The regulatory path to equitable fintech

As much as it may want to, fintech can’t change the larger financial landscape on its own. Working in lockstep with lawmakers, regulators, and other stakeholders, however, gives the industry an opportunity to shape regulations in its image.

Recalibrating priorities

Creating a more equitable financial landscape requires a first-principles discussion on what fintechs are solving for—and, crucially, how they’ll go about doing it. While missions and marketing copy may discuss “democratizing access” to key financial instruments and products, attempting to do so while maximizing shareholder profit may inadvertently prevent more vulnerable and resource-strapped groups from accessing wealth-building products and services.

Of course, fundamentally changing the kinds of metrics fintechs—and the larger economy—solve for is much easier said than done. Regardless, we may see uniquely equity-focused fintechs lead the charge with the help of the right funders and stakeholders. Regulators may even catalyze this shift if they grow to value social outcomes over short-term financial returns.

Expanding alternative data

Equity-focused fintech often approaches existing financial gaps from new, innovative angles. Lending solutions are increasingly deploying alternative data sources beyond FICO scores in their underwriting operations. But, without the right guardrails, these sources can inadvertently entrench biases rather than mitigate them.

While many private players have a market-driven incentive to use alternative data responsibly—using positive social outcomes as a brand differentiator and channel for growth—major risks remain. Lawmakers and regulators should define what sources of alternative data can be used in financial decisions, regulate the collection and storage of this data, and consult with privacy and equity advocates throughout the drafting process.

Classifying new financial instruments

The Covid-19 pandemic induced a series of curious financial trends, such as the meme stock craze and the crypto boom and bust. These episodes proved that lawmakers were behind the curve in regulating the financial landscape, and, in the process, allowed everyday consumers to lose their life savings to misleading schemes.

Bringing a more equity-focused approach to fintech also requires minimizing vectors for malfeasance and exploitation. Shifting away from post-hoc enforcement and properly defining and regulating nascent financial sectors is a critical—and overdue—part of this goal.