Bridging the Finance Gap for Women Entrepreneurs

9. Harnessing the potential of fintech to improve access to start-up finance for women entrepreneurs

Abstract

Fintech is reshaping financial markets through the emergence of new products, services, actors and marketplaces. These technological innovations hold the potential to reduce gender discrimination in start-up financing decisions and improve access to finance for women entrepreneurs. However, there are concerns that decisions made by algorithms will nonetheless have gender biases and that they will direct financial resources towards projects that are most likely to generate high levels of profit. Both would be detrimental for women’s entrepreneurship.

 

Digitalisation in start-up finance markets

Digitalisation is revolutionising financial markets by improving efficiency, reducing transaction costs and making markets more accessible, transparent and secure. Fintech – the contraction of “finance” and “technology” – can be defined as “technology-enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on the provision of financial services” (FSB, 2017[1]). In practice, this term is used to cover a wide range of financing services, new actors such as online challenger banks (i.e. new banks that typically rely on fintech products and services to compete with traditional banks), new marketplaces (e.g. online crowdfunding platforms) and the digital transformation of private equity instruments (i.e. digitalisation of investment assessment and monitoring, including the influence on investor objectives). The growth of fintech and alternative finance markets has changed the way that traditional actors and markets behave but has also created opportunities for technology companies to offer some financial services (e.g. Amazon, Alibaba, Alphabet, Apple, Facebook) (OECD, 2020[2]). The growth of fintech and alternative financial markets creates both opportunities and challenges for women entrepreneurs.

While fintech is still disrupting financial markets, there is evidence that women entrepreneurs have been relatively more successful in some emerging markets than in traditional financial markets. Most notably, women entrepreneurs appear to be more successful at raising funds on crowdfunding platforms than male entrepreneurs (Wesemann and Wincent, 2021[3]; Johnson, Stevenson and Letwin, 2018[4]). This is likely due to women entrepreneurs being more active in crowdfunding markets than in traditional financing markets. Another factor is that women investors are also more active in crowdfunding markets and there is evidence suggesting that women investors are more likely to support women-led projects, which is sometimes referred to as “activist homophily” (Greenberg and Mollick, 2017[5]).

Nonetheless, there is a risk that fintech could reinforce financial exclusion for women entrepreneurs. These new markets, products and services rely on algorithms that are potentially embedded with the unconscious gender biases of those who are designing, coding and using them, i.e. mostly men. In addition, there is a risk that a strong reliance on algorithms could direct funding away from projects that are not seeking high levels of profit, which would put women entrepreneurs at a disadvantage because they are more likely than men to operate smaller and less growth-oriented businesses. They are also more likely to operate businesses with a social mission (OECD/EU, 2022[6]).

In addition, there is a risk that funding decisions will be largely data-driven and that entrepreneurs will have fewer opportunities to interact with lends and investors. These face-to-face interactions are an important learning opportunity for women entrepreneurs where “soft” information can be exchanged and informal coaching can occur (Malmström and Wincent, 2018[7]). These missed opportunities likely have greater consequences for women entrepreneurs who, on average, have greater knowledge and skills gaps (OECD/European Commission, 2023[8]) and fewer opportunities to acquire such knowledge in their networks (OECD/EU, 2015[9]).

Role of public policy

Governments play a critical role in shaping the development of fintech. Some of the paramount concerns for governments are to ensure the integrity of financial markets, including maintaining financial stability, protecting consumers and investors from misleading and illegal transactions as well as reducing possibilities for money laundering and financial crime. Other major concerns include cybersecurity, promoting competition in financial markets and working with other countries to ensure that taxation is collected appropriately in the correct jurisdiction. In addition, they support innovation with various mechanisms including tax incentives and grants and often work with the technology companies in regulatory sandboxes to ensure that new products, services and markets are developed in-line with government and regulator policy objectives.

There is also a need for governments to ensure that entrepreneurship support programmes (e.g. training, coaching and mentoring, business counselling) are preparing women entrepreneurs to take advantage of these opportunities. This include informing them about different products, services and markets as well as potential pitfalls to avoid. This could be done by integrating basic training into existing programmes and developing more advanced training in collaboration with the private sector.

In addition, there are examples of governments leveraging some of these new tools in public funding programmes. For example, there are a number of crowdfunding platforms that have been established as a marketplace for specific groups of entrepreneurs and others where entrepreneurs benefit from government providing matching funding for finance raised on the platform.

Lessons from the policy cases

This report includes three country-level policy insight notes focused on exploiting the potential of fintech for improving access to finance for women entrepreneurs, covering Scotland (United Kingdom), South Africa and Spain. The first note on Scotland (United Kingdom) focuses on how the government could further leverage crowdfunding to support women entrepreneurs since this is one of the fintech success stories with respect to women’s entrepreneurship. The other two notes on South Africa and Spain examine fintech more broadly, discussing how to involve more women in the sector to increase the benefits for women entrepreneurs and how women-dedicated schemes could be used.

All three notes underline the potential of fintech for improving access to finance but note several conditions need to be met. These include having the appropriate regulatory framework in place that balances the wide range of policy considerations such as market integrity, consumer protection, financial literacy and “know your client” regulations. It is also important to invest with the private sector in developing the necessary infrastructure for these innovations (e.g. secure transaction processing) and related regulations. Finally, there is a need to have greater representation of women in the fintech sector at all levels (e.g. employees, leadership) so that the sector moves towards being more gender neutral. This will help to address some of the risks that fintech will re-enforce gender bias in funding decision because algorithms have been coded with a gender bias.

The following lessons for government policy can be drawn from these country notes:

1. Increase the availability of financial literacy training – specifically on fintech – for women entrepreneurs both as integrated modules in general entrepreneurship training programmes as well as specialised stand-alone training for those looking for more knowledge. A particular focus on debt and equity crowdfunding would be a good start given the success that women entrepreneurs have had on platforms in recent years.

2. Work with the private sector to look for ways to increase the participation of women in the fintech sector so that gender issues are given strong consideration as new products and services are developed. This includes supporting the development of women-centric fintech products and services. Governments could also consider when public funds could be dispersed through crowdfunding platforms, e.g. by offering matching funding when campaigns reach certain thresholds.

3. Closely monitor developments in the fintech sector to ensure that financial exclusion is not increased. This will require collecting more gender-disaggregated data in partnership with fintech companies and sector associations to monitor and report on trends. This could also help raise awareness of the risks of financial exclusion within the sector.

References

[1] FSB (2017), Financial Stability Implications from FinTech: Supervisory and Regulatory Issues that Merit Authorities’ Attention, Financial Stability Board, https://www.fsb.org/wp-content/uploads/R270617.pdf.

[5] Greenberg, J. and E. Mollick (2017), “Activist Choice Homophily and the Crowdfunding of Female Founders”, Administrative Science Quarterly, Vol. 62/2, pp. 341-374, https://doi.org/10.1177/0001839216678847.

[4] Johnson, M., R. Stevenson and C. Letwin (2018), “A woman’s place is in the… startup! Crowdfunder judgments, implicit bias, and the stereotype content model”, Journal of Business Venturing, Vol. 33/6, pp. 813-831, https://doi.org/10.1016/j.jbusvent.2018.04.003.

[7] Malmström, M. and J. Wincent (2018), “The Digitization of Banks Disproportionately Hurts Women Entrepreneurs”, Harvard Business Review.

[2] OECD (2020), Financing SMEs and Entrepreneurs 2020: An OECD Scoreboard, OECD Publishing, Paris, https://doi.org/10.1787/061fe03d-en.

[6] OECD/EU (2022), Policy brief on access to finance for inclusive and social entrepreneurship: What role can fintech and financial literacy play?, OECD Publishing, Paris.

[9] OECD/EU (2015), Policy Brief on Expanding Networks for Inclusive Entrepreneurship, OECD, Paris.

[8] OECD/European Commission (2023), The Missing Entrepreneurs 2023: Policies for Inclusive Entrepreneurship and Self-Employment, OECD Publishing, Paris, https://doi.org/10.1787/230efc78-en.

[3] Wesemann, H. and J. Wincent (2021), “A whole new world: Counterintuitive crowdfunding insights for female founders”, Journal of Business Venturing Insights, Vol. 15, p. e00235, https://doi.org/10.1016/j.jbvi.2021.e00235.