Understanding Financial Innovation
The clue’s in our name: working with financial innovators is at the heart of the Lab’s work. They provide the proof that building a better financial system is possible and they point the way to the wider changes that are needed in the system.
We’ve been lucky to work with some of the most pioneering start-ups around, many of whom have gone on to real success – such as All Street, EngagedX and Numbers for Good. Now it’s time for us to support the next generation of gamechangers in finance: the people and the projects that will accelerate the shift to a financial system that puts people and planet first.
We have a distinctive take on financial innovation. For us, it’s not the same as fintech, although there’s often an overlap. We see three levels of innovation:
- Innovation that creates greater efficiency without fundamentally changing the way finance works – essentially finding new ways to create more profit more quickly. Some fintech developments will fall into this category, even technologies that enhance the ‘customer experience’. We call this status quo innovation and we don’t find it terribly exciting, no matter how snazzy the technology.
- Innovation that changes the relationship between the customer and the business. We call this disruptive innovation and we find it more interesting, because it has the potential to shift power relationships within the system. Crowdfunding as a whole is a good example: by removing traditional intermediaries it connects people more closely to the assets they invest in, which can increase transparency and control.
- Innovation that changes the relationship between the financial system and wider society. This sort of innovation has the potential to redefine the purpose of finance and shift power relationships across the system. It includes, for example, crowdfunding that takes an explicit value position on the world it wants to create (such as crowdfunding for renewables or community ownership); personal loan businesses that see their purpose as supporting, rather than exploiting, financially vulnerable households; community currencies that exist to support the local economy; or mutuals with democratic business structures that put ordinary people in charge. We call this transformative innovation and it’s the most exciting form of innovation we see.
Just as fintech isn’t necessarily transformative, transformative innovation does not need to be technologically cutting-edge. Transformative potential comes from the purpose of the business, the way it relates to its stakeholders and the way it makes money. Mutuals and community finance organisations aren’t usually known for their digital superiority, but this isn’t a barrier to an innovative business model – although it may well be a barrier to retaining customers in the future.
That’s why, in our selection criteria for the Fellowship scheme, we focus on the business model and the motivation of the innovators, rather than any particular technology or subset of the financial system.
We keep an open mind about exactly the types of start-ups that will become Fellows (if we could predict them, they probably wouldn’t be that innovative) but we also list some examples of the design features we know represent a more democratic, responsible and fair way to do finance, relative to each Fellowship theme (for example, financial health).
One thing we already know about our Fellows is that the challenges they face will be enormous. But by building a community of innovators, connecting them to experienced entrepreneurs and raising the profile of their work, we’ll give them the best possible chance of success.