Fintech’s radical promise
Marion Labouré is a senior economist at Deutsche Bank in London and a lecturer at Harvard University. Nicolas Deffrennes is a consultant, investor, entrepreneur and lecturer.
Below, Marion shares 5 key insights from her new book with co-author Nicholas Deffrennes, Democratizing Finance: The Radical Promise of Fintech. Listen to the audio version – read by Marion herself – in the Next Big Idea app.
1. Fintech opens up new opportunities for decision makers.
Financial technology, or Fintech, is a global equalizer that can reduce inequalities between countries that emerged during the first industrial revolution. In developing countries, Fintech provides access to basic banking, payment and insurance services, which are critical to helping people escape poverty traps. In developed countries, Fintech can also have an equalizing effect by offering new investment tools to the middle class and alternative loan solutions to the underserved.
Taking lessons from the banking sector, governments, including in smaller countries such as Estonia, are increasingly adopting blockchain technology to handle significant amounts of data and improve public services. Groundbreaking Fintech enabled digitization of citizen notification, tax declaration, small contracts for business, banking and government transactions. These innovations pave the way for better and faster services for citizens.
Politicians can create positive technological ecosystems. The most striking case study is Aadhaar, which is India’s ambitious program to tackle the huge ID shortage. Prior to these efforts, less than half of India’s population had a valid ID, allowing for high levels of corruption and fraud. This national effort (which was compatible with the banking system’s mandatory identification process) enabled a fairer distribution of social benefits. It has also helped the banks to open more accounts. Later, it became the basis for Fintech companies to offer new services. Regulation is key, and governments must promote innovation, not hinder it.
“Fintech innovations pave the way for better and faster services for citizens.”
A case study on M-Pesa, a mobile payment system in Africa, shows how telecoms operator Vodafone has worked with regulators. Despite systemic risks, such as the potential for alternative currencies, the company and regulators worked together to bring a local payment solution to some of the most remote parts of Kenya.
2. Greater efficiency for back-office functions.
The second wave of the modern technological revolution largely automated the input, storage and analysis of data. Computing is a critical part of the banking and insurance sectors, employing thousands of people to handle middle and back office processes. The management consultancy firm McKinsey estimates that around 50 percent of today’s work activities in these sectors can be automated. They also estimate that more than 30 percent of the activities in six out of 10 occupations today can be automated.
Blockchain offers the next generation of computing. A decentralized trust system enables blockchain to avoid data duplication when services, transactions and contracts are handled by multiple banks. Automation and other improvements in banking data processing will continue to evolve and challenge today’s organization.
3. Artificial intelligence is gradually overshadowing front office jobs.
The first wave of automation was mainly aimed at banking and middle office functions. Now, new algorithms and other forms of AI are replacing people in higher-paying, more sophisticated front-office jobs. For example, some high-frequency traders are being replaced by optimized algorithms. In the US stock market and many other advanced financial markets, around 70 to 80 percent of total trading volume is now generated through algorithmic trading.
“Advances in software development and artificial intelligence will continue to replace pathways to value chains and key roles in banks.”
Big data also makes it possible for companies to automatically identify consumer needs, thus intervening in the role of relationship-based branch managers and account managers. Advanced screening by value and risk algorithms also allow banks to detect risk exposures and loss potentials in asset portfolios. Through this approach, they learn information faster than with traditional human-based risk management. Another affected job is actuarial work in insurance companies, which is increasingly supplemented and partly replaced by risk algorithms.
In the long term, advances in software development and artificial intelligence will continue to replace pathways to value chains and key roles in banks.
4. A revolution that removes credit cards for digital payments.
The coming decade will see a rapid increase in digital payments, leading to less payment via plastic credit cards. In the next five years, mobile payments are expected to account for two-fifths of in-store purchases in the US, which is four times the current level. A similar growth in digital payments is expected in other developed countries. However, the rate at which the use of cash and plastic cards declines will vary from country to country.
Many customers in emerging markets switch directly from cash to mobile payments without ever owning a plastic card. Digital payment platforms will increasingly be able to collect highly personal data from consumers. This data will be monetized and increasingly valuable, allowing these businesses to significantly reduce any fees they charge – perhaps to near zero.
“Many customers in emerging markets are switching directly from cash to mobile payments without ever owning a plastic card.”
Developments in China provide a preview of the future of payments. The country is developing a world-leading digital payment infrastructure. The value of online payments is equivalent to three quarters of China’s GDP, which is almost double the share in 2012. Today, almost half of in-store purchases are made with a digital wallet, which is more than in any other country.
5. The central bank’s digital currencies are on the horizon.
The question is no longer ifbut when. About 90 percent of central banks are developing, launching, researching or piloting their own digital currency. According to the Bank of International Settlements, central banks (representing roughly one-fifth of the world’s population) are likely to issue a general purpose digital central bank currency (CBDC) within the next two years. A large majority of countries may well have a CBDC in four or five years.
Emerging economies are likely to lead the race. They are likely to move faster and have higher adoption rates than advanced economies. For example, the Bahamas, the Eastern Caribbean and Jamaica have all launched a CBDC. China has also been working on a CBDC since 2014 and began piloting the digital yuan starting in 2020.
There are two main barriers for advanced economies to lead the CBDC race. The first barrier is the older demographic because the younger demographic is more likely to switch to digital payments. The second barrier is a strong reliance on cards. CBDCs are poised to gradually replace cash, but cash will clearly be around for many years to come.
To listen to the audio version read by co-author Marion Labouré, download the Next Big Idea app today:
