Fred had been homeless until around 2017. He finally got on his feet and became a dump truck driver. He was finally able to save some money- all cash that he kept in his house. He had around $18,000 and he wanted to invest it in something–anything. He just didn’t want it to be too risky since he planned on retiring in a few years. Fred needed to get the cash out of his house and into some sort of investment vehicle, but no one had ever taught him how.
Fred’s truck
He took his only day off to try to open an investment account at a bank, but didn’t know what type of account he needed or even how to differentiate between a good or bad investment. The bank lobby was closed, and he didn’t have another day off for 2 weeks.
– Story taken from BJ McAndrews
Brandon Brooks is a venture capitalist (VC), although to many he’s more of an anti-VC. While traditional venture capital investments are a network game, where who you know is more important than what you do, Brandon is working on helping entrepreneurs locked out of the tech startup ecosystem break into the industry.
The SEC & others want to raise the accredited investor regulations to $10M+ in net-worth.
— Brandon Brooks (@OfficialBBrooks) April 26, 2023
They are upset than more than 13% of the US population can invest in early-stage startups.
Let’s put the American dream back within reach of all those who seek it. pic.twitter.com/ARRx29IPHO
And he’s not the only one. Mac Conwell of RareBreed Ventures started his micro-venture capital firm after a Black woman was forced to be a surrogate mother in order to fund her startup, because traditional venture capitalists wouldn’t give her the time of day.
Apple’s Apple Card and UnitedHealth’s Optum, both came under fire from the New York Department of Financial Services for having allegedly racially discriminatory algorithms.
“So the issues surrounding how the algorithms are built, what data is fed into them, how those factors are being weighted […] You cannot say ‘The machine did it and we don’t know how it happened’, because from a regulatory standpoint that is not going to cut it.”
Jean Donnelly, FinTech Sandbox Partners
This isn’t the first time inherent biases played a large part in algorithmic oppression of underserved markets, but it shows the fintech industry is no different.
If these stories piss you off, good.
According to Bloomberg Financial, equity funding raised by fintech companies around the world has nearly doubled. To date, fintech companies have a collective global market value of $5 trillion and industry growth is expected to be above 23% for the next five years. And despite all this investment, people are getting left behind.
If fintech startups want to expand market share, increase revenue, and open new capital markets, they need to, for lack of a better term, fix their s@%t.
Here’s how fintech startups can support underserved communities
1. Get rid of racist algorithms
Bank partnerships with fintech companies have increased. Everyone wants to bank digitally and quickly. And algorithmic underwriting and process automation have recalibrated how credit risk is gauged by reducing the role of humans in such decisions. That doesn’t mean humans can’t imbue racist influences or inherent biases into their algorithms.
Step one is to ensure that doesn’t happen. The easiest way is to make sure a fintech’s engineering, management, and product teams are diverse. More importantly, if a fintech startup is targeting a specific underserved community, their development team better be made up of members of that community.
2. Expand credit availability
By expanding credit availability, advanced machine learning algorithms can enable historically underserved communities to gain credit and build wealth. These tools can tap into a cache of data not used in traditional credit reports to create more accurate risk assessments essential to obtaining credit and other financial services.
Other benefits include lowering overhead costs so lenders can afford to make smaller loans. This can extend financing services to communities with fewer bank branches. It also keeps established financial players honest.
3. Support more entrepreneurs
Entrepreneurship allows for underserved communities to gain autonomy and become socioeconomic actors. They create new job opportunities and directly aid their local economy. Fintech brands such as Pipe allow entrepreneurs to be more creating in obtaining working capital needed to build or grow their business.
But there are too many aspiring entrepreneurs who do not fit the traditional Venture Capital model. Fintech startups have the opportunity to build a more sustainable, accessible, and empowering platform for more entrepreneurs to launch (and sell) smaller, more local, service-based businesses.
They also have the ability to follow Brandon and Mac’s footsteps, and open the traditionally closed tech startup ecosystem to more communities, instead of backing the same horses that fail 9 times out of 10.
It’s time for fintech startups to step up and make a real difference. They can do something that will benefit underserved communities, as well as their own bottom line. Fintech companies need to ensure their algorithms are free of bias, expand credit availability, and back more entrepreneurs from underserved markets if they want to truly level the playing field.
