The term Fintech probably has not escaped you. It has emerged as the new ‘disruptive market force’ and is challenging the traditional means of providing financial services. National and International conferences everywhere are buzzing with Fintech related events and global Fintech investments have increased from $2.5 billion in 2012 to over $31 billion in 2017.
But what exactly is Fintech? Simply put, Fintech stands for Financial Technologies. It refers to technological innovation in the financial sector, including anything and everything from mobile banking and peer-to-peer payments to distributed ledger technologies and digital currencies.
Central Banks around the world are waking up to the immense possibilities and challenges this emerging sector poses with some of the Commonwealth countries leading work in this area. A short SWOT Analysis below highlights the many advantages and challenges of these new and emerging technologies.
The advantages of Fintech are manifold. By making the interaction between consumers and financial services as well as between financial service providers easier and simpler, Fintech offers significant potential to enhance efficiencies, reduce costs, modernise financial infrastructure, enable more effective risk management and expand access to financial services across a range of different areas including lending, payments, personal finance, money transfer, and insurance.
The privacy of personal information provided by consumers online is under the spotlight these days. The recent data breach at Facebook is a case in point. This issue is particularly relevant for the Fintech sector as is the risk of fraud or financial risks associated with consumers not fully understanding the new financial products.
The ‘de-risking’ phenomenon has become an existential threat to many small states in the Commonwealth, especially in the Caribbean and the Pacific. Fintech could potentially offer solutions to some of the key drivers of de-risking such as ‘Know Your Customer’ policy, or eliminate the need for corresponding banking relationships altogether.
The declining cost of internet services and growing mobile and smartphone penetration in small and developing countries also provide an excellent opportunity to leverage Fintech to promote financial inclusion amongst the estimated two billion people who remain without access to formal financial services. Kenya’s M-Pesa is one commonly cited example.
While many Central Banks are actively promoting Fintech through ‘sandbox’ approaches, the existing regulatory barriers are helping banks to maintain the status quo. The Fintech and the traditional banking sector, however, need not always compete but can also complement and learn from each other, forging new partnerships for the efficient delivery of financial services.
Cybercrime can potentially undermine the integrity of the entire financial system. This is perhaps the main reason why some Central Banks are reluctant to embrace Fintech more broadly. In the Commonwealth, many small and developing countries lack the capacity and infrastructure to safeguard cybersecurity. There are also concerns that many Fintech start-ups are too focussed on launching their product quickly, without paying due attention to security measures.
Then, there is a potential abuse of Fintech. Without proper regulation, easy access to finance can encourage risky behaviours like excessive borrowing and high personal debt accumulation. There is also some legitimate concern about market competition. A few early entrants in the market can get too large too soon and can wield considerable monopolistic power. On the other hand, too many entrants providing similar services can also crowd the market and make supervision more difficult. This is especially true for many small and developing countries where the rise of the sector can stretch already limited regulatory and supervisory capacity.
I do not think that Fintech is just a buzzword, rather it is here to stay. The wide range of technologies and their possible use under the Fintech umbrella means that all countries can benefit from the technological innovations in financial services in a way that suit their needs. This can lead to more sustainable growth by enhancing productivity and creating new markets and jobs.
The main challenge is striking the right balance between regulation and promotion of this rising sector. What is your take on it? What role, if any, can we at the Commonwealth Secretariat play to help our member countries realise the full potential of Fintech? Your comments are welcome.