By Manuel Pereira Arias
When we think of traditional finance firms, we don’t usually associate them with social change. Banks and insurance companies are often portrayed as heartless, money-making machines. The fast-growing social FinTech sector, however, might help change our perspective on this matter. Fintech companies committed to social change not only provide users with exceptional customer service, but also dedicate themselves to improving the lives of thousands of people around the globe.
The financial services industry has changed drastically since the beginning of the 2008 economic crisis. General resentment towards traditional financial firms and their inability to adapt to new customer needs facilitated, in part, the emergence of the FinTech industry. According to an EY Fintech Adoption study, a third of all digitally-active users are using FinTech products, up from 15% in 2015. The industry is likely to continue growing in the following years, as an increasing amount of people embrace the digitalization of banks and gain access to basic financial services through technology. FinTech is one of the hottest industries today in terms of short, mid and long-term growth potential.
When speaking about social FinTech, it is necessary to distinguish between de facto social companies and those with strong social corporate responsibility (CSR) policies. On the one hand, social companies are those whose primary purpose is to solve a pressing social or environmental issue by employing market mechanisms. On the other hand, although any company can implement CSR policies within its core business model, their main objective is not to effect social or environmental change. Consequently, social FinTech companies have a much larger transformational potential (all things equal) than traditional companies with a social edge.
The social FinTech sector also helps debunk the myth that for-profit financial organizations cannot have social impact as their primary objective. According to a recent study conducted by Morgan Stanley, impact investment has risen by almost ten percentage points since 2012, and over 70% of “impact” businesses generate more profits than traditional businesses. Consequently, it is possible for a company to engage in traditional financial operations and generate a profit while contributing to the advancement of society.
This “social” appeal is the main reason why more and more customers are being drawn to social FinTech products every year. Although there is a lack of data in the sector due to its recent development, studies show that social FinTech firms will continue growing in numbers, and will most likely develop a stronger presence in underdeveloped nations. According to Finnovista, a FinTech accelerator, social FinTech companies could capture 30% of Mexico’s financial market in just ten years. China, India and Brazil, three nations with exceptionally high percentages of underbanked and unbanked populations, are amongst the top five countries in the world in terms of FinTech adoption rates.
Although social FinTech firms can be found in all corners of the world, they are mostly present in developing nations. Fintech companies in the Global North tend to focus on traditional banking services such as money transfers, insurance and online banking, which are already offered by regular financial entities. Those in the Global South, on the other hand, focus on serving the underbanked. They tend to provide microfinance, payments and crowdfunding services. In many cases, FinTech companies operating in developing nations grant access to financial services to its users for the very first time. This has made them particularly appealing to countries in Africa, Asia and Latin America, and can therefore be found primarily in these continents.
This regional imbalance is attributed to the much greater necessity for basic financial services in the underdeveloped world. According to the World Bank, approximately 2 billion adults worldwide do not have access to formal financial services. Providing basic and safe access to remittances, savings accounts and mobile payment services can go a long way in many undeveloped nations. By providing these services, social FinTech companies are helping introduce thousands of people to the banking system.
Creating FinTech startups based on the premise of effecting social change is an ambitious idea. Yet as FinTech begins to captivate users all over the globe, so does its social counterpart. This innovative sector, which is currently disrupting the markets of many developing nations, has just kicked-off. Yet there is no doubt that it will be making headlines in the near future. Whether it is by helping the unbanked obtain their first savings account or by effecting social change through personalized financial services, social FinTech is here to stay, and is positioned to grow exponentially.