The Innovator’s Dilemma is challenging financial nonprofits. They must adopt disruptive technology, become data driven and follow their clients to the digital world to remain relevant. The problem is that these organizations are not experienced nor built to manage the risk of large investments in technology and organizational transformation. They face the same disruptive forces that large corporations did years ago but without the vast resources to experiment, hire experts and invest for the longer term.

The organizers and sponsors of Boston Fintech Week 2019 deserve major props for putting mission finance front and center for the 1,000 plus fintech professionals in attendance at the annual September event. Commonwealth, a Boston-based nonprofit, spearheaded daily sessions on the impact of fintech on low and moderate consumers in several areas which were tied together and highly informative.  That’s the good news. The bad news is that fintech still doesn’t seem to be doing much for the financial well-being of low and moderate income households. 

Consumer finance is now overwhelmingly digital and data-driven. While buzz-words like Financial inclusion and financial health are ubiquitous in marketing materials and startup pitches, most fintech companies seem to lack sincerity or a viable business model to address the needs of less wealthy households. 

The fact is that most “inclusive” startups that were founded over the last few years seem to have quickly disappeared or now offer online products that are targeted to high income consumers or are actually harmful to low and moderate income consumers. And there is this . . . last week Bloomberg published an article entitled America’s Middle Class Is Addicted to a New Kind of Credit which documented how the nation’s payday loan industry, with its crippling, triple-digit interest rates, has transformed itself into today’s $50 billion online installment loan business. So congratulations Fintech world, you’ve invented predatory lending!

It turns out that the digital world is pretty much like the physical world in that the quickest way to make a buck with low and moderate income consumers is still with predatory products, hidden fees and unneeded services. Even worse, artificial intelligence and other data-driven technologies are making it far easier to identify and target vulnerable consumers. Unfortunately, the promise of the Internet to provide information and tools for making good financial decisions has been overwhelmed by bad guys selling harmful products.

While fintech,data and open banking initiatives may lower the cost of providing financial services  overall, I still don’t believe that the LMI fintech market in the foreseeable future can deliver the kind of returns venture capitalists and other investors in fintech are generally hoping to achieve. If less wealthy households are going to benefit from fintech, it will be because of the efforts of mission-driven organizations and private sector investments that include social impact and responsibility in calculating returns.

It took 20 years but the threat posed by technology to corporate America as described in Clay Christianson’s book “The Innovator’s Dilemma” has been addressed by the banks and large companies that learned to thrive with technology. Those that didn’t are gone. Banks today know how to manage strategy and decision-making around threatening disruptive technology.  Many even spend small fortunes on idea labs and platforms just to get a front-row view of the latest ideas in fintech no matter how far-out.

The Center for Financial Security and Asset Funders Network, recently published their 2019 bi-annual report and survey of nonprofit financial coaching.  The report states that:

Technology has been lauded as a mechanism to increase accessibility of coaching and as a potential way to scale coaching while reducing the cost to an organization. The financial services sector as a whole has seen tremendous growth in the number of firms providing technology-based services, and the number of consumers being reached with some digital financial tools is reaching into the millions. Yet, despite well-documented growth in the broader financial services sector, the Coaching Census has recorded no significant increase of technology use since the first wave (report) in 2015.

While risks and challenges abound for nonprofit fintech, the opportunities are even greater. Organizations can use data and technology to scale from meeting the needs of thousands to millions of people, provide broader personalized services and deliver those services in real-time. Data and technology can empower nonprofits to become life-time partners of clients in their financial health as well as helping people avoid the crises and critical problems that now often bring them to the door today. Nonprofits can also help clients manage their personal and financial data and connect them with high quality financial products that are optimal for their needs.

Speaking at Boston Fintech Week, Mae Watson Grote, CEO of The Financial Clinic, wisely pointed out that mission-driven organizations actually have two businesses - first, to serve their clients and second, to get the investments and donations necessary to keep their organizations afloat. To adapt to the digital world, mission-driven organizations not only have to address the challenge posed by The Innovators’ Dilemma, they also have to convince philanthropists and funding sources to support technology development and the resources they need to transform themselves into data-driven organizations that deliver primarily digital services.

How do nonprofits survive and thrive in digital finance?

1. Acknowledge the problem. Recognize the human problem. It isn’t man or machine but people’s roles will have to change - which is always difficult. Smart empathetic people will be empowered by technology - not replaced.

2. Cooperate and work together. Even the largest banks and financial companies have joined forces to cope with technology investment. Individual financial nonprofits do not have the expertise, experience and data they need to transform themselves. But they do have the ability to collaborate and cooperate to achieve the scale they need. As long as resources, initiatives and projects remain fragmented and siloed in individual organizations, there will be no progress

3. Funding sources and the private sector must recognize the problem and provide funding, expertise, data and technology to cooperative groups of nonprofits to maximize the value of these contributions.

Tim Duncan was formerly Head of Technology and Senior Policy Analyst at the CFPB. aiFinancialCommons.org is building a centralized collaborative platform with technology, expertise, data, tools, governance and other resources that can be used, re-used and built upon by impact organizations, institutions and researchers to massively help people achieve financial well-being and stability.