FinTech companies are seeing enormous investor interest on the back of promises of providing services to the financially underserved — a clear example of social enterprise that can do well by doing good. Yet while the industry has increasingly become synonymous with impact potential, fintech companies and investors have little insight into whether the industry is actually living up to its grand promises. Without more rigorous approaches to identifying and measuring impact, investors will continue to guess at the impact these companies. The authors provide several pieces of advice for how FinTech can better disclose their social impacts.
The financial technology (fintech) industry seems to strike investors’ goldilocks dream of doing exceptionally well while creating exceptional good. Based on the promise of positive social impact through financial inclusion, fintech has seen meteoric growth while also capturing more impact-related investment funds than any other industry.
In the last year alone, equity funding raised by fintech companies around the world 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.
This growth is driven in part by fintech’s potential for social impact at scale. Fintech executives promise to expand financial inclusion to the unbanked while strengthening financial health and promoting digital security. Companies like PayPal, Mastercard, Visa, and Shopify are embracing this promise, positioning their products and services as tools for financial inclusion and equitable economic growth. Investors are also embracing fintech’s impact potential: the industry currently receives approximately one quarter of all impact-oriented investment, more than any other industry and representing almost $250 billion in assets under management.
Yet while the industry has increasingly become synonymous with impact potential, fintech companies and investors have little insight into whether the industry is actually living up to its grand promises. Without more rigorous approaches to identifying and measuring impact, investors will continue to guess at the impact these companies have while fintech leaders pitch their products as saviors for society without necessarily delivering on that pitch. In this piece, we describe how fintech companies and investors approach impact today and the strategic opportunity to do more. We also provide concrete solutions for impact measurement and management.
State of Play in Fintech
The way firms design, manufacture, distribute, and sell their products has impact not just on the bottom line, but also on their consumers and society as a whole. A challenge, though, is that product impact — the impact on consumers and communities from using a product — can be idiosyncratic.
Through the Impact Weighted Accounts project at Harvard Business School, we have developed a framework to understand and quantify product impact as a means of addressing this challenge. The major barrier to execution, though, is that few companies disclose information related to product impact, focusing more on social responsibility initiatives than on impact from their core business.
This lack of information is particularly common among fintech companies, despite mission statements promoting positive impacts to customers. For instance:
- Visa has made a commitment to digitally enable 50 million small and micro businesses by the end of 2023, but Visa does not disclose its progress or outcomes from this initiative, and its last impact report was published in 2020.
- FIS’s mission is to help businesses and communities thrive by advancing commerce, but its disclosures have also been insufficient, with minimal data on core products’ reach among underserved consumers (e.g., small merchants) and core product outcomes.
- Mastercard has promised to connect 1 billion people (including 50 million micro and small merchants) to the digital economy by 2025, but its reporting has also been insufficient with minimal data on core products’ reach among underserved consumers and core product outcomes.
- Both PayPal and Shopify have been more transparent, but just barely. PayPal for instance, has provided data on core products’ reach among small- and medium-sized businesses but is missing data on underserved individual consumers and core product outcomes. And Shopify has released data on core products’ reach among merchants outside urban centers and in emerging markets, but has not disclosed data on other underserved groups (e.g., small and medium businesses) and outcomes.
What’s Left on the Table
In the current disclosure landscape, it is much more common for firms to treat issues of impact as potential risks as opposed to opportunities, so it is not surprising that mission statements and impact-related disclosures are misaligned. But correcting this misalignment provides opportunities for firms to better align their mission with their operations and allows investors to make informed decisions.
For fintech companies, as capital starts to become scarcer, product impact disclosures can enable differentiation, helping companies win customers and investors, especially in the fast-growing impact investing category. These firms can also improve impact management on material issues as a means of driving growth, innovation, and profit. This process creates a virtuous cycle: product iteration and innovation to support a more diverse and financially healthier customer base drives business.
Harnessing Fintech’s Impact Potential
The good news is that there are clear ways in which fintech companies and investors can begin to advance impact measurement and management, and these strategies can be applied beyond the fintech industry to any firm seeking to identify and strengthen its impact.
1. Parse specific impact goals that are aligned with revenue models.
Many fintech companies identify broad goals like equitable economic growth without identifying the specific impact areas best aligned with their core products and services. For example, financial health may be more about disruptive products, whereas goals of financial inclusion may be more about affordability and delivery channels at scale.
Similarly, few companies identify and report on product outcomes by key demographic groups (i.e., by race/ethnicity or by gender). If the industry fails to track demographic data, it will lose out on both growth and impact opportunities.
2. Experiment with approaches to quantifying social impact of products.
Based on the Impact Weighted Accounts project, fintech companies can begin to quantify product impact in ways that are rigorous and comparable. We have identified a preliminary approach for fintech-enabled transactions and compared PayPal and Shopify given sufficient, albeit still limited, public data.
Analysis reveals that product impact can vary meaningfully between fintech companies, with PayPal’s impact driven by affordability of services and Shopify’s impact driven by access among small and medium-sized businesses, a group traditionally underserved by financial services. Such quantification efforts can help investors make investment and engagement decisions while helping fintech leaders manage toward greater impact.
3. Champion standards for financial inclusion and health.
Financial inclusion and financial health are difficult outcomes to define and measure, and they remain relatively elusive among existing standards bodies. Fintech companies can partner with the International Sustainability Standards Board and expert intermediaries focused on financial health, like the Financial Health Network, to develop actionable and meaningful outcomes metrics.
4. Embrace interim metrics on the path to outcomes.
There is inevitably a lag in being able to claim outcomes based on corporate actions taken today. Given this lag, firms can identify compelling interim metrics (e.g., relative affordability of products for underserved groups, uptake for financial literacy tools built into core products) and engage external assurance processes.
5. Establish flexible systems.
What is most important will vary by stakeholders and over time, as investors and companies develop more nuanced impact theses. Given this evolution, a company’s approach to product impact must be flexible enough to address stakeholders’ evolving questions and goals.
Fintech companies can do this by managing data relevant to a range of product impact topics, including financial inclusion, financial health, and digital stewardship. Fintech companies can also work to organize disclosures such that metrics follow impact headlines and can be readily bundled and unbundled.