How fintechs are tackling racial and gender wealth gaps

Financial technology, or fintech platforms, have the opportunity to confront racial and gender wealth inequality by creating opportunities for wealth building and investing that support the needs of systemically underserved individuals and communities, according to data from Commonwealth, a national nonprofit building security and opportunity for financially vulnerable people.

Despite the growing number of fintechs democratizing access to investing and wealth building, there are glaring wealth disparities in the U.S. with women and Black, Indigenous and people of color. For example, 65% of low- and moderate-income working women are interested in investing, yet only four in 10 are currently investing, according to the research. 

That disconnect represents a significantly untapped market for the wealth management industry while widening the racial and wealth gaps, according to a panel of fintech experts during a webinar hosted by Commonwealth in partnership with fintech startup accelerator MassChallenge FinTech. 

Enterprise financial institutions are slated to play a key role in closing the wealth gap, said Axel Thibon, Founder and CEO, Wizest. The challenge is having traditional financial institutions see growing fintech startups as collaborators, not competition. 

“There is no risk on the side for the bigger financial institutions to partner with fintechs,” Thibon said. “They have gains, they can access a new type of client to which they can cross sell other services that the fintech does not offer.” 

Moreover, financial institutions can learn from fintechs that emulate applications from popular social media platforms to become more in sync with consumer behavior, Thibon said. 

However, fintechs have to move beyond partnering with larger financial institutions in wealth management that see their platforms as only a client acquisition strategy, said panelist Calvin Williams Jr, CEO and founder of Freeman Capital, the only Black-owned, automated wealth management platform registered by the SEC. Instead, fintechs must be the example that proves to legacy systems that there are business models that can both promote social good and generate revenue, he said. 

“If we're going to do social good, we have to integrate social good into our business models because just leaving it for nonprofits, which can't step up, it's not going to solve enough of the problem,” Williams said. “So we have to reimagine how to make profit in a way that also adds social good and is inclusive, so that these people, our people, our country, can feel comfortable trying to build wealth.”

Then it’s on the larger financial institutions to make a collective effort to think about modernizing their own business models, Williams said. “These banks are massive, it has to be a collection of folks from within the bank to help change the culture, which takes decades because none of these banks were started yesterday.”

BARRIERS TO ENTRY

It’s worth acknowledging the barriers that have historically made it more difficult for women and minority groups to start investing and wealth building, Williams said. 

“There is a bias in this industry that people who are people of color or people who are not as financially savvy are also lower income,” he said. “Due to the barriers that have happened in this society, we have folk who are making great money and have no wealth.” 

Many of these barriers are systemic, especially around access to resources, said Julianna Samper, senior innovation manager at Commonwealth. “It will take a focused approach and group effort to address, but what we see are opportunities for fintech to address market access, investor identity and actionable knowledge.” 

For example, with market access, the fintech ecosystem has done a great job of lowering minimum requirements and cutting out trading fees, Samper said. “But then what we see is that the participation is not nearly where it should be, and so we have to examine the next barrier, which we identified as investor identity.” 

Basically, there is a lack of role models, Samper said. “For example, the majority of women of color, myself included, did not grow up learning or hearing about investing,” she said. “So it becomes a situation where you count yourself out because you don't even think that this is for you.”

Black, Latinx and female-led households disproportionately experience financial insecurity due in large part to longstanding, systemic racism and gender discrimination, according to Commonwealth. Women and single mothers of color with household incomes under $80,000 are a significant untapped market for investing that have not yet been served well by traditional investment companies.

Enter Public.com, a fintech that’s combining social networking and investing to advance financial literacy. Commonwealth and Public.com announced last Tuesday a partnership that will combine Commonwealth's research with financially vulnerable people and Public.com's social approach to investing. 

Public.com leverages a community feel with the app’s 1 million users, made up of 40% women and 45% people of color. When users open the app, the first thing they see is other investors talking about their investments and personal finance.  

Together, Commonwealth and Public.com will pilot a product to a group of more than 300 women of color for six months, designed to empower women of color, an underserved segment, to invest as a channel towards closing the racial and gender wealth gap and making wealth building accessible to all, according to the announcement. 

"It is clear that labor income alone will not close the gender and racial wealth gap,” said Commonwealth co-founder and executive director Timothy Flacke in a statement. “We are focusing on investing in the stock market through this partnership because of a lack of participation from women of color — and the opportunity to change by innovating fundamentally more inclusive product design.”