Fintech offers many ways to transform access to finance for the poorest, but there is a risk that it could widen social and economic disparities. Catherine Early investigates.
“Digital disruption creates an historic opportunity to reshape finance,” according to a report by the UN task force on digital financing of the Sustainable Development Goals (SDGs) earlier this year, which was set up to make recommendations on how digitalisation could accelerate financing of the SDGs.
There is widespread optimism about the potential of digitalisation to reduce global inequality, one of the 17 United Nations SDGs that governments signed up to in 2015. Mobile platforms and data analytics are now used by more than one billion people, bringing sophisticated financial services to mass markets, and empowering people as savers, lenders, borrowers, investors and taxpayers, says the report.
The proportion of adults worldwide with access to a bank account was 69% in 2017, up by seven percentage points since 2014. In many countries in sub-Saharan Africa, over 60% of the adult population now have a mobile money account.
The UN taskforce highlights the role of digitalisation in providing social and financial safety nets to people and businesses during the COVID-19 crisis. In China, fintech company Ant Group used blockchain-powered supply-chain finance to enable small businesses to apply for loans from banks based on their receivables from large companies. On the eve of what was to be the world’s biggest initial public offering, the Chinese and Hong Kong stock exchanges suspended the $37bn listing of Ant Group amid concerns over market and investor stability. There is no suggestion that the suspended IPO will affect Ant’s day-to-day business.
US accountancy software firm Intuit partnered with GoFundMe to allow businesses affected by the pandemic to launch fundraisers and accept donations, while Riskcovry, a Mumbai-based start-up, introduced coronavirus insurance-in-a-box for businesses.
But the UN task force also found some of the downsides of the fintech boom, including inadequate digital infrastructure, access and affordability, and the risk of bias against women and minorities.
Digitalisation 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 inequality.
“There’s been a feeling for years that digitalisation will be a panacea for the world’s ills. The UN task force report is very upbeat about the opportunities, but doesn’t deal with the risks much,” he says.
The fintech sector 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 transfer and microfinance platform, M-Pesa, allows people to transfer money via text messages, so does not require a smart phone or internet connection.
However, in the past two or three years, there has been an “explosion” in online gambling and payday loans in Kenya, he says. “Lots of people are getting into debt because they now have access to credit that they didn’t before. That wouldn’t be possible without digital finance platforms.”
The potential for digitalisation can also detract from the real causes of inequality, says Lawson. He points to an eagerness to give school children laptops, but they did not even have teachers, or electricity. “Yes, the fourth industrial revolution is great, but it would be even better if we can get these countries to the second industrial revolution.
“Digital finance tools don’t make up for the grotesque levels of inequality. You may be able to transfer money to your partner in the village without big fees, but you’re still earning poverty wages for working 70 hours a week,” he says.
Inequality in the UK
Even in a developed country such as the UK, campaigners are sceptical that digitalisation has made a dent on inequality. There have been some improvements, with the number of people without a basic bank account falling dramatically following European legislation giving all citizens the right to a bank account, says Mick McAteer, co-director of the Financial Inclusion Centre.
“It was one of the areas where regulation was needed; we have seen progress,” he says. However, there is a risk that fintech, digitalisation, big data and open banking could reverse that, he cautions. Data makes it easier for banks to identify the profitable, lower risk people, and those that are low profit and high risk, he says. Banks can hold back from marketing products to certain people, while targeting more profitable groups more accurately.
Marloes Nicholls, head of programmes at systems change innovator the Finance Innovation Lab, is also very sceptical of the potential of fintech to bring about equality. Digitalisation 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 organisations will use data to either exclude those on low incomes or increase costs for them to access 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 that policy and regulation align with them. We don’t see that at the moment, it’s very much a competition-led approach, and we know that’s not enough to drive better outcomes for consumers and citizens,” she says.
The problem is not with the technology itself, but the purpose with which it has been put to use, which could be changed for the better, she says.
Dominic Lindley, director of policy at financial thinktank the New City Agenda, points to the acceleration of bank branch closures in recent years, leaving many people without access to a physical bank.
“Senior executive bonus schemes have targets for the numbers of ‘digitally active’ customers, but they do not have targets around the availability of branches or ATMs, as far as I can see,” he says. There are questions about whether and how senior executives and boards are considering these and other access issues. Banks should reinvest savings from the reduced use of cash into maintaining access to banks, he adds.
While guidance published in July by the UK’s Financial Conduct Authority on protecting vulnerable customers is welcome, it will not make any difference unless the regulator is willing to intervene, he says.
A cashless society
An independent review last year found that eight million people were at risk from the demise of cash in the UK, which was used in fewer than three in 10 transactions in 2019, compared to six in 10 in 2010. The government has acknowledged the issue and in October published proposals for people to obtain cash from local shops without having to buy anything.
Another problem is that many people struggle 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 given the task of teaching colleagues, customers and members of the public to build digital confidence using online banking, as well as shopping and social media. RBS/NatWest has also upgraded more than 550 branches with iPads for customers to register and access online banking and free Wi-Fi access.
Campaigners are concerned that the pandemic risks exacerbating existing inequalities in the financial system. McAteer points to the fact that nearly half of UK households have less than £1,500 in savings. People in jobs affected by lockdowns, such as gig workers and those in the hospitality sector, have been badly hit, and they are also the ones who are least prepared for economic shock, he says.
Though the FCA responded very quickly to the COVID-19 crisis by making banks exercise forbearance on mortgages, consumer credit and credit cards, there could be a lot of problems once payment holidays end, he says.
“Banks will have to work hard to regain their balance sheets, which will lead to more aggressive treatment of people in arrears and a focus on the better-off households. There are some great individual organisations trying to do good things with digitalisation, but it’s really difficult to see them making inroads into the profits of big banks.”
McAteer says: “It’s all pointing towards a pretty horrible time for lower income groups, and it’s hard to see how digitalisation will help any of that.”
NestEgg innovates to turn borrowers to savers
The FCA has targeted improving access to financial services in its latest “regulatory sandbox” exercise, under which companies can pilot innovative ideas with the aim of helping them to get to market more quickly.
One of the start-ups selected to participate, NestEgg, aims to reduce the number of borrowers using high-cost short-term credit, and instead turn them into savers. Traditional credit scoring is tough on low-income borrowers, for example, by 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. Crucially, 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 then lowers price, NestEgg says.
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