Fintech for good?

February 08, 2017

The emerging Fintech sector represents an exciting opportunity to kick-start sustainable development. But this new disruptor of the financial services industry should use its power wisely if it’s to maximise positive impact, says Emma Amadi.

Despite being a hot topic over the last few years, it’s always surprising how little most people know about Fintech. The term refers to the application of digital technology to deliver financial services, including innovations such as blockchain, bitcoin, crowdfunding and mobile payment. After wading through all of the weird and inventive jargon, actually trying to understand how this tech works is headache-inducing. But, even if you can’t tell a sidechain from an altchain you should be paying attention, because Fintech is big business and has the potential to positive societal impact beyond financial returns, from enabling financial inclusion to safeguarding land rights.

The concept itself is not that new – mobile phones have been used for money transfers since the mid-2000s in Kenya and the Philippines, to bridge the lack of access to reliable banking. However, the pace of innovation and novel applications of these technologies has picked up significantly in the last few years. The industry is now valued at over $876 billion globally, driven by significant investment and growth outside of the US, particularly in Europe and Asia-Pacific.

Innovating for the future

If the scale of this growth is impressive, the impact that Fintech is having on society has become near ubiquitous. As the earlier example of early mobile banking suggests, companies are innovating both within and beyond financial services to deliver solutions to social issues across the world. This potential has been recognised and explored both from a sustainable development perspective, most notably in UNEP’s report exploring a range of possible implications for development, as well as the emerging trends for business outlined by Accenture. With an estimated $400 billion of investment required by low-income countries to finance their development needs, from funding entrepreneurship and job creation to developing electricity networks, there’s certainly a huge gap to be filled.

Financial inclusion is one of the key areas that Fintech has been tipped to revolutionise. With around 2 billion unbanked people globally, Fintech is plugging the gap to provide much needed services to this previously underserved group. A number of success stories have emerged from the developing world where Fintech is leapfrogging traditional financial infrastructure, or providing basic services where banks are unwilling or unable to do so.

The earliest and perhaps most famous example of this is the Kenyan peer-to-peer (P2P) service M-PESA. Developed back in 2007 by Safaricom and Vodafone, it allows users to deposit money in an account on their mobile phones; send money to other users via text message; and exchange deposits for regular cash. Where people once had little or no access to ATMs or physical banks, M-PESA allows people to send and receive money from friends and relatives all over the country. You could use mobiles to pay for your taxi or bus ride to work or school in Kenya before Uber was invented, saving people energy and time where they once had to walk. The service was so successful it’s now expanded its offering to include low-interest loans and savings products to markets across Africa, Asia and Europe, with over 25 million customers worldwide.

The system has been replicated by others, including Visa, indicating that companies can clearly see the business case in providing these Fintech-based services to break into new markets. Other P2P services developed since, like Transferwise, now allow much cheaper and more transparent rates for international money transfers. With the cost of sending remittances to Sub-Saharan Africa averaging at over 12%, these kinds of services could allow those earning money abroad to send more back home. This could also provide help for the 65 million forcibly displaced people with cheap and often instant cash transfers allowing people to settle and thrive in in new locations.

Fintech-based services and the technologies they work off, like mobile phones, store a huge amount of data about their users. These have the potential to make other services available to customers, like loans based on your mobile phone payment history or even your social media activity. If you’ve never had access to traditional financial institutions you don’t have a credit score and it can, therefore, be impossible to get the credit vital to entrepreneurs everywhere.

Other development initiatives have piggybacked off this mobile loan technology, such as M-KOPA, started in 2010 and now providing low-cost solar power systems to over 400,000 homes in Kenya, Tanzania and Uganda. These are cheaper and cleaner that traditional kerosene lamps and customers pay for them in monthly instalments via mobile phone. The solar panels themselves are fitted with SIM cards, allowing them to monitor the repayment of loans, solar panel performance and check for faults. This same data could potentially be used to monitor local climate and provide drought or flood warnings – simultaneously an adaptation and mitigation response to climate change. Those close to paying off their solar panel are then offered other products such as energy-efficient cooking stoves, whose wide ranging benefits have been explored in an earlier Briefing article.

The challenges ahead

With such exciting possibilities for sustainable development, it’s hard not to get carried away with the positive potential of Fintech. However, despite the aforementioned success stories from the developing world, the highest adoption of Fintech-based services and products is amongst individuals with high incomes. Fintech is not necessarily inherently good from a societal perspective due to its disruptive capacity alone. Ultimately, the multinationals that help many Fintech companies to scale could stand to make huge financial gains off the back of such ventures, and making sure that this profit is made responsibly will be key to its ability to make real, sustainable social change.

The challenge here is leveraging the potential of Fintech to reach the most marginalised people, especially those in areas where electricity and internet infrastructure is lacking. Corporates also need to take account of the huge environmental costs and ethical impacts, from the energy required to run phones, laptops and servers to the cost of sourcing the materials used in their production, such as the use of slave labour to mine cobalt in the Democratic Republic of Congo.

The boom in Fintech was fostered in part by the lower standards of financial regulation required of Fintech start-up’s after the financial crisis of 2008. Traditional financial institutions moved away from less profitable and often more financially marginalised customers, allowing smaller, more nimble Fintech companies to fill the gap.  Many of these new products and services remain poorly regulated and if this doesn’t change, there’s a danger that they could end up perpetuating the very inequalities they were originally trying to solve. Moving forward, an effectively enforced regulatory framework has been identified by the UNEP as a key factor in ensuring Fintech can be Fintech for good.

Emma Amadi is an LBG Analyst at Corporate Citizenship