Tracking the Social Impacts of the Fintech Industry – Part I

Tracking the Social Impacts of the Fintech Industry – Part I

Part I: Impact weighted accounts

Though promises of financial inclusion are aplenty, are fintech companies really even executing their promises of a positive social impact? Read on to know more:

That the fintech market is set to be the game-changer for the future is reflected squarely in the forecasts for its growth. According to Yahoo Finance, the industry is expected to grow at an exceptional CAGR of around 26.2% to reach a valuation of $936.51 billion through 2030. Currently, they have a collective market value of almost $5 trillion globally. Its real success, however, will lie in whether the industry can strike the balance between ‘doing exceptionally well while creating exceptional good’.

Based on promises of positive social impact and increased levels of financial inclusion, fintech has seen exceptional growth whilst also managing to capture more impact-related investment funds than any other industry in the world. In fact, through the last year, the volume of equity funding raised by fintech firms around the world have nearly doubled. The Harvard Business Review writes:

“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.”

Harvard’s Impact Weighted Accounts Framework

To this end, the way firms sell, distribute, manufacture, and design products affects not only their own bottom line but also consumers and society as a whole. Yet, questions around its potential remain as investors have little insight into whether or not the industry will truly live up to its grand promises. More rigorous approaches to identify the impact thus become absolutely crucial at this point.

As a means of addressing the issue, Harvard Business School embarked on its ‘Impact Weighted Accounts’ project in 2019 to develop a framework that would understand and quantify product impact. The mission of the project was to drive financial account creation to reflect a firm’s financial, social and environmental performance.

Challenges, however, were a fair few owing to the difficulties related to gathering data. Only a few companies disclose information on product impact focusing on social responsibility initiatives rather than impacts from their core businesses. Consider again the examples of Paypal, Visa, Mastercard, and Shopify:

  • Visa made a commitment to digitally enable 50 million small and micro businesses by the end-2023, however, no progress or outcomes from this initiative has been reported since their last impact report in 2020.
  • MasterCard promised to connect a billion people (including 50 million micro and small merchants), to the digital economy by 2025. Again, the reporting has been insufficient with minimal data supplied.
  • The HBR writes: “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.”
  • US-based fintech giant FIS too promised to help businesses and communities thrive by advancing commerce, but disclosures have been insufficient.

[Read about how fintech’s impact potential can be harnessed in Part II]

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