Can 'fintech' innovations impact financial inclusion in developing countries?
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Financial technology, “fintech,” has been reshaping the financial services industry with the level and speed of innovation that’s simply fascinating.
A month ago, my colleagues and I attended the 5th Annual Lendit USA conference to check out about the latest innovations and thinking in this field and see how we can apply it to our work.
There is growing interest in trying to figure out this new industry and take advantage of the opportunity. Now billed as the largest Fintech industry meeting in the world, Lendit organizers started this event four years ago with about 200 participants. This year’s event attracted more than 5,000 people.
We work on various areas of financial inclusion and are interested in new ways that can help expand access to financial services to hard-to-reach populations and small businesses in developing countries.
We returned with a new appreciation for the magnitude of change that is coming, and how quickly it could occur – and already is in some instances. Some innovations will help developing countries leapfrog into this new tech era. This could have a significant – and potentially highly positive - impact on financial inclusion, and fundamentally change the nature of financial infrastructure.
However, these opportunities come with potential risks, such as those related to (un)fair lending practices related to unmonitored use and analysis of big data or increased systemic vulnerabilities due to threats to cybersecurity.
Here are key conference takeaways we find relevant to our work of extending access to finance to the two billion people who are currently left out of the formal financial system.
- Fintech as partners with banks (and competitors): The conference emphasized opportunities for partnerships with banks to advance the online finance industry. For the first time, all major U.S. banks attended Lendit, with mandates to figure out this segment and how to respond / leverage fintech. Some presenters highlighted the difficulties traditional financial institutions will have in shifting to a radically new business model with lower fixed costs and even greater reliance on technology.
- Importance of data: Data is at the center of fintech and the quantity of data, accessibility of data and ability to rapidly analyze and use data are moving much faster than the ability of traditional business models to adapt. For example, traditional credit reporting institutions are already being challenged – and perhaps even overtaken in some areas – by big data / alternative data approaches, including those where consumers voluntarily share data (even to the extent of sharing all the data on their smartphones) in order to get credit or other commercial benefits.
- Consumer protection: Increased access to both payment and non-payment data through big data analytics creates a number of critical challenges. On this particular topic, Richard Cordray of the U.S. Consumer Financial Protection Bureau (CFPB), called for stakeholders’ participation in providing insights and experience that could serve as examples for addressing risks and technological challenges that consumers face when sharing their information. “Consumer protection and compliance must be essential elements of the business model, from beginning to end,” he pointed out.
- Customer-focused business: Some new business models focus on a commitment to acting in the consumers’ interest, such as the online investing platform Betterment. This business model takes a fee off the top in exchange for unbiased advice on investment and income and wealth management strategies and options. The idea is to increase trust in financial services providers through an incentive compatible business model and transparency – to ensure that financial firms will act to maximize financial returns for their customers, not for themselves.
- Finance embedded in transactions: “Customers don’t enjoy going to a bank to discuss finances,” said keynote speaker Scott Sanborn, CEO of the online lender Lending Club. While not unexpected from that perspective, who wouldn’t agree with this statement? The trend will be for finance to be wrapped within a transaction seamlessly once the payment mechanism is enabled – such as uber where payment is set up once and then not revisited. There is a consumer protection risk if this comes to pass as consumers are less aware of the cost of finance or take on even higher levels of debt through automatic credit line extensions.
- Voice, not text, as the next major interface: The trend is toward simpler interfaces and technology solutions including the ability to use voice extensively to conduct transactions and business, as evidenced at Lendit by IBM’s demonstration of Watson as an avatar financial advisor – still in prototype but very interesting, including for low literacy populations.
- Strong interest in the legal and regulatory framework: A number of regulators were in attendance, mostly from the U.S. (conference organizers are planning upcoming events in Shanghai and Europe where regulators from those jurisdictions will join.) The industry is keenly aware of the importance of establishing an appropriate legal and regulatory framework to keep standards high, avoid large-scale frauds that can shake both investor and consumer confidence, and provide rules of the road to make business model and expansion decisions clearer. Regulators are interested in the potential for lower cost, more efficient business models and increased healthy competition in financial services.
- Many interesting new business models: A few notable examples: (1) Smartphone-enabled financing offered by PayJoy is set to create the lowest but very significant equity for the poor and could easily serve as a moveable collateral. (2) Carrying one’s credit history across borders is on route to becoming a reality thanks to the new startup called NOVA, which was selected a winner of Pitchit@Lendit.
Is fintech affecting your work with clients (either public or private sector) in financial sector development in emerging markets?
We’d love to hear from others how they are addressing these challenges and balancing innovation with other concerns such as stability and consumer protection.
Other World Bank Group colleagues who attended the conference include Marianna Camino, Nancy Chen, Bartol Letica, Rekha Reddy, Alban Pruthi, Sam Raymond and Ran Tao.
Photo: Anna Koblanck/IFC