“Digital disruption creates a historic opportunity to reshape finance,” according to a report by the United Nations Working Group on Digital Financing for the Sustainable Development Goals (SDGs) earlier this year, which was set up to make recommendations on how digitization could accelerate the financing of the SDGs.
There is widespread optimism about the potential of digitization to reduce global inequalities, one of the 17 UN SDGs to which governments subscribed in 2015. Mobile platforms and data analytics are now used by over a billion people, bringing sophisticated financial services to mass markets, and empowering people as savers, lenders, borrowers, investors and taxpayers, the report says.
The proportion of adults globally with access to a bank account was 69% in 2017, up seven percentage points since 2014. In many countries in sub-Saharan Africa, more than 60% of the adult population now owns a mobile money account.
The United Nations task force highlights the role of digitization in providing social and financial safety nets to people and businesses during the COVID-19 crisis. In China, financial technology company Ant Group has used blockchain-powered supply chain finance to enable small businesses to apply for loans from banks based on their claims from large corporations. On the eve of what was to be the world’s largest initial public offering, the Chinese and Hong Kong stock exchanges suspended Ant Group’s $ 37 billion listing over concerns over market and investor stability. There is no indication that the suspended IPO will affect Ant’s day-to-day operations.
U.S. accounting software company Intuit has partnered with GoFundMe to enable businesses affected by the pandemic to initiate fundraisers and accept donations, while Riskcovry, a Mumbai-based start-up, has introduced the coronavirus insurance in a box for businesses.
But the UN task force also uncovered some of the downsides of the FinTech boom, including inadequate digital infrastructure, affordable access and pricing, and the risk of bias against women and minorities.
Digitization in developing countries
Max Lawson, head of inequality policy at Oxfam, believes that digital finance tools could potentially be transformative, but they also have the potential to exacerbate extreme inequalities.
“For years, we have felt that digitization will be a panacea for the world’s ills. The UN task force report is very optimistic about the opportunities, but does not deal much with the risks, ”he said.
The fintech industry is “massively unregulated,” he says. Lawson gives the example of Kenya, which has been at the forefront of developing countries in terms of digital finance. The country’s mobile money and microfinance transfer platform, M-Pesa, allows people to transfer money by text message, so it doesn’t require a smartphone or an internet connection.
However, over the past two or three years there has been an “explosion” of online gambling and payday lending in Kenya, he says. “A lot of people are going into debt because they now have access to credit that they didn’t have before. This would not be possible without digital finance platforms.
The potential for digitization can also harm the real causes of inequality, Lawson says. He points to an eagerness to give schoolchildren laptops, but they didn’t even have teachers or electricity. “Yes, the Fourth Industrial Revolution is good, but it would be even better if we could bring these countries to the Second Industrial Revolution.
“The tools of digital finance do not compensate for grotesque levels of inequality. You may be able to transfer money to your partner in the village at no significant cost, but you still earn a pittance for working 70 hours a week, ”he says.
Inequality in the UK
Even in a developed country like the UK, campaigners are skeptical that digitization has reduced inequalities. There have been some improvements, with the number of people without a basic bank account drastically decreasing as a result of EU legislation giving all citizens the right to a bank account, says Mick McAteer, co-director of the Financial Inclusion Center.
“It was one of the areas where regulation was needed; we’ve seen progress, ”he says. However, there is a risk that fintech, digitization, big data and open banking could turn the tide, he warns. The data makes it easier for banks to identify profitable and low-risk people, and low-profit and high-risk people, he says. Banks may refrain from marketing products to certain people, while targeting more specifically the most profitable groups.
Marloes Nicholls, program manager for systems change innovator, Finance Innovation Lab, is also very skeptical of fintech’s potential to bring equality. Digitization and financial inclusion are often used in the same sentence, but there is very little evidence that they are linked, she says. She agrees that financial organizations will use the data to exclude low-income people or increase the costs of accessing products and services.
“If we want data-driven finance to work for people and the planet, then we need to set social and environmental goals and make sure policies and regulations align with them. We don’t see that right now, it really is a competitive approach, and we know that is not enough to achieve better outcomes for consumers and citizens, ”she said.
The problem is not with the technology itself, but with the purpose for which it was used, which could be improved, she says.
Dominic Lindley, policy director at financial think tank The New City Agenda, points to the acceleration of bank branch closures in recent years, leaving many people without access to a physical bank.
“The bonus programs for senior executives have targets for the number of ‘digitally active’ customers, but they do not have targets for the availability of branches or ATMs, as far as I know,” says- he. Questions arise as to whether and how senior executives and boards view these and other access issues. Banks should reinvest savings from reduced use of cash into maintaining access to banks, he adds.
While guidance released in July by the UK’s Financial Conduct Authority on protecting vulnerable customers is welcome, it won’t make a difference unless the regulator is willing to step in, he said.
A society without cash
An independent review last year found that eight million people were at risk of the disappearance of cash in the UK, which was used in less than three in 10 transactions in 2019, up from six in 10 in 2010 The government recognized the problem and in October released proposals for people to get money from local stores without having to buy anything.
Another problem is that many people find it difficult to understand how to use digital services. Banks have made efforts to improve this in recent years. For example, Barclays, Lloyds and RBS / NatWest have ‘digital champions’ who are tasked with teaching their colleagues, customers and members of the public to build digital trust using online banking, as well as shopping. and social media. RBS / NatWest has also upgraded more than 550 branches with iPads for customers to sign up and access online banking and free Wi-Fi.
Campaigners fear the pandemic could exacerbate existing inequalities in the financial system. McAteer points out that almost half of UK households have less than £ 1,500 in savings. People in jobs affected by the closures, such as concert workers and hospitality workers, have been hit hard, and they are also those least prepared for the economic shock, he says.
Although the FCA reacted very quickly to the COVID-19 crisis by forcing banks to forbear on mortgages, consumer loans and credit cards, there could be a lot of problems once the holidays are over. payment completed, he said.
“Banks will have to work hard to get their balance sheets back, which will lead to more aggressive treatment of those in arrears and a focus on better-off households. There are a few large individual organizations that are trying to do good things with digitization, but it’s really hard to see them making inroads into big bank profits. “
McAteer said, “Everything points to a pretty horrible time for low-income groups, and it’s hard to see how digitization will contribute to all of this. “
NestEgg innovates to turn borrowers into savers
FCA has targeted improving access to financial services in its latest ‘regulatory sandbox’ exercise, in which companies can pilot innovative ideas to help them get into the market faster. Marlet.
One of the startups selected to participate, NestEgg, aims to reduce the number of borrowers using high-cost short-term loans, and turn them into savers. Traditional credit scoring is tough on low-income borrowers, for example, deducting points for living in a particular area, where default rates are higher, so the NestEgg team is developing an alternative.
This will use financial health indicators to transform lending decisions. Importantly, the information on which decisions are based will be shared with the consumer, rebalancing the relationship between consumers and lenders. This will give them more options, which in turn will lower the price, says NestEgg.