Reading the trades the other week, I came across the following announcement:
SAN FRANCISCO–(BUSINESS WIRE)–Feb. 3, 2021– Visa (NYSE:V) today announced a partnership with First Boulevard, a digitally native neobank focused on building generational wealth for the Black community. First Boulevard will be first to pilot Visa’s new suite of crypto APIs, which will enable their customers to purchase, custody and trade digital assets held by Anchorage, a federally chartered digital asset bank. The pilot will serve as a key first step in supporting API capabilities that help additional Visa clients access and integrate crypto features into their product offering, and is anticipated to launch later this year.
This reflects a broader industry shift towards legitimizing so-called ‘crypto-currencies’. Major incumbents like Visa, PayPal, Chase, and more are all rushing to announce their support of digital currencies, and allowing customers to invest and transact with them. I’ve already laid out why I believe ‘crypto-currencies’ are a delusion, but I think its worth briefly dissecting why establishment providers have suddenly begun promoting them.
More importantly, I think its worth using this example to examine broader industry hypocricy around ‘financial inclusion’.
the growing crypto-madness
Today it is nearly impossible to find anyone who hasn’t heard of bitcoin or its peer ‘crypto-currencies’. They are hyped everywhere from Fox News to the NY Times. Auction houses are setting sales records on digital art, sold via ‘crypto-currencies’ and banks are rushing to offer customers the option to invest in ‘crypto-funds’. Even major, publicly traded companies like Tesla and Square have invested in these ‘assets’. Just in the past three months bitcoin’s price has tripled from ~$20,000 to ~$60,000. Is the market finally realizing the value of privately created digital currencies?
Or instead are the retail investors the ones being taken for a ride? Could it be that the Elon Musk and other influential figures are artificially pumping up the price out of self-interest? With more than 70% of all bitcoin is controlled by 2% of bitcoin holders, ‘crypto-currencies’ don’t seem to be living up to their original promise of democratized finance. Instead, they are rife with money laundering and are considered a generally poor investment.
why industry has bought into crypto
Major players in financial services are far too savvy to have been taken in by today’s ‘crypto-currency’ mania. Just recently Bank of America published an investment note stating ‘there is no good reason to own bitcoin’. The real motivation is the longer play - major governments worldwide are aggressively developing and piloting Centrally Backed Digital Currencies (CBDCs) which leverage similar infrastructure as ‘crypto-currencies’. While CBDCs' true scale, use cases, and impacts are yet to be determined, major players would be foolish to be unprepared at their arrival. In this sense the financial sector’s investment in digital tokens is an expected cost of doing business.
‘Crypto-currencies’ have turned an otherwise unnoticed evolution in banking infrastructure into a popular culture ‘meme’. With this development the financial sector has perceived an opportunity to leverage current mania to develop, refine, and pay for the infrastructure needed for handling CBDCs. If investors lose out, potential reputational damage is diluted by (i) the broader industry’s participation and (ii) the competitive advantages gained by being prepared for the introduction of CBDCs. All in, catering to today’s crypto-manaia appears a sound business decision.
the problem with promoting crypto
The trouble is recklessly promoting use of risky and worthless ‘crypto-currencies’ harms the least financially educated investors with the most to lose.
Sure, those really wanting to invest in ‘crypto-currencies’ would do so anyhow without the financial industry’s participation. However, legitimizing ‘crypto’ in establishment banking only makes it easier for the ill-informed to lose their money. Similar to how the brokerage app Robinhood pushes reckless investing behavior, financial services as a whole now aims to essentially profit off of encouraging poor choices with ‘crypto’.
All adults should be free to make their own investment decisions. However, financial services cannot ignore how financial ability varies across society. Research has revealed major distinctions across racial groups wherein people of color - especially African-Americans - are on average less financially literate than other races. These differences also extend across socio-economic lines, in that the poor are more likely to make worse financial decisions than their wealthier peers. It is worth noting (and no coincidence) these same populations have long been ignored, disserved, and generally ‘underbanked’, by mainstream finance.
When the financial establishment enables consumers to invest in assets it considers ‘worthless’, who do they expect to take advantage? Certainly not those who know better. Where does advertising and hype end and predatory behavior begin?
where financial inclusion stumbles
This brings us back to the headline Visa announcement. Visa has launched a set of bank services enabling consumers to buy, hold, and sell ‘crypto-currencies’ which are known by the industry to be worthless. Further, Visa is piloting this service with a newly formed bank which caters specifically to the historically underbanked African-American community.
Advocates of so-called ‘crypto-currencies’ may argue this advantages African-Americans with the same investment opportunities as their peers. Even were it a bad investment, they would argue, surely African-Americans have the right to fritter away their money as easily as anybody else. I understand this perspective. In a fair world, this makes sense.
I just can’t buy into the concept. While undoubtedly the intentions here are for the best - empowering African-Americans to invest in a new space - ‘crypto’ is known as an extraordinarily risky asset. The former CEO of Mastercard has even called out the dangers of promoting ‘crypto’ to the historically underbanked:
“Can you imagine someone who is financially excluded trading in a way to get included through a currency that could cost the equivalent of two Coca-Cola bottles today and 21 tomorrow? That’s not a way to get them included - that’s a way to make them scared of the financial system.”
There is no reason our industry should ever knowingly push underserved communities risky products and services, especially if they represent the latest trend. Instead we must focus on building solutions and tools which build rather than destroy the wealth of the underserved.
More broadly, ‘Financial Inclusion’ is an increasingly common refrain across the financial services industry. Greater participation in the formal banking system - the thinking goes - means individuals can better build wealth, participate in the formal economy, and improve their own and their community’s circumstances. The trouble is profit cannot be untangled from this core mission - more consumers engaging with financial services directly translates to increased revenues.
Indeed, Financial Inclusion in practice shows mixed success. For all the startups and good work in the space, the term is growing ever-more abused as a cover for exploitative business operations. The traditionally underserved (e.g. poor) around the world are now pitched as attractive ‘new markets’ wherein fees and interest are growing at a steady clip. Similar to how financial services are leveraging installments to induce impulse-purchases amongst those who can’t afford them, most privately offered financial services catering to the underserved are geared towards maximizing provider profit rather than meeting the actual need. Does anyone need a loan with 5,800% APR? In Kenya the issue is of national proportions as fintech startups have entrapped users in perpetual debt. I’m not sure if given the chance for a do-over, those consumers would opt-in again for this version of ‘financial inclusion’.
Similar to how ‘greenwashing’ has become used by organizations to cover lacking environmental efforts, financial services is developing its own method of hyping ineffective financial inclusion initiatives. I hereby declare this corporate-speak ‘financial fauxclusion’. Hopefully this term will stimulate discussion on how unthoughtful attempts to boost economic participation can have unintended consequences at best, and entrench poverty at worst.
High risk necessitates high fees. This is a fair law of finance. However, let’s not pretend profit-driven firms catering to the underserved are doing so out of purely charitable reasons. Recognizing that, let us innovate by building new financial services which grow rather than extract wealth, like enabling real-time payment of hourly wages and enabling the purchase of fresh water in developing markets. We can do much better than hyping ‘crypto’ to those who need it the least.
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