A lot has been written about the fact that access to financial services, or more elementally, money, is a lynchpin that enables people to participate and prosper in the economy. The business of money is undergoing a significant and sustained amount of innovation which has the potential to widen economic participation funnels. Creating on-ramps for our most underserved populations, which almost by definition are under or unbanked, increases prosperity for all, lowers friction and enhances pathways. This is good for business and society. I have been privileged to witness this potential in a career with chapters as an investor, entrepreneur, and policymaker and currently as a venture capitalist at Fenway Summer.
My first job was flipping burgers at a McDonald’s for $3.35/hour. That is a very tough way to make a living, trust me. I always smelled like pickles and grease and getting dispatched to deal with overflowing toilets were real lowlights. Character building in full effect, no question. About 1 in 10 Americans would agree because that many of us have worked there at some point in our lives and for most, it’s a short and temporary stint. What’s my point? Glad you asked: The United Nations estimates that more than 1 billion people live on less than $1 a day and more than double that struggle on less than $2 a day. Think about that for a second. What I earned all those years ago in one shift at one of the lowest paying jobs in the United States is what twenty seven people at the bottom of the pyramid live on for a whole day. They overwhelmingly exist in overcrowded urban centers or in isolated rural areas, are poorly educated, don’t have access to health care and have perpetually sporadic and inconsistent incomes. Most people think about Sub-Saharan Africa or South Asia when they think extreme poverty, but as a Trustee of the Pan American Development Foundation, I have seen it first hand in our hemispheric neck of the woods.
In 2010, UK’s Department for International Development found that there was a clear link between access to financial services and the ability of households to invest or buy things, everything from education to fish tackle. Those investments, even tiny little ones, lead to growth and the commensurate ability to earn higher incomes. This is a cycle that could be infinitely scaled with technology. Using a tech-enabled lens, not a grant-giving or a traditional economic development lens to look at the democratization of financial services and capital access shifts the paradigm. These lofty ambitions start to seem remotely doable with the smart application of technology.
Just one of many technologies being applied to these financial challenges, blockchain, has massive potential to disintermediate (read: lower the cost of) financial services as well as macro and micro supply chains' inefficient, noise-ridden and hackable value transfer constructs. This technology involves open and completely distributed databases that keep and update transaction records efficiently, permanently and automatically. They are also immutable. That immutability lends with an ability to securely record everything of value that is underpinned by a transaction. This is basically everything when you boil it down to "ones and zeroes" including one’s financial and actual identity. Value is always tied to an identity, so the ability for everyone to have one becomes a building block to effect a world in which economic participation in broadly shared, by all. In the purest sense these building blocks are attributable to the application of technology to financial services.
While the potential for fintech innovation is immense, barriers on the demand and supply side continue to persist. And if you widen the purview to include a rung or two above "the bottom of the pyramid" discussed previously, the numbers are staggering. The combined wealth of the world is about one quarter quintillion dollars, yet the richest 62 people have as much wealth as half of the world and the top one percent's (about 75 million people's) wealth equals that of the other 99% (6.75 billion people). Mind boggling for sure and while wealth creation is a good thing, its extreme concentration has dire consequences.
In the US alone it is estimated that 60 million people are un or underbanked. Connectivity alone is a massive barrier, even in our own country where the digital divide mirrors the economic opportunity divide. On the positive side of the ledger, the logic behind the potential is easy to grasp: if financial inclusion is one of the keys to economic growth and tech-driven innovation provides the most promising way to achieve financial inclusion, cracking the code to serve the un and underbanked is a huge economic and social opportunity. Many of the companies in our firm's portfolio touch on these themes. A few examples include companies that enable consumers to save money smartly, help people afford a middle class lifestyle and bridge the digital divide, provide sustainable alternatives to payday loans for those seeking to establish, strengthen, or rebuild their credit , provide taxi drivers in Uganda solutions to afford vehicles, and offer bank solutions for low and moderate income populations. Cross border transfers, simplified data analytic constructs, value exchange simplification, nimble asset and liability repositories and neural networks all have great appeal individually. Collectively their potential is boundless but policy makers and regulators must be vigilant to ensure that the stability of the financial system is preserved while allowing for these great innovative strides.
The world’s GDP clocks in at over $100 trillion and that is a big number, but the global economy is far from firing on all cylinders. Imagine how much more economic activity would happen if we responsibly leverage financial technology. Tackling persistent economic and financial inclusion challenges for the billions of people and the hundreds of millions of businesses that are on the sidelines is at the top of the list of most world leaders. The level of innovation in financial services today rivals other globally significant and life changing innovations. Oil, steel, microchips, jet engines and mobile networked devices are examples of seismic innovations. Their impact on humanity have been oversized and my sense is that this type of transformative potential applies to fintech and its clear nexus with the under and unbanked.
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Note: This article was recently published on LinkedIn as has been slightly edited.
