May 2, 2018
Stanford Social Innovation Review on Fintech Risks in Low Income Countries
As much as one-third of the global population does not have access to a bank account. They remain excluded from financial institutions. A recent article in the Stanford Social Innovation Review highlights Bamboo Capital Partners and their efforts to leverage Fintech to open up financial opportunities for the world’s marginalized population.
Over the last few years, Bamboo Capital Partners invested in peer-to-peer lending companies in countries such as Colombia, Tanzania and Mexico. Their efforts aim to democratize access to financial tools that enable investing, obtaining insurance and saving. They also see some of the inherent risks that the digitization of financial services poses for low income people.
AI and Over- Lending
The article emphasizes that increased frictionless financial services, often powered by software or AI, tend to target low-income borrowers usually by over-lending saddling the borrower with more debt than they can repay. Digitization of lending can lead to over-standardization that in turn could create more exclusivity for financing.
Algorithms Inhibiting Access
Removing the human element also removes discretion in lending to some extent. If a borrower fails to meet the criteria of a lending algorithm, they may become barred from access to financing or credit. The selection process and criteria behind traditional lending practices tends to be more transparent than the methodologies behind algorithms. By nature, algorithms and software backing Fintech innovations are closely guarded elements of intellectual property.
On aggregate, Fintech possesses the power to democratize access to financial tools and investing. It poses greater opportunities than threats for the developing world. Associates at Bamboo Capital Partners acknowledge these potential risks as investors and innovators in the Fintech space. The article aims to illuminate some of the unintended consequences of digitizing finance as some of these methodologies may hurt the very populations startups and nonprofits aim to serve. They emphasize when developing Fintech products to always focus on the end user. It’s important to innovate responsibly and take into account the vulnerabilities of your products could pose to your end-users.