WORKWEEK

A lot of people wanted me to write about Web3 use cases, which…sure I guess I can take a stab at it over the next couple of weeks (the beauty of being my own boss is that I don’t answer to anyone, including annoying internet trolls). But there are more important things to talk about than settling lame Twitter debates. 

Yesterday was Juneteenth, a holiday dedicated to celebrating the emancipation of slaves in America. And despite slavery ended centuries ago, Black Americans still have a lot of structural disadvantages in the traditional financial ecosystem. 

Now before we dive too far in, I just want to acknowledge that it feels a bit weird that I’m an Indian guy writing about the financial plights of black people in America. But I feel like it’s an important topic, and I felt like writing about it, so I am. 

Two things are true: black people are woefully underfunded in the venture capital world, and fintech products have a outweighed positive impact on minorities. This juxtaposition is severely holding back the tech industry’s impact on underserved communities, and solving is starts with better access to funding for entrepreneurs. 

Fintech’s impact on minorities and in particular black Americans was abundantly clear during COVID-19 and the PPP lending program designed to help small businesses. As many of us remember, both traditional lenders and fintech lenders played a massive role in dispersing PPP funds. According to the New York Fed, black owned businesses applied for PPP loans through fintech companies at a significantly higher rate than other groups:

The application and approval process for loans are two different battles—the fact that black business owners applied to PPP loans through fintech lenders is consistent with other economic data from the program. Typically, studies say that borrowers go through existing channels and relationships they’re already familiar with—since many black business owners don’t have preexisting relationships with banks, they opted to work with fintech lenders instead. Because fintech companies have more modern methods of reaching customers (like, you know, through the internet instead of bank branches), the implication here is that fintech  lenders could reach prospective borrowers through methods they’re already familiar with, like a Facebook ad. 

But fintech companies didn’t just succeed in reaching black business owners, they also actually lent to them too:

As you can see from the chart above (also from the NY Fed), black business owners were approved for PPP loans through fintech lenders at a significantly higher percentage than through large or small banks, despite usually not having a pre-existing relationship with the lender. 

There are probably a few reasons for this, but it boils down to the overall benefits of financial technology: fintech companies have a better ability to lend money to a larger group of people by focusing on untapped data sources and reaching their customers in new ways. A NBER report backs that up: when banking processes are automated, they result in a higher rate of lending for black people, because the automation strips the loan process of any potential racial biases or discrimination. 

In a more recent report from April 2022 (coauthored by a friend of FTT, Ocrulus’s David Snitkof, and folks from NYU Stern) discusses the impact of automation on racial biases throughout the PPP loan process at length. Here’s a passage from the report (which you can read here):

“Among applications routed to fintech lenders, we observe no racial disparities in the chance of getting a PPP loan from that lender. In contrast, among PPP applications routed to conventional lenders, Black-owned firms were 3.9 percentage points (12.3%) less likely to obtain a PPP loan from that lender. Furthermore, Black-owned firms were 5.8 percentage points (15.9%) more likely to get no PPP loan at all—through Lendio or otherwise—when their application was routed to a conventional lender. These results are magnified when the application was routed to a small bank. Therefore, the least automated lenders appear the most likely to reject PPP loan applications from Black-owned firms, relative to otherwise similar firms with owners of other races. This represents an important real effect of automation: automation does not only affect the identity of the final PPP lender, but also the ability of Black-owned firms to obtain PPP loans at all.”

Fintech’s impact in facilitating loans to black owned businesses is clear. But what about consumers? Well, there’s data on that too. A 2019 FDIC report says that fintech companies haven’t completely removed biases in consumer lending but there are some benefits: 

“…Our findings with regard to the lower levels of discrimination of rejection rates in FinTech mortgage lending suggest that, in addition to the efficiency gains of these innovations, they may also serve to make the mortgage lending markets more accessible to African-American and Latinx borrowers.”

Essentially, while fintech companies don’t completely remove bias in consumer lending, the fact that it’s easier to apply for loans increases the competition and makes it easier for consumers to find the most affordable/cheapest loan available to them. And similar to other reports around lending discrimination, by removing the face-to-face aspect of lending, fintech companies remove a lot of the potential for racial bias too. 

A lot of fintech companies were designed with this problem in mind—most of financial technology is focused on markets and audiences that are typically underserved by traditional financial institutions. And in America that usually means minorities. 

There’s a huge structural problem, though. Black founders still account for a miniscule percentage of venture capital funding. Even more alarming is that after a record year, VC funding to black founders actually fell dramatically over the last year, according to Crunchbase:

This is fucked up on a lot of different levels: first, it’s a bit shameful for the industry considering there are so many new “diversity funds” rolling out. Both established funds and newer investors have been shilling their “diversity funds” or their minority focus, yet it looks like the data implies that things have gotten even worse. I wonder if championing diversity is a way to appease LP’s and make it easier to fundraise. LP’s probably eat that shit up, and there’s no repercussions if you don’t walk the walk, so to speak. 

Secondly, the more fucked up aspect that really irks me is the fact that there’s a massive potential to help people, and that potential remains unmet. I tend to support founders that have a unique insight into a problem or market; usually that means living a life that’s a bit more untraditional than most. If black founders are finding it harder and harder to raise, then that implies that VC’s aren’t taking the appropriate amount of risk to solve these challenges. Tristan Walker really illuminated this for me—Walker & Co only focused on products for black people. The company sold to Proctor & Gamble for a reported $20-$40 million by mainly catering to a highly specific demographic. 

Perhaps there are more similarities between applying for a loan and venture capital—both processes seem ripe for racial biases through a highly manual and face-to-face process. While VC’s like to say they’re altruistic and empowering a new generation of entrepreneurs, that generation tends to look a lot like themselves (read: Ivy League educated and white.) 

There are A LOT of problems left to solve in finance, but a lot of them will take the right founder market fit. If VC’s aren’t backing different types of founders, with different life experiences and from different backgrounds, we’ll end up regurgitating solutions to the same problems and, at the end of the day, not living up to the potential impact technology can have on underserved communities.