The Innovator’s Dilemma
is challenging financial nonprofits. They must adopt disruptive technology,
become data driven and follow their clients to the digital world to remain
relevant.
The problem is that these organizations are not experienced nor built
to manage the risk of large investments in technology and organizational
transformation. They face the same disruptive forces that large corporations
did years ago but without the vast resources to experiment, hire experts and
invest for the longer term.
The organizers and
sponsors of Boston Fintech Week 2019 deserve major props for putting mission finance
front and center for the 1,000 plus fintech professionals in attendance at the
annual September event. Commonwealth, a Boston-based nonprofit, spearheaded
daily sessions on the impact of fintech on low and moderate consumers in
several areas which were tied together and highly informative. That’s the
good news. The bad news is that fintech still doesn’t seem to be doing much for
the financial well-being of low and moderate income households.
Consumer finance is now
overwhelmingly digital and data-driven. While buzz-words like Financial
inclusion and financial health are ubiquitous in marketing materials and
startup pitches, most fintech companies seem to lack sincerity or a viable
business model to address the needs of less wealthy households.
The fact is that most
“inclusive” startups that were founded over the last few years seem to have
quickly disappeared or now offer online products that are targeted to high
income consumers or are actually harmful to low and moderate income consumers.
And there is this . . . last week Bloomberg published an article entitled America’s Middle Class Is
Addicted to a New Kind of Credit which documented how the nation’s payday loan industry, with its
crippling, triple-digit interest rates, has transformed itself into today’s $50
billion online installment loan business. So congratulations Fintech world, you’ve invented predatory
lending!
It turns out that the
digital world is pretty much like the physical world in that the quickest way
to make a buck with low and moderate income consumers is still with predatory
products, hidden fees and unneeded services. Even worse, artificial
intelligence and other data-driven technologies are making it far easier to
identify and target vulnerable consumers. Unfortunately, the promise of the
Internet to provide information and tools for making good financial decisions
has been overwhelmed by bad guys selling harmful products.
While fintech,data and
open banking initiatives may lower the cost of providing financial
services overall, I still don’t believe that the LMI fintech market in
the foreseeable future can deliver the kind of returns venture capitalists and
other investors in fintech are generally hoping to achieve. If less wealthy
households are going to benefit from fintech, it will be because of the efforts
of mission-driven organizations and private sector investments that include
social impact and responsibility in calculating returns.
It took 20 years but the
threat posed by technology to corporate America as described in Clay
Christianson’s book “The Innovator’s Dilemma” has been addressed by the banks and large
companies that learned to thrive with technology. Those that didn’t are gone.
Banks today know how to manage strategy and decision-making around threatening
disruptive technology. Many even spend small fortunes on idea labs and
platforms just to get a front-row view of the latest ideas in fintech no matter
how far-out.
The Center for Financial
Security and Asset Funders Network, recently published their 2019 bi-annual report and
survey of nonprofit financial coaching. The report states that:
Technology has been lauded as a mechanism to
increase accessibility of coaching and as a potential way to scale coaching
while reducing the cost to an organization. The financial services sector as a
whole has seen tremendous growth in the number of firms providing
technology-based services, and the number of consumers being reached with some
digital financial tools is reaching into the millions. Yet, despite
well-documented growth in the broader financial services sector, the Coaching Census
has recorded no significant increase of technology use since the first wave
(report) in 2015.
While risks and
challenges abound for nonprofit fintech, the opportunities are even greater.
Organizations can use data and technology to scale from meeting the needs of
thousands to millions of people, provide broader personalized services and
deliver those services in real-time. Data and technology can empower nonprofits
to become life-time partners of clients in their financial health as well as
helping people avoid the crises and critical problems that now often bring them
to the door today. Nonprofits can also help clients manage their personal and
financial data and connect them with high quality financial products that are
optimal for their needs.
Speaking at Boston
Fintech Week, Mae Watson Grote, CEO of The Financial Clinic, wisely pointed out
that mission-driven organizations actually have two businesses - first, to
serve their clients and second, to get the investments and donations necessary
to keep their organizations afloat. To adapt to the digital world,
mission-driven organizations not only have to address the challenge posed by
The Innovators’ Dilemma, they also have to convince philanthropists and funding
sources to support technology development and the resources they need to
transform themselves into data-driven organizations that deliver primarily
digital services.
How do nonprofits
survive and thrive in digital finance?
- Acknowledge the problem.
Recognize the human problem. It isn’t man or machine but people’s roles
will have to change - which is always difficult. Smart empathetic people
will be empowered by technology - not replaced.
- Cooperate and work together.
Even the largest banks and financial companies have joined
forces to cope with technology investment. Individual financial
nonprofits do not have the expertise, experience and data they need to
transform themselves. But they do have the ability to collaborate and
cooperate to achieve the scale they need. As long as resources,
initiatives and projects remain fragmented and siloed in individual
organizations, there will be no progress.
3.
Funding sources and the
private sector must recognize the problem and provide funding, expertise, data
and technology to cooperative groups of nonprofits to maximize the value of
these contributions.
Tim
Duncan was formerly Head of Technology and Senior Policy Analyst at the CFPB. aiFinancialCommons.org is building a centralized
collaborative platform with technology, expertise, data, tools, governance and
other resources that can be used, re-used and built upon by impact
organizations, institutions and researchers to massively help people achieve
financial well-being and stability.
