Let me begin this blogpost with what I think is a necessary preamble. Having lived in the San Francisco Bay Area for the past several years, I’m well aware of the problems posed by profit masquerading as purpose. Tech company after tech company has claimed that their product is going to “make the world a better place” and then gone on to design an app that helps improve the lives of the already rich or built a sleek new gadget that 90 percent of the world can’t afford. There’s nothing wrong with companies that are out to make money, but it’s always a little unsettling when these companies try to wax over the profit motive with a thin veneer of false humanitarianism. Let’s call a spade a spade and a dollar a dollar.
With this in mind, it’s perhaps only natural to be skeptical of the claims that the new ways in which finance and technology intersect will help improve the lives of people around the world. While there are certainly concerns to be mindful of, I think these changes, broadly termed FinTech, also offer exciting possibilities. Here are what I see as a few of the promises and potential pitfalls of FinTech.
- Improved access to banking services. Globally, there are around 2 billion people who currently don’t have a bank account. These individuals are left in the inconvenient position of having to pay for most things in cash and the insecure position of having to keep most of their savings in cash. Because a bank account is often necessary to take out a loan, this also means that those who are unbanked have an extremely hard time accessing credit. Changes in technology, primarily the rise of mobile banking, are already offering solutions to this problem. In the past 5 years, 700 million people around the world have signed up for a bank account and the number of account holders in the developing world has risen from 41 to 54 percent in that same time period. The World Bank’s goal of providing universal access to financial services by 2020 seems a lofty one, but the rapid progress made so far is encouraging.
- Better rates on financial products. Traditionally, when someone has wanted to borrow money, he or she has had to go to a bank and apply for a loan. This meant that the person was often bound to whatever interest rate the bank in his or her community charged. The internet has given rise to peer to peer (P2P) lending which is beginning to change that. With services like Kiva and Lending Club, a group of individuals can now pool money together and lend it to another person, anywhere in the world, cutting out the bank entirely. The interest rates on these loans are generally much lower than what would have been charged by a bank, opening up lines of credit that didn’t previously exist. Recent pushes around open banking will also change the way in which consumers interface with traditional banks. Instead of going to a bank for a loan, in the future, I think we will see widespread use of websites where a consumer can go through hundreds of loan offers from banks and pick the right one for them. This will lead to a paradigm shift where banks compete for the consumer.
- The ability to easily and cheaply send money around the globe. In 2015, migrant workers sent an estimated $582 billion to family and friends living in their home countries. These payments, known as remittances, have a huge impact on the economic development of the countries that receive them. In countries like Nepal, remittances can account for up to one-third of the total GDP. Banks have traditionally charged rates of over 10 percent to facilitate these exchanges, taking large chunks out of the money refugees are trying to send home. New, online products charge rates that are about half of this which means that more money can get in to the hands of the people who need it and enter the local economy. Blockchain, a payments technology which allows consumers to safely and securely send money without an intermediary, will improve the process of sending remittances even further. All of this combined is putting tremendous pressure on banks and traditional money transfer services to improve their rates.
- Safety and soundness. The last thing that most people want to talk about when discussing exciting new technologies is what the regulatory response to those technologies should be, but there is an important role for regulators to play in the evolution of FinTech. The information consumers share with financial companies must be guarded carefully and proper security protocols need to be established to ensure that personal information doesn’t fall in to the wrong hands. Regulators must also make sure that banks and bank alternatives aren’t selling consumers on snake oil financial products. We’ve seen the effects of too lax a regulatory environment in places like China where the government is now having to play catch up and shut down hundreds of peer to peer lending platforms that shouldn’t have been allowed to exist in the first place. In one of the most notorious cases of this, P2P lender Ezubao stole over $7 billion from consumers before the Chinese government realised it was a Ponzi scheme.
- Threat of discrimination. The increased use of big data and artificial intelligence (AI) that has accompanied the rise of FinTech has allowed many financial processes to be expedited and led to financial services that are more tailored. While this is a good thing, there is also a risk that financial decisions will start to be automated and based on assumptions rather than an individual’s profile. For example, a financial algorithm could deny an applicant a line of credit based not on their individual credit worthiness but an aggregation of the credit scores of the neighbourhood in which they live. In the U.S., banks used to draw red lines around communities on a map in which they didn’t want to lend, regardless of the individual applicant’s profile. This practice was subsequently outlawed as discriminatory, and we must ensure that similar standards apply to FinTech companies, even if they are not otherwise considered banks.
FinTech has already dramatically altered the financial landscape and will continue to cause tectonic shifts in the industry. The promises of FinTech are exciting, but we must ensure that regulation keeps pace with the speed of innovation and be careful that these new technologies, as they move forward, aren’t leaving people behind.