions and compared PayPal and Shopify provided sufficient, albeit limited, public data.

Analysis reveals that product impact can vary significantly between fintech companies, with PayPal’s impact driven by affordable services and Shopify’s impact driven by access among small and medium-sized businesses, a group traditionally poorly served by financial services. Such quantification efforts can help investors make investment and engagement decisions, while helping fintech executives achieve greater impact.

Champion standards for financial inclusion and health.

Financial inclusion and financial health are difficult outcomes to define and measure, and they remain relatively elusive among existing standardization bodies. Fintech companies can work with the International Sustainability Standards Board and expert intermediaries focusing on financial health, such as the Financial Health Network, to develop action-oriented and meaningful performance targets.

Embrace temporary calculations on the road to results.

There is inevitably a backlog in being able to claim outcomes based on the company’s actions taken today. Given this backlog, companies can identify compelling temporary calculations (eg relative affordability of products for underserved groups, use of tools for financial expertise embedded in core products) and engage external insurance processes.

5. Establish flexible systems.

What is most important will vary with stakeholders and over time, as investors and companies develop more nuanced effects. Given this development, a company’s approach to product impact must be flexible enough to meet stakeholders’ changing questions and goals.

Fintech companies can do this by managing data that is relevant to a range of product impact topics, including financial inclusion, financial health and digital governance. Fintech companies can also work to organize disclosures so that calculations follow impact headings and can be easily gathered and separated.