Can Fintech be a force for good?

Many people are actually no strangers to these technologies. Artificial intelligence and machine learning are being used to analyze huge volumes of data and enable service providers to get to know their customers better or perform due diligence on a scale that was not possible before. At the architectural level, cloud computing and quantum computing have enabled the scale, flexibility, and speed needed to handle huge volumes of data.

We have also seen how blockchain has transformed the way data is captured and authenticated, laying the foundations for cryptocurrencies and NFTs. Meanwhile, opportunities abound in specialized functions such as cybersecurity to keep the fintech ecosystem secure, as well as developing APIs (application programming interfaces) that allow different applications to interoperate.

These technologies have transformed financial services, from payment to credit, including investment and insurance. Loan and insurance applications can now be validated and processed more quickly. Investors can trade easily with AI portfolio management tools and high frequency trading. Indeed, with the emergence of cryptocurrency, even the very notion of money is being questioned.

Crypto and FOMO

When cryptocurrencies were first launched, they were greeted with exuberance, just like most technological leaps. This is why markets are marked by bubbles and crashes, Fang noted. Fear of missing out (FOMO), fueled by social media, the media and the influence of market influencers such as Elon Musk and Cathie Wood, has prompted many to jump on the bandwagon of cryptocurrency.

At the same time, financial platforms like Robinhood have brought cryptocurrency trading to the masses, in the form of commission-free trading via a mobile app. Fang warned that platforms that gamify investing tend to make investing look cheap and easy while minimizing the risks investors face.

In the world of crypto, the peer-to-peer money system is designed in such a way that everyone is responsible for their own actions and money. While cutting out middlemen smacks of freedom, it also means there’s no safety net or possibility of government bailouts if things go wrong.

On governance and ethics

Traditionally, financial services such as banking and insurance are heavily regulated to keep providers compliant with mandatory standards and ethical behavior. While technology has radically changed the delivery of these services, the fundamentals of finance remain.

On the other hand, tech companies – most of which operate in less regulated environments – are racing ahead in the fintech landscape. Thus, the entry of tech companies into a traditionally highly regulated space has created regulatory gaps, which need to be filled. Regulations simply do not keep pace with technological developments. Blockchain technology, for example, is designed to decentralize data governance, authentication, and protection. Unlike a bank, it cannot be shut down by the government.

While blockchain proponents insist that the technology’s distributed architecture cannot be hacked, cryptocurrencies are stolen daily in reality. At the national level, the introduction of digital currencies by central banks can put volumes of data into the hands of governments, giving them unparalleled power and surveillance capacity, Fang warned. Ultimately, the merits of the technology depend not only on design, but also on human actors and governance, she said.

On a positive note, some regulatory convergence is being seen as governments make banking licenses mandatory for mobile banking providers. Globally, the Basel Committee on Banking Supervision plays an important role in setting standards and regulations for cryptocurrencies.

Can fintech be a force for good?

Disruption in the financial sector has forced financial service providers to “self-disrupt” in order to catch up technologically and do better. By reducing the costs of providing financial services, fintech is lowering the bar and making financial services more accessible to more people. Ultimately, fintech can reduce inequality by enabling financial inclusion.

In 2007, telecommunications companies Vodafone and Safaricom revolutionized banking in Kenya with the mobile banking service M-Pesa. In a country where only 14% of the population had a bank account, the service enabled the vast majority of Kenyans to be part of the financial system without the need for bank accounts or credit cards. By improving access to financial services and enabling commerce, technology has lifted more than 2 million people out of poverty over the years.

In another example, insurtech (the combination of insurance and technology) leverages blockchain technology to improve access to insurance. Insurers such as AXA offer customizable insurance – known as parametric insurance – to compensate its customers against the probability of predefined parameters such as floods or drought. By reducing the cost of insurance while providing broader, customizable coverage, it closes the gap to conventional coverage. This has enabled businesses that typically fall through the cracks – such as micro-farmers – to manage risk and do more with limited resources.

Don’t lose sight of the basics

Ultimately, not all financial and economic problems can be solved by technology. To assess the merits of technological innovations and solutions – including fintech – Fang urged managers and consumers to put these questions first:

• Does the company have a real purpose?
• What is the problem the company is trying to solve?
• Is he using the right way to solve it?
• What are the motivations behind the offer?

“We need a healthy dose of understanding that technology won’t solve all the problems,” Fang said. “At the end of the day, we still need judgment.”