Large tech companies have stepped up their claims that they can provide better, fairer financial services than traditional banks because of their superior technology and interest in helping underbanked Americans.
It's a common refrain in congressional hearings, conferences and private conversations.
“Being shut out of the financial system has real consequences for people's lives — and it’s often the most disadvantaged people who pay the highest price,” said Facebook CEO Mark Zuckerberg in his recent congressional testimony about Facebook’s Libra digital currency project. “The financial industry is stagnant and there is no digital financial architecture to support the innovation we need. I believe this problem can be solved, and Libra can help.”
This idea isn’t new — fintechs have been saying roughly the same thing since the beginning of their movement — but the claims appear to be getting louder and in some cases coming from companies that have questionable motives.
Take, for example, Uber Money. Peter Hazlehurst, head of Uber Money, said last week that his team’s mission is to get people “moving forward with their financial lives.”
He described the many financial products the ride-share company now offers to its drivers, including a bank account, debit card and mobile banking app all handled by Green Dot. Uber drivers can now get paid after every trip. He also floated the idea that Uber might eventually let drivers automatically save a certain amount per trip, rather than per month, and touted a $100 fee-free overdraft.
“It’s that kind of innovation that helps our drivers succeed,” he said. “We know with behavioral economics we can coach people in a subtle way to do the right thing.”
During his speech at the Money 2020 conference, Hazlehurst repeatedly hammered on the point that Uber drivers don’t make enough money to make ends meet.
But despite his pitch of financial services products designed to help them, he never suggested what would arguably help improve their financial situations most of all — paying them more. Uber doesn’t pay a minimum wage, offer time off or sponsor health insurance. Drivers have to pay for their own cars and gas expenses.
While Uber is an interesting example of a nonbank getting into banking, and probably a sign of where fintech is going, it doesn’t appear to be using its own resources to help its drivers achieve financial stability. Rather, it’s leaning on Green Dot, which provides the low-cost financial services it offers, and partners like Walmart that provide rewards on its card.
At the other end of this spectrum, at least in how it compensates employees, is PayPal.
Executives at the payment company, one of the first fintechs, also offer strong rhetoric around helping the financially insecure and democratizing financial services.
“Financial health and financial wellness is foundational to making our democracy work and to combatting the rise of populism,” said Dan Schulman, PayPal's CEO. “I think in technology — the explosion of mobile phones, the digitization of money — there’s a solution that can make a real difference in the way people manage and use their money and all of us have a responsibility, an obligation to address that. ... The goods and services we deliver should be imbued with social purpose.”
PayPal makes more than $1 billion in working capital loans every quarter, and 70% of those loans go to communities that have had a disproportionate number of banks close and are in low and medium income neighborhoods, he said. Schulman also said that within PayPal, he is committed to paying employees at or above market rate in every location and in every job title.
Crowdsourced salary data site Levels.fyi shows compensation for software engineers at PayPal starting around $110,000. At Microsoft, Adobe and Facebook compensation trends a bit higher. Capital One, JPMorgan Chase and Citi appear to pay a little less.
Still, Schulman acknowledged that many PayPal employees have trouble making ends meet at the end of the month.
“That is not acceptable for a company like PayPal,” Schulman said. “I am determined that as the leader of PayPal, if we aspire to become a great company, the only way to do that is have compassionate, engaged employees who are financially secure.”
Tech companies aren’t wrong when they say banks aren’t innovating fast enough, charge a lot of fees, and leave many consumers out of the financial system.
But when they say they’re the ones best suited to fix the system, it’s fair to raise some important questions.
For instance, many online lenders extend credit to consumers and small businesses who can’t get it at traditional banks. But the interest rates they charge tend to be much higher, sometimes at the level of payday lenders. In the final analysis, will their borrowers truly be better off?
Some fintechs also provide early wage access. In a pinch, such as a medical emergency or pay a utility bill in a difficult month, borrowing against future earnings can be a godsend. But if someone has been unable to save enough money to meet emergencies, is giving them more access to quick loans the best answer, or could it help them dig themselves a deeper hole?
Ethan Bloch, the CEO of Digit, the fintech that pioneered the concept of automated savings, has some healthy skepticism of some companies that claim to be interested only in the good of their customers.
“The thing for me that’s most helpful in sorting this stuff out, irrespective of what people say is their mission, is how they make money,” he said in an interview. “I think the people at a lot of these companies have good intent, but will they live up to it? I have a hard time believing they'll live up to it when they make money when people spend money.”
Facebook, for instance, makes most of its money through advertising that takes advantage of the information it stores about its users. Uber takes a large chunk out of every ride summoned on its app. PayPal gets a 3% fee per transaction. Most of the challenger banks, including Chime and Varo Money, get their revenue from interchange fees on their debit cards. Digit, by contrast, charges a monthly $5 fee.
“You have to make sure that the way you make money is aligned with your mission,” Bloch said.
To be sure, tech companies are bringing interesting innovations to financial services. Apple, for instance, shows its Apple Card holders their balance every time they try to use the card, defaults the user to paying in full, and provides weekly spending totals.
PayPal made person-to-person payments easy and doable and appears to be helping disadvantaged communities with its working capital loans. Many fintechs have brought lower-cost financial offerings to consumers, including basic, fee-free banking, useful views of spending and saving patterns and automated savings and loan payoff, among other innovations.
But there are tech companies trying to get into financial services that don’t have a track record of doing what’s best for their customers. Those companies’ do-good messaging must be taken with a big grain of salt.
Bankshot is American Banker’s column for real-time analysis of today's news.
