• CFRED CUHK Law

Fintech's Potential Impact on Consumer Banking and America’s Wealth Gap

Pamela Foohey – Indiana University Maurer School of Law;

Nathalie Martin – University of New Mexico School of Law

-- Income and wealth gaps in America have grown significantly over the past few decades. The United States now has more income and wealth inequality than any other developed country, and more than just before the Great Depression. Communities of color experience even starker income and wealth gaps. A lack of income and accumulated wealth push people to consumer credit to pay for unexpected necessary expenses and to smooth their consumption. In addition, research shows that communities of color pay more for this credit, such as home loans and education loans. They also are more likely to use alternative lending products, such as payday loans and auto title loans, as well as to use alternative banking services like check cashing. All of these products cost more than traditional banking and lending services.

Increased usage of consumer credit exacerbates wealth gaps, particularly in communities of color that have unequal access to debt. People are less able to convert their income to savings. In turn, expensive banking and lending services facilitate the redistribution of wealth from the low and middle classes to richer Americans. Indeed, America is in midst of the greatest redistribution of wealth from the poor to the rich in its history. Recent years also have seen a rise in fintech banking and lending providers and products, such as for student loans and small dollar lending, which have the potential to disrupt the consumer banking and lending sectors.

Our new article, Reducing The Wealth Gap Through Fintech ‘Advances’ in Consumer Banking and Lending, forthcoming in the University of Illinois Law Review, assesses the potential impact of these fintech banking and lending “advances” on wealth gaps in the United States. We focus specifically on three products as case studies of fintech innovations -- payroll cards, early wage access programs, and online automobile loans, including Uber’s short-lived car financing program. Fintech companies contend that their products and platforms will revolutionize how people’s financial lives. They promise tailored loans with lower interest rates and fewer fees. Reducing the cost of banking and lending could help people save more of their income, thereby slowing the growth of the wealth gap and even possibly chipping away at it.

Conversely, these “advances” could be exploited in ways that perpetuate racial and ethnic inequalities in banking and lending and could contribute to widening America’s wealth gap even further. For instance, some auto lending platforms partner with auto dealers and lenders, making these companies the platforms’ true customers, not consumers purchasing cars or taking out auto loans. Based on our analysis of these fintech innovations, we conclude that they are much more likely to entrench economic disparities and continue to enable the redistribution of wealth across American households.

We leverage our analysis of these new fintech innovations, as well as the history of racial and ethnic disparities in lending, to set forth hallmarks of banking and lending products that actually may help close the wealth gap by targeting Americans’ unequal access to banking and lending services (which we term “debt inequality”). With these requirements in mind, we conclude the article by evaluating recent proposals aimed at closing the wealth gap, focusing specifically on their potential to combat debt inequality.

Ultimately, fintech companies market their products as solutions to the problems that people previously have faced with banking and lending institutions, which only heightens the need for a comprehensive plan to address disparities in access to consumer credit. The need for this plan is even more critical in the wake of the coronavirus pandemic, as more people adopt online banking and lending services. Otherwise, debt inequality will continue to feed wealth inequality and will impede other efforts to help communities of color and lower-income Americans build their wealth.

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