Can Fintech be a force for good?

Many people are actually no strangers to these technologies. AI and machine learning are used to analyze huge amounts of data and enable service providers to know their customers better or conduct 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 required to handle massive amounts of data.

We’ve also seen how blockchain has transformed the way data is captured and authenticated, laying the groundwork for cryptocurrencies and NFTs. Meanwhile, opportunities abound in specialized functions such as cybersecurity to keep the fintech ecosystem safe, as well as in the development of APIs (application programming interfaces) that enable different applications to work together.

These technologies have transformed financial services, from payments to credit, investment and insurance. Loan and insurance applications can now be validated and processed more quickly. Investors can easily trade with AI portfolio management tools and high-frequency trading. In fact, with the rise of cryptocurrency, even the very concept of money is being challenged.

Crypto and FOMO

When cryptocurrencies first launched, they were met with exuberance, as were most technological leaps. That’s 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-moving power personalities like Elon Musk and Cathie Wood, spurred many to jump on the cryptocurrency bandwagon.

At the same time, financial platforms such as Robinhood have put cryptocurrency trading within reach of the masses, in the form of commission-free trading via a mobile app. Fang warned that platforms that gamify investments tend to make investments seem cheap and easy, while underestimating the risks that investors face.

In the crypto world, the peer-to-peer system of money is designed in such a way that everyone is responsible for their own actions and money. While the removal of the middlemen smacks of freedom, it also means there is no backstop or possibility of a government bailout should things go south.

About governance and ethics

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

On the other hand, technology companies – which mostly operate in less regulated environments – are running ahead in the fintech landscape. As such, the entry of technology companies into a traditionally highly regulated area has created regulatory loopholes that need to be closed. Regulation simply does not proceed as quickly as technological development. Blockchain technology, for example, is designed in a way that decentralizes data management, authentication and protection. Unlike a bank, it cannot be closed down by the authorities.

While proponents of blockchain insist that the technology’s distributed architecture cannot be hacked, in reality cryptocurrencies are stolen daily. On a national scale, the introduction of digital currencies by central banks could put reams of data in the hands of authorities, giving them unparalleled power and surveillance capabilities, Fang warned. Ultimately, the benefits of technology depend not only on the design, but also on human actors and governance, she said.

On a positive note, some regulatory convergence has been observed as authorities make banking licenses mandatory for providers of mobile banking services. On a global scale, the Basel Committee on Banking Supervision plays an important role in setting standards and regulations for cryptocurrencies.

Can fintech be a force for good?

The disruption of the financial sector has forced financial service providers to “self-disrupt” to catch up with technology and do better. By lowering the cost structure for providing financial services, fintech lowers the level and makes 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 percent of the population owned a bank account, activated the service the vast majority of Kenyans to be part of the country financial system without the need for bank accounts or credit cards. By increasing access to financial services and enabling commerce, technology has pulled over 2 million people out of poverty over the years.

In another example, insurtech (the combination of insurance and technology) is leveraging blockchain technology to improve access to insurance. Insurers such as AXA have offered customizable insurance – known as parametric insurance – to insure their customers against the likelihood of pre-defined parameters such as floods or droughts. By lowering the cost of insurance while offering broader, customizable coverage, it closes the gap with conventional coverage. This has enabled businesses that typically fall through the cracks – like micro-farmers – to manage risk and do more with limited resources.

Don’t lose sight of the basics

Ultimately, not all economic and financial problems can be solved with technology. To assess the benefits of technological innovations and solutions – including fintech – Fang encouraged managers and consumers to put these questions at the center:

• Does the business have a real purpose?
• What is the problem the business is trying to solve?
• Does it use the correct way to solve it?
• What are the incentives behind the offer?

“We need a healthy dose of understanding that technology is not going to solve every problem,” Fang said. “At the end of the day, we still need judgment.”