fintech sees consumers as stupid—it needs to give them some credit
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Contxto – As promised, I’ve sat myself down in front of my computer, dusted off my notes, and am now trying to make sense of what The Economist Event’s Finance Disrupted Latam actually meant.
Overall, I liked it. I liked it a lot. It was interesting to see lots of players in an ongoing revolution together in one room rubbing shoulders.
In some ways, it was kind of weird.
Virtually everyone agreed on everything. Challenger bank reps nodded their heads sagely as traditional banking execs talked about how the regional banking sector had become too comfortable in the years before the fintech revolution.
Regulators (some from notoriously left-wing backgrounds) and financial institutions (of the most conservative kind) sang the praises of free-flowing capital and called for a much-needed credit boost all across the region’s anemic economy.
But, most of all, everyone agreed that one of the biggest issues facing Latin America’s financial and banking ecosystems was an utter lack of “financial education.”
Now, this is going to sound strange, but this really rubbed me the wrong way.
At first it made sense. People do need to be educated at a young age about how to deal with their personal finances.
How much money is coming in monthly? How much is going out? How much should I be spending on non-essentials and how much should I be saving? Will I have enough money to retire on? (This last question only applies if you were born before 1980.)
However, I quickly gathered that there was some serious suppositional subtext going on at the summit. Most speakers were using the term “financial education” as a euphemism for issues that really didn’t have much to do with customers at all.
Sometimes “financial education” covered problems that were clearly within the purview of regulators to solve; other times, it was the financial sector’s responsibility to deal with what was being explained away as an “educational problem”; in other moments, “education” was merely a way of explaining rather timeless pitfalls within banking and finance—like the creation of bubbles.
Overall, I realized that whenever I heard the term “financial education”, even if it sounded like a very progressive idea, it was more often than not being used to victim-blame consumers for issues that the financial, regulatory, and banking sectors didn’t want to take responsibility for.
I heard this often at the Finance Disrupted Latam: It’s not so much that the ecosystem of investment, innovation, and entrepreneurship is off-kilter, so much that the consumer market that is not mature enough to receive our most sophisticated products.
So, how much truth is in these claims if we’re hearing it from the head honchos of finance themselves?
The risk view from up top
Now, let’s review the facts.
First, obviously financial education is essential. I said it above in this article, but if you are so far not liking where I’m going with this, you’ve probably already forgotten and are saying “Hey, but financial education is actually essential!
I know. My point goes beyond actual education. It is more of a critique of those who use the term to skirt their own responsibilities.
Then, there’s the real difficult structural problem with finance, which fintech—no matter how revolutionary—also falls victim to, and it’s this:
Finance and banking—and it feels almost redundant to say it—are very capital intensive.
The sector requires a large critical mass of cash in order to beat those tight profit margins. Therefore, any fintech looking to be successful must aim to become a scaleup.
SoftBank understands this, having announced earlier this year that it would be focusing its big lending guns specifically on Latin America’s fintech sector.
Related article: SoftBank looks for loaning startups from Latin America
However, for a fintech to scale up it needs capital—a lot of capital—, making any investment so intensive that it can tend to become—in the words of a Citibanamex rep at Finance Disrupted—speculative.
Suddenly, anything but aggressive growth is out of the question.
Now, every founder knows that one of the key issues with scaling is keeping the quality of their product and their customer care up to scratch.
On this point, the folks at the summit were very attuned to potential solutions and road-bumps.
Keeping up with customers’ needs was paramount to all.
For instance, artificial intelligence (AI) was seen as an answer, but not a panacea. Indeed, everyone agreed that the dehumanizing automated elements of modern fintech, could lead us all down a path of omnichannel services minus actual people, which is often who customers want to deal with.
The consensus was that the human touch was not only a nice-to-have feature; it was essential for the proper functioning of a product.
Where the potential of AI was seen to really hit its stride was with credit assessments. For many at the summit, the real tech revolution was the bypassing of the ominous Credit Bureau via the automatization of creditworthiness assignment.
This is possible, because a clever algorithm can learn what makes a desirable borrower, and then can instantly sift through someone’s life’s accounts to discern if they are worthy.
Suddenly, we’ve emerged from the mind-boggling credit paradox of needing to have had previous credit to get credit. Hurray!
This is particularly important in Latin America, which is a credit poor region. So, overall, surely easier credit lines are a positive development and all is well with the world. Right? Right!
Subliminal messaging
Unfortunately, something is still rotten in the state of finance and banking.
This is due to the persistence of a certain paradox.
True, AI and big data can help discern who is creditworthy and who isn’t, but the monetary incentive to push those limits and lend money to those who might not be able to pay them back is strong.
Remember, the riskier a loan, the higher its interest rate, and this is an industry that needs to lend a lot of money to make money.
If you were born at any point before the turn of the century, you will actually be well-acquainted with the consequences of this paradox.
In the 2000s, much of the banking industry in the US and the UK thought they’d cracked the code. They invented a complex financial product known as a “securitized loan” through which they were able to sell credit to people who, to anyone not under the spell of the profit motive, would never be able to pay the bank back.
Today, the resulting financial crisis of 2008 is history, but many of the problems that the current financial revolution has inherited from that time are not.
One of the most sinister effects of the financial crash was the subsequent finger-pointing. Many blamed the banks themselves for lending irresponsibly; many others blamed the borrowers:
“The nature of finance forced banks to lend aggressively; it was consumers who needed to have a long hard look at their incomes to discern if they were worthy of such loans or not,” said the latter.
At the time, all those years back, I thought this reasoning to be a bit of awkward self-defense in the midst of a crisis.
And yet, a dozen years later there I was, sitting at a summit looking to the future of a rather different looking financial sector, and I was met with the following claims by an academic at Mexico’s National Autonomous University (UNAM):
“Without financial education, what you’re doing is passing the risk onto the consumer… If you give just anybody MXN$10,000 (just over US$500) they’ll just think it’s their money and spend it all.”
Wait, perhaps I was going crazy but, wasn’t it a financial institution’s responsibility to lend only to those who can pay for it?
It felt like we’d learned nothing as a sector and as a society; newfangled tech aside, here we were, still victim-blaming consumers (who perhaps, unfortunately, should not have been customers in the first place).
One thing had changed though.
Unlike some particularly cack-handed commentators in the late naughties who were openly saying that borrowers with low credit scores were “stupid”, at Finance Disrupted we were getting far more subtle, dog-whistle comments that still went on to blame consumers.
Enter “the urgent need for financial education for the masses.” Indeed, many of the “educational” objectives initially seemed laudable to me.
For instance, an influential fintech panelist mentioned that UX (user experience) was an important branch of financial education, since clear templates and onscreen experiences would allow clients to know where their money was, what it was being used for and how.
This sounded great! But, then went on to beg the question as to whether this speaker was conflating the need to educate their consumers with the responsibility the company had to be transparent with its users.
Then there was the awkward lack of self-awareness.
Miriam Cosío, the COO of Mexican electronic payments solution, Clip, very presciently pointed out that traditional banking suffered from a form of snobbery that bordered on classism. She noted that Mexican convenience store, OXXO, was far more successful at dealing with pyramid base customers’ daily payments, even when banks offered the same services.
Turns out, the cashiers at the convenience store didn’t condescend to their clients, they instead treated them as equals. The banks, the customers reported, treated them as unworthy.
So, ironically, the heads of finance at the Finance Disrupted conference were very much aware as to how discrimination could undermine their quest for banking a population, while also playing host to the idea that:
“We all know what we’re doing with our finances, but the average Latin American has no idea.”
We don’t need no education
I’d like to think I received a relatively good financial education. And yet, many of the “educational solutions” advertised at the conference—things like clear credit-limits or timely fee warnings—, if not implemented would leave me rather befuddled.
The truth is, understanding finance is a globalized world is difficult. Therefore, for a good financial product to be comprehensible is not only a nice touch, but rather an essential aspect for fintech to include.
Indeed, on a more sinister note, concepts like “subprime mortgages” and “securitized loans”, along with deliberately over-complicated mathematical formulae, were specifically used to obfuscate dubious practices within the banking sector pre-2008.
What’s more, case studies show that people actually understand and manage complex financial transactions rather well.
After the collapse of the banks, populations in Ireland and Iceland, for instance, resorted to community lending, where creditworthiness was mutually assessed and assigned with great precision without the need for traditional financial institutions.
Of course, this was tremendously inefficient. All this Irish and Icelandic money would have been far more productive in a bank where it could have accrued some interest, but it helps prove the point that laypeople are often far more competent with financial operations than the experts give them credit for. All they need is not to be led astray by an overzealous credit officer.
These are their life-savings we’re talking about, after all.
But all this does is return us to our initial paradox: How is ethical finance and banking to survive if they are not pushing those narrow margins and making lending money at higher interest rates?
Well, this is where we could perhaps be of some help.
Latam wants loans not lectures
I was rather relieved when Nicolas Shea, Founder of Chilean fintech Cumplo, pivoted slightly from the consensus: “Yes, education is a big issue, but the other half is the high cost of capital… Capital is lacking in a productive outlet.”
Indeed, a story told at the Finance Disrupted summit featured a New York-based Goldman Sachs executive who fretted that, worldwide, there was over US$1 trillion (that’s, US$1,000,000,000,000) in assets at zero percent gains.
Here is where credit-poor Latin America may hold the answer to increased profitability for financiers, alongside more ethical lending, without the need to victim-blame consumers with poor credit ratings.
I’ve been a bit gloom and doom about the financial sector, but this is not to say there are no good actors in fintech. There are many!
Indeed, these are the folks who are actively presenting solutions to the paradoxical questions posed above. The answers are certainly not easy.
Many people’s initial hunch to controlling the predatory instincts of lenders would be to turn towards regulators. A Colombian rep for social-impact VC, Adobe Capital, noted Colombia’s 30 percent usury rates as an example.
In this regime, it is up to lenders to use their own creativity to find solutions around this limit and towards profitability. But, with high margins, I felt this was a recipe for obfuscating risk—and 29 percent interest rates are still pretty eye-watering. Surely there was a more elegant solution?
So, I turned with interest towards the industry-based solutions to these problems.
VISA Mexico’s Chief Executive, Luz Adriana Ramírez, threw out an intriguing thought experiment:
“Take cash dependency versus digital transactions,” she said. “A shift from the first to the second option would move marginal costs to zero. It would be like a multi-billion dollar injection into the Latin American economy with just one step.”
Interesting, I thought. Who would have thought that, by promoting efficiency and reducing operational and transactional costs, a company wouldn’t have to choose between sacrificing its profits on one hand and its ethics on another?
In this regard, I was particularly pleased by one of the solutions on offer. Kueski—a Mexican fintech on one of the Finance Disrupted panels—proudly touted its overdue fees’ limits.
The fintech’s CEO and co-founder, Aldaberto Flores, made it clear that, after seven days of non-payment, late fees would stop being charged. Apparently, you could go 10 years without paying anything at all, and you’d only end up paying about 30 percent in fees.
It was that simple, and yet the concept felt really revolutionary. Tech-enabled finance that didn’t seek to bleed their customer dry. That was some of the most disruptive stuff at the Finance Disruptive Latam summit.
I left the event with a positive outlook for fintech in our region. It placed Latin America at the forefront of the financial revolution, not because it was a place where risk could be pawned off, but because it sat in a goldilocks zone of financial under-servicing and innovation.
The terrain was ripe for profit through increased innovation and investment, certainly not because its customer market is uneducated.
Indeed, it felt like those who needed wising up were the lenders; I mean, give Latin Americans consumers some credit.
Related articles: Tech and startups from Mexico!
-AG
