Democratising finance
Periods of disruptive innovation have always transformed the inequality map. Digital technology has transformed and democratised finance, for example. In her new book, Deutsche Bank Research Senior Strategist Marion Laboure explains how fintech is tackling financial exclusion, and what more can be done
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ublished in 2022 by Harvard University Press, the book 'Democratizing Finance: The Radical
Promise of Fintech' was completed during the Covid-19 pandemic, when my co- author Nicolas Deffrennes and I were confined to our respective homes and teaching online, instead of at Harvard's campus in Cambridge, Massachusetts. The experience concentrated our minds on
the profound changes in the ways people were handling payments. Physical cash was regarded a potential transmitter of the virus, and with the willingness to comply with social distancing, digital payments were rapidly becoming mainstream. We saw how the pandemic accelerated efforts by governments to deploy central bank digital currencies (CBDCs), and we reflected on the resilience of consumer trust in online payment security. Just as the 2008 global financial crisis catalysed change – allowing for innovative companies to emerge and thrive – the pandemic appears to have acted as another catalyst – or perhaps a ‘fertiliser’ – for these new payment technologies to become mainstream.
Financial inclusion We also reflected on how the uneven distribution of resources such as labour, capital and technology can limit economic growth. But beyond its macroeconomic benefits, financial inclusion leads to significant social and personal benefits. Consider the basic benefits of having a bank account: it allows individuals to save, earn interest, balance household consumption and raise productive investment. Moreover, a bank account can empower women and give them more economic equality. Although more people have gained access to bank accounts, there is still considerable
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work to be done. By 2017, 1.7 billion adults were still unbanked, according to the World Bank Global Findex. If we look deeper into that database, we find that nearly half the world’s unbanked people lived in seven countries: Bangladesh, China, India, Indonesia, Mexico, Nigeria and Pakistan. But people need more than a bank account, and the financial needs of individuals and families evolve along a lifecycle, as summarised in Figure 1. When households have access to financial
products such as money transfers, savings and investment, credit, insurance and pensions, they tend to enter an upward cycle towards increased wealth and wellbeing. By contrast, the absence of these basic financial services can derail low-income households and push them
into debilitating debt cycles and spiralling poverty traps. Furthermore, in developing countries, a large share of GDP comes from small and medium enterprises (SMEs), including subsistence farmers, traders and shopkeepers. Although formal financing exists in all countries, many traditional banks refuse to lend to SMEs because the amount borrowed is typically too low to cover transactional costs related to the bankers’ time and evaluation services. Many owners of land, homes, farms or shops have no official proof of ownership, rendering their properties ineligible as collateral. Weak regulations and laws are an added complication. With seasonal agricultural loans, agents do provide credit to farmers, but only if the agent can sell the crops or take a percentage of profits.
Fintech is profoundly changing our economy and our lives. This important book is necessary reading for anyone who cares about the future of our economy or our society
Lawrence H. Summers, Former United States Secretary of the Treasury, Charles W. Eliot Professor and President Emeritus, Harvard University
How fintech can help A large proportion of people in developing countries work in traditional sectors such as agriculture. Because innovation and productivity growth tend to take place within the non-farming sectors of the economy, rural citizens are often excluded from the formal economy. This presents a strong need for technology that can enable higher productivity by improving the speed, reliability, transparency and cost of information delivery. Mobile phone ownership is widespread among the unbanked. Globally, in 2017 about 1.1 billion unbanked adults – representing about two-thirds of the 1.7 billion unbanked adults in the world – had a mobile phone. The rising rate of global cell phone use has the potential to advance financial inclusion. Technology has ensured that even basic devices can enable transactions, thus reducing the need for branch banking. In sub-Saharan Africa, relatively simple text-based mobile phones have powered the spread of mobile phone accounts via services such as M-Pesa in Kenya. Further details of emerging market penetration levels are set out in the book, and the success of fintech in emerging markets is not just because of its ability to tap into a large, tech- literate population, but also by reaching those who had previously been financially excluded. South Africa, Mexico and Singapore are on track to become significant fintech players, with borrowing and financial planning as the fastest growing fintech services. All of this indicates growing opportunities for the expansion of mobile banking.
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