Jarmo Kotilaine
Fintech has become one of the catchwords of our time, shorthand for creative innovation and potentially transformative change in the way financial services are provided. It has spawned a multitude of start-ups and pushed many incumbent financial institutions to review their operating models.
The restrictions on economic activity during COVID-19 further validated and popularized many of these new ideas, as more and more people resorted to home delivery, touchless payments, and other solutions that reduced physical contact. Technological change proved effective in driving the growth of disruptive innovators, protecting — or even increasing — the margins of banks, and allowing many companies to generate profits at a time when their survival was threatened.
To what extent, though, have we truly unleashed the transformative potential of fintech? Better payment systems and digitalized transactions are important, but ultimately represent the application of digital technology to something that was happening already.
A very different situation occurred in some developing countries where the rise of fintech has become a potent tool for financial inclusion as new providers have levered widely available mobile telecommunications technology to compensate for the shortcomings of formal financial intermediation in a widely accessible, low-cost manner. Of course, some of this has been seen in the Gulf, in the form, for instance, of new mechanisms for the remittance payments of unbanked laborers.
How could fintech deliver even more? The true promise of technology stems from its ability to lower costs and boost transparency. Meaningful progress in these areas can deliver substantial benefits in terms of increasing access to finance and of doing so more cheaply.
Many countries have now capitalized on open banking to foster more competition among lenders. Technology can be used to allow customers to compare services and products between banks. This is pushing service providers to compete on price and quality.
Technology can also make it easier to structure complex transactions and products which can not only reduce their prices but also helps broaden the range of available solutions. Digitalization is reducing the cost and time of on-boarding new bank customers. By decentralizing financial service provision, technology is enabling more business ventures and projects to raise capital through novel mechanisms such as crowd funding.
Transparency is an issue of particular importance and potential. Perhaps the most profound change delivered by digital technology stems from the ease with which data can be collected and analyzed. This matters because informational asymmetries have been among the main factors restricting access to capital.
Central banks have used sometimes cumbersome regulatory and reporting requirements as a way of addressing the problem. Risk managers at banks are often forced to cite limited or unverifiable information as an argument for restricting access to credit or for pushing up their cost.
In principle, technology could be used to obviate some of the tasks currently pursued through regulation and supervision by making it easier to gain access to all the relevant data more accurately and swiftly. It should also make it easier and faster for customers to build reliable credit profiles which could be used to assess their eligibility for different products. Again, open banking is being used by more and more lenders to access customer data and evaluate their financial history through hard data rather than assumption or generalization on the basis of potentially inaccurate or misleading applications.
Easy access analytics can help customers make more informed and efficient decisions. For instance, more investment platforms now provide access to a wide-range of investment options on a global scale, along with analytics on their performance and risks. They have reduced the costs of trading and dramatically boosted the speed of execution. Such platforms can also be used to build financial literacy, for instance through tools for financial projections or scenarios.
Of course, technology cannot overcome human myopia and wishful thinking. The way forward must be to build ways that properly account for data privacy and security. Today, though, the technological toolkit is more versatile than ever.
Progress is already helping us reimagine financial service provision, but much more is both needed and possible. Virtually every independent assessment of the financial services sector in the Gulf comments on constraints on access to capital, which in turn limit financial inclusion, economic diversification, and business growth.
Making the most of the opportunities presented by technology is thus not only a business opportunity but a chance to drive the economic paradigm shift, whose success, in large part, hinges on financial services. With governments repositioning themselves, the core task of financial institutions, the pooling and efficient allocation of capital, will matter more than ever. Doing it faster, more accurately, and for more customers will be an important driver of success.
