Fintech

Investment tech won’t solve systemic wealth gaps, but it’s a good start

Comment

Miniature people standing on piles of different heights of coins. The idea of a growing income gap between individuals.
Image Credits: hyejin kang (opens in a new window) / Getty Images

Dean Sterrett

Contributor

Dean Sterrett is the co-founder, COO and head of product at LEX Markets, a commercial real estate securities marketplace for institutional and traditional investors.

Robinhood founder Vlad Tenev recently sparked controversy when he told the New York Times that lower participation in equity markets by younger Americans “ultimately contributed to the sort of the massive inequalities that we’re seeing in society.”

In his 2015 book “The Economics of Inequality,” Thomas Piketty argues that when the growth rate of invested capital outpaces the growth of GDP (and the average per-capita earnings), income inequality will increase. Where Vlad Tenev missed the mark is neglecting to note that while participation in equity markets is key to building wealth, a prerequisite to investment is having capital to invest in the first place.

Structural changes (including access to affordable health care, job training, higher wages, expanding infrastructure, and other public policy initiatives) are necessary to combat systemic inequality. But innovations in fintech can supplement these policies by providing tools that can give people access to wealth-building investment opportunities at the individual level. While these advancements aren’t a substitute for the macro forces necessary to bring societal change, they can help provide one opportunity to remove barriers individuals have faced.

The age of fintech and the millennial investor

Despite recent controversy around the zero-commission stock trading revenue model, fintech investment apps have given retail investors unprecedented access to the stock market. This is especially true for younger investors, who lag behind other generations in terms of expected wealth.

Popular fintech apps like Acorns, Public and Robinhood have created a niche for millennials and Gen Z retail investors looking to begin investing in the stock market. From January to April, Robinhood alone has acquired more than three million funded accounts, with an average age of 31.

Similar trends are emerging in other asset classes that have traditionally not been accessible to retail investors. For example, according to EY, real estate crowdfunding investments have doubled to more than $8 billion since 2016. Commercial real estate in the U.S. was valued at around $16 trillion in 2018. That’s about half the size of the U.S. stock market during the same time period.

Real estate is a critical asset class for wealth building: Approximately 90% of millionaires have made their money from investments in real estate. This can partly be explained by the fact that the asset class is so siloed: Historically, only wealthy investors could access these opportunities.

A few fintech companies have emerged in the real estate space in attempts to widen access to the asset class, but to-date none have truly opened up the market to the everyday investor.

Lowering the cost of participation

So what does this mean? If everyone can access real estate investment opportunities, can they all become millionaires? Probably not. But if circumstances allow anyone to access the tools and educational resources to achieve financial stability, then acquiring wealth becomes much more plausible.

Financial literacy and access are key components in the establishment of stable financial footing. Also important is eliminating many of the costs associated with being in the lower earning brackets — often referred to as the “poverty tax.”

An industry-wide push toward commission-free trading is a prime example of fintech removing these costs of participation. A $10 trade fee on a $100,000 trade is nominal, yet that $10 becomes significant for a share purchase of $100; you would need a 20% gain just to cover your transaction costs. Yet the zero-commission and fractional share models haven’t seen widespread adoption in real estate investment markets.

Of all traditional asset classes, real estate remains one of the costliest to participate. The adoption of zero-commission and low-cost share models have the greatest potential to echo what is happening in the stock market: Opening doors to everyday investors.

What’s next?

It’s only a matter of time before we see the junction of real estate and fintech take shape.

This is one area where technology can make a material difference. According to a study from the University of California, Berkeley, fintech solutions like algorithmic lending reduce some of the barriers that have made it difficult, historically, to purchase a home.

The study found that leading fintech products don’t completely solve the problem, given the deeper underlying systemic issues. However, they do reduce rate disparities by more than a third.

As these companies open up new investment opportunities and reduce the buy-in costs, we will hopefully see a greater share of wealth being accumulated by those who create the value that underlies equity investments: everyday Americans.

Based on the history of limited access and the current absence of investment opportunities, it’s a fair argument that exposure to new wealth-building tools and financial literacy — in a tech-powered, millennial-friendly way — can help solve the barrier-to-entry problem and open up access to more stable investments.

With over 24 million users across Stash, Acorns and Robinhood — many of them overlapping — there’s no shortage of interest in tech-enabled investing. The average Acorns investor, for instance, is 29 years old and makes $50,000 a year — a far cry from the accredited investor’s minimum salary of $200,000.

Don’t be surprised to see these new investors seek out holdings in alternative assets like real estate, energy and more. It’s all about access, quality of offerings, education and user experience.

Fintech founders often like to overstate the level of social good their products can bring. We, as two real estate fintech founders, believe that we can help individuals on a person-by-person micro level, but larger structural change outside of tech is also necessary if we want to see real, widespread improvement. It goes without saying that tech alone won’t change deeply embedded structures, but it sure can open a lot of doors.

Correction: A previous version of this article had said that Robinhood has added six million first-time investors since the pandemic hit. A spokesperson contacted us to say “Robinhood added 3 million funded accounts from January to April.”

More TechCrunch

OpenAI is removing one of the voices used by ChatGPT after users found that it sounded similar to Scarlett Johansson, the company announced on Monday. The voice, called Sky, is…

OpenAI is removing ChatGPT’s AI voice that sounds like Scarlett Johansson

Copilot, Microsoft’s brand of generative AI, will soon be far more deeply integrated into the Windows 11 experience.

Microsoft Build 2024: All the AI and hardware products Microsoft announced

Hello and welcome back to TechCrunch Space. For those who haven’t heard, the first crewed launch of Boeing’s Starliner capsule has been pushed back yet again to no earlier than…

TechCrunch Space: Star(side)liner

When I attended Automate in Chicago a few weeks back, multiple people thanked me for TechCrunch’s semi-regular robotics job report. It’s always edifying to get that feedback in person. While…

These 81 robotics companies are hiring

The top vehicle safety regulator in the U.S. has launched a formal probe into an April crash involving the all-electric VinFast VF8 SUV that claimed the lives of a family…

VinFast crash that killed family of four now under federal investigation

When putting a video portal in a public park in the middle of New York City, some inappropriate behavior will likely occur. The Portal, the vision of Lithuanian artist and…

NYC-Dublin real-time video portal reopens with some fixes to prevent inappropriate behavior

Longtime New York-based seed investor, Contour Venture Partners, is making progress on its latest flagship fund after lowering its target. The firm closed on $42 million, raised from 64 backers,…

Contour Venture Partners, an early investor in Datadog and Movable Ink, lowers the target for its fifth fund

Meta’s Oversight Board has now extended its scope to include the company’s newest platform, Instagram Threads, and has begun hearing cases from Threads.

Meta’s Oversight Board takes its first Threads case

The company says it’s refocusing and prioritizing fewer initiatives that will have the biggest impact on customers and add value to the business.

SeekOut, a recruiting startup last valued at $1.2 billion, lays off 30% of its workforce

The U.K.’s self-proclaimed “world-leading” regulations for self-driving cars are now official, after the Automated Vehicles (AV) Act received royal assent — the final rubber stamp any legislation must go through…

UK’s autonomous vehicle legislation becomes law, paving the way for first driverless cars by 2026

ChatGPT, OpenAI’s text-generating AI chatbot, has taken the world by storm. What started as a tool to hyper-charge productivity through writing essays and code with short text prompts has evolved…

ChatGPT: Everything you need to know about the AI-powered chatbot

SoLo Funds CEO Travis Holoway: “Regulators seem driven by press releases when they should be motivated by true consumer protection and empowering equitable solutions.”

Fintech lender SoLo Funds is being sued again by the government over its lending practices

Hard tech startups generate a lot of buzz, but there’s a growing cohort of companies building digital tools squarely focused on making hard tech development faster, more efficient and —…

Rollup wants to be the hardware engineer’s workhorse

TechCrunch Disrupt 2024 is not just about groundbreaking innovations, insightful panels, and visionary speakers — it’s also about listening to YOU, the audience, and what you feel is top of…

Disrupt Audience Choice vote closes Friday

Google says the new SDK would help Google expand on its core mission of connecting the right audience to the right content at the right time.

Google is launching a new Android feature to drive users back into their installed apps

Jolla has taken the official wraps off the first version of its personal server-based AI assistant in the making. The reborn startup is building a privacy-focused AI device — aka…

Jolla debuts privacy-focused AI hardware

The ChatGPT mobile app’s net revenue first jumped 22% on the day of the GPT-4o launch and continued to grow in the following days.

ChatGPT’s mobile app revenue saw its biggest spike yet following GPT-4o launch

Dating app maker Bumble has acquired Geneva, an online platform built around forming real-world groups and clubs. The company said that the deal is designed to help it expand its…

Bumble buys community building app Geneva to expand further into friendships

CyberArk — one of the army of larger security companies founded out of Israel — is acquiring Venafi, a specialist in machine identity, for $1.54 billion. 

CyberArk snaps up Venafi for $1.54B to ramp up in machine-to-machine security

Founder-market fit is one of the most crucial factors in a startup’s success, and operators (someone involved in the day-to-day operations of a startup) turned founders have an almost unfair advantage…

OpenseedVC, which backs operators in Africa and Europe starting their companies, reaches first close of $10M fund

A Singapore High Court has effectively approved Pine Labs’ request to shift its operations to India.

Pine Labs gets Singapore court approval to shift base to India

The AI Safety Institute, a U.K. body that aims to assess and address risks in AI platforms, has said it will open a second location in San Francisco. 

UK opens office in San Francisco to tackle AI risk

Companies are always looking for an edge, and searching for ways to encourage their employees to innovate. One way to do that is by running an internal hackathon around a…

Why companies are turning to internal hackathons

Featured Article

I’m rooting for Melinda French Gates to fix tech’s broken ‘brilliant jerk’ culture

Women in tech still face a shocking level of mistreatment at work. Melinda French Gates is one of the few working to change that.

1 day ago
I’m rooting for Melinda French Gates to fix tech’s  broken ‘brilliant jerk’ culture

Blue Origin has successfully completed its NS-25 mission, resuming crewed flights for the first time in nearly two years. The mission brought six tourist crew members to the edge of…

Blue Origin successfully launches its first crewed mission since 2022

Creative Artists Agency (CAA), one of the top entertainment and sports talent agencies, is hoping to be at the forefront of AI protection services for celebrities in Hollywood. With many…

Hollywood agency CAA aims to help stars manage their own AI likenesses

Expedia says Rathi Murthy and Sreenivas Rachamadugu, respectively its CTO and senior vice president of core services product & engineering, are no longer employed at the travel booking company. In…

Expedia says two execs dismissed after ‘violation of company policy’

Welcome back to TechCrunch’s Week in Review. This week had two major events from OpenAI and Google. OpenAI’s spring update event saw the reveal of its new model, GPT-4o, which…

OpenAI and Google lay out their competing AI visions

When Jeffrey Wang posted to X asking if anyone wanted to go in on an order of fancy-but-affordable office nap pods, he didn’t expect the post to go viral.

With AI startups booming, nap pods and Silicon Valley hustle culture are back

OpenAI’s Superalignment team, responsible for developing ways to govern and steer “superintelligent” AI systems, was promised 20% of the company’s compute resources, according to a person from that team. But…

OpenAI created a team to control ‘superintelligent’ AI — then let it wither, source says