Fintech’s Race Problem

Chris Brummer is a Georgetown law professor and host of the Fintech Beat podcast, produced by CQ Roll Call. You can also subscribe to his free newsletter for weekly posts like this.

One reason I, along with many people of color, have found fintech to be especially interesting has to do with its potential — in the right hands — of dramatically increasing financial opportunities for people who have long been underserved in the financial economy. And I have been constantly awed and inspired by so many people in the sector who have found new and ingenious ways to further the cause of equality — for women, the young, people in rural areas, and minorities.

That said, the George Floyd killing by police in Minneapolis is one of those gut wrenching, painful moments — now hitting home far too often — requiring everyone to take stock as to where we are, and what more can be done, as we work for a more inclusive society.

And the fintech community has this responsibility as well.

We know the headline numbers in the private sector don’t look good: The Harvard Business Review has reported that fewer than 2 percent of tech executives are black, and only 5.3 percent of tech professionals. And with fintech accounting for perhaps 10 to 15 percent of tech employment overall, the gross numbers of full time, African American fintech executives and professionals could be in the hundreds, not thousands.

And for those of us on the East coast and the rest of the country, it’s important to underscore that this isn’t just a San Francisco phenomenon. My adopted home town of Washington, DC offers a lesson in dramatic contrasts: even here, in a city with the largest and best educated black professional class in the country, only four of the top twenty (private) venture capital shops as identified by Crunchbase appear to have any African American executives.

With this situation the norm nationally, it’s hardly surprising that women and minority owned startups struggle to attract capital and funding. Besides the obvious bias problem, there may be literally no one at the helm of firms dispensing capital that understands the markets that emerging tech entrepreneurs may be trying to serve.

Public sector failure

But the private sector is only part of the problem.

Politicians on both sides of the aisle have systematically failed to appoint African Americans to positions of leadership at the regulatory agencies best suited to guide, encourage, and ultimately supervise the fintech industry.

Instead, they’ve looked to their congressional staffs, where far fewer people of color serve, and skip larger outreach. Indeed, according to my research, only ten African Americans (of 327 total regulators) have ever served on a financial regulatory agency since the New Deal.

This absence of diverse leadership has in turn trickled down and infected rulemaking and supervision more generally. The Consumer Financial Protection Bureau, for all its troubling recent decisions on policing auto and student loan discrimination, suffered complaints from black staffers as early as 2014 about discrimination within the agency and the absence of blacks in leadership positions. Some described it as a plantation. And if you look at the staffs of the SEC’s commissioners, Republican or Democrat, none of the counsel assisting in policymaking are African American. From what I understand from civil servants across town, I’d see the same with the other agencies in town, from the staffs of FTC commissioners to the advisors of the Federal Reserve governors.

Fintech’s Truly Systemic Risk

Such numbers appear wildly anachronistic, and out of place for an industry whose businesses invariably succeed or fail on their ability to scale. Historically, African Americans have been locked out of lending and credit building opportunities that make up the cornerstones of inclusion and wealth building. As a result, they are far more likely to lack credit histories (and high scores), financial advice and information necessary to build wealth.

This makes people of color — and African Americans in particular — especially important stakeholders in the fintech conversation. And, precisely because of their lived experience with the failures of traditional financial services, they may well prove to be the ones with the best ideas and intuitions for helping the industry evolve and flourish. After all, how can you build a better lending app for assessing and scoring people’s credit risk if you don’t understand what their spending priorities are? And how can you develop standards for “plain English” disclosures and marketing for prospective online customers if you don’t know the consumer or investor you’re trying to talk to?

I’m a terribly optimistic person. Probably annoyingly so. And I’d like to think of most people as neither good nor bad, just confused and sometimes a little myopic. But in this instance, the causes really don’t matter. 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. And we would have all let a once-in-a-generation opportunity to upgrade rails for economic inclusion go to waste.

Brummer is co-founder of Fintech Beat, CQ Roll Call’s deep dive on how technology is transforming the banking and financial services sector. He is a professor at Georgetown Law, a member of the Commodity Futures Trading Commission’s Subcommittee on Virtual Currencies, and a member of the Consultative Working Group for the European Securities and Markets Authority’s Financial Innovation Standing Committee.

Want to learn more? Listen to the podcast Fintech Beat, and a recent episode on Ethical Algorithms.

Correction: An earlier version had mentioned Michael Powell’s membership in the FTC; he was instead a member of the FCC.