Fintech has a diversity problem. The killing of George Floyd and so many other Black people, and the systemic racism their deaths have laid bare, requires that the industry own up to the lack of Black representation in fintech and do something about it.
Many sectors of the economy have too few Black leaders. But fintech’s entire supply chain is overwhelmingly white - from the investors who fund startups, to the entrepreneurs leading the startups, to the end users the startups target.
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Data specific to fintech is nearly impossible to come by, but the overall picture for tech is indicative. Only 3% of venture investors were Black as of 2016, according to a Harvard Business School analysis, and fewer than 1% of founders were Black. While people of color don’t only build businesses to serve other people of color, diversity at the top is more likely to yield strategies, products and marketing aimed at diverse users.
The numbers, though, are only part of the story. Fintech has an even greater responsibility than other industries to address its diversity problem because, from the beginning, the sector promised to democratize access to finance by serving the underserved. In America, the underserved are disproportionately Black and brown people.
The idea that advances in technology present an opportunity for financial services companies to better reach and serve lower-income people and people of color dates back twenty years. “Technological change is creating profitable new opportunities for financial services companies to bring lower-income consumers into the economic mainstream by ‘making the market work,’” according to one of the key findings of a 2002 Brookings Institute report.
Since the iPhone was invented in 2007 and fintech was born, many entrepreneurs have wrapped themselves in the flag of “democratizing access.” Prosper founder Chris Larsen talked about the peer-to-peer lending model as democratizing access to credit. Jack Dorsey originally described Square as democratizing access to payments for small businesses. Jon Stein talks about Betterment as democratizing access to investing.
Indeed, those entrepreneurs and other fintech success stories have created new technologies, platforms and business models that have allowed a broader array of people to participate in the financial system. But as often happens with venture-backed companies, the investor demand for hockey-stick growth pushes entrepreneurs to move upmarket, to take less risk. And, as venture capitalists opened up their spigots to fintech investments over the last few years, more and more entrepreneurs focused on building businesses that solved problems of convenience versus access. Twenty years in, fintech has increased access for some, but not all.
Through the Financial Solutions Lab, my organization runs an annual challenge to identify and support fintech startups focused on solving financial health challenges, especially those of low- to moderate-income consumers and historically underserved communities. Despite efforts to expand our outreach and cultivate a diverse pool of applicants, we have struggled to fund Black entrepreneurs. Our data suggests that, of the 43 companies we have invested in over the last six years, about half had at least one diverse founder and one third had at least one female founder. Less than 10% had a Black founder.
One challenge we have identified is the need to invest even earlier in the startup life cycle in order to build a more robust pipeline. The Financial Solutions Lab typically invests in companies that already have a product in market, but Black founders need investment at the ideation and incubation stages, where personal networks and the availability of “friends and family” seed money disproportionately favor white men.
We have built a network of organizations around the country to help us recruit applicants of color for our programs, which helps. But ultimately, one-to-one relationships are critical. For example, one of our alumni helped curate a dinner with dozens of professionals from his network, mostly people of color, whom he believes are primed to start their own company and who have first-hand experience of many of the financial health challenges we seek to address. Connecting these individuals with the right mix of resources, capital and support is one way to diversify the pipeline.
A growing number of companies and organizations are working to tackle diversity throughout the fintech supply chain, more than I can name here. BLCK VC was founded in 2018 to increase the number of Black investment professionals in venture capital to 400 by 2024. Kapor Capital, which was founded with the belief that the lived experience of founding teams from under-represented backgrounds provides a competitive edge, has been at the forefront of investing in women and people of color. Zeal Capital (for which I am an unpaid advisor) is similarly focused on investing in diverse management teams that are building businesses to bridge the nation’s wealth and skills gaps.
These efforts and others are good, but they are not enough. Investors must do what it takes to train and hire Black partners and find and invest in Black entrepreneurs. But even that isn’t enough. Silicon Valley needs to look at its culture through the eyes of Black people to understand just how unwelcoming it is. Venture capital is ultimately a relationship business, and until investors diversify their personal networks, it will be challenging for them to make successful shifts toward diverse hiring and investing.
Failing to do so, however, will demonstrate that fintech’s promise to increase access has been a sham. Georgetown law professor Chris Brummer summed it up best: “If fintech fails to innovate where it counts the most, it will be doomed to repeat the failures of the very system it seeks to replace.”
