Marion Labouré is a Senior Economist at Deutsche Bank in London and a lecturer at Harvard University. Nicolas Deffrennes is a consultant, investor, entrepreneur, and lecturer.
Below, Marion shares 5 key insights from her new book with co-author Nicholas Deffrennes, Democratizing Finance: The Radical Promise of Fintech. Listen to the audio version—read by Marion herself—in the Next Big Idea App.
1. Fintech opens new opportunities for policy makers.
Financial technology, or Fintech, is a global equalizer that can reduce inequalities between countries that emerged during the first Industrial Revolution. In developing countries, Fintech provides access to basic banking, payment, and insurance services, which are essential for helping people escape poverty traps. In developed countries, Fintech can also have an equalizing impact by offering new investment tools to the middle class and alternative loan solutions to the underserved.
Taking lessons from the banking sector, governments, including in smaller countries such as Estonia, are increasingly adopting blockchain technology to handle significant amounts of data and improve government services. Cutting-edge Fintech enabled the digitalization of citizen notification, tax declaration, small contracts for business, banking, and government transactions. These innovations pave the way for better and faster services for citizens.
Policymakers can create positive technological ecosystems. The most striking case study is Aadhaar, which is India’s ambitious program to tackle its massive ID shortfall. Prior to this effort, less than half of India’s population had a valid ID, which enabled high levels of corruption and fraud. This national effort (which was compatible with the banking system’s mandatory identification process) allowed for a more equitably distribution of social benefits. It has also helped banks open more accounts. Later, it laid to ground work for Fintech companies to offer new services. Regulation is key, and governments need to foster innovation, not hamper it.
“Fintech innovations pave the way for better and faster services for citizens.”
A case study about M-Pesa, a mobile payment system in Africa, demonstrates how the telecom operator Vodafone has successfully worked with regulators. Despite systemic risk, such as the potential for alternative currencies, the company and regulators worked together to bring a local payment solution to some of the most remote parts of Kenya.
2. Greater efficiency for back-office functions.
The second wave of the modern technological revolution mostly automated the input, storage, and analysis of data. Data management is a critical part of the banking and insurance sectors, which employ thousands of people to handle middle and back-office processes. Management consulting firm McKinsey estimates that around 50 percent of current work activities in these sectors can be automated. They also estimate that more than 30 percent of the activities in six out of 10 occupations today could be automated.
Blockchain offers the next generation of data management. A decentralized system of trust enables blockchain to avoid data duplication when services, transactions, and contracts are handled by several banks. Automation and other improvements in bank data management will continue to evolve and challenge the current organization.
3. Artificial intelligence is gradually eclipsing front-office jobs.
The first wave of automation mostly targeted bank and middle office functions. Now, new algorithms and other forms of AI are replacing people in higher paid, more sophisticated front-office jobs. For example, some high frequency traders are being replaced by optimized algorithms. In the U.S. stock market and many other advanced financial markets, around 70 to 80 percent of overall trading volume is now generated through algorithmic trading.
“Progress in software development and artificial intelligence will continue to replace paths of value chains and key roles within banks.”
Big data is also enabling companies to automatically identify consumer needs, thereby encroaching on the role of relationship-based branch managers and account executives. Advanced post-value screening and risk algorithms also allow banks to detect risk exposures and loss potentials in asset portfolios. Through this approach they learn information faster than with traditional human-based risk management. Another affected job is actuarial work in insurance companies which is increasingly supplemented and partially replaced by risk algorithms.
In the long run, progress in software development and artificial intelligence will continue to replace paths of value chains and key roles within banks.
4. A revolution ousting credit cards for digital payments.
The coming decade will see a rapid increase in digital payments, leading to less payment via plastic credit card. Over the next five years, mobile payments are expected to constitute two-fifth of in-store purchase in the U.S., which is quadruple the current level. A similar rate of growth in digital payments is expected in other developed countries. However, the rate at which cash and plastic card usage declines will vary from country to country.
Many customers in emerging markets are transitioning directly from cash to mobile payment without ever owning a plastic card. Digital payment platforms will increasingly be able to collect highly personal data from consumers. That data will be monetized and become increasingly valuable, which will allow these businesses to significantly reduce any fees they charge—perhaps to nearly zero.
“Many customers in emerging markets are transitioning directly from cash to mobile payment without ever owning a plastic card.”
Developments in China offer a preview of the future of payments. The country is developing a world-leading digital payment infrastructure. The value of online payments is equivalent to three-quarters of China’s GDP, which is almost double the proportion in 2012. Today, nearly half of in-store purchases are made with a digital wallet, which is more than in any other country.
5. Central bank digital currencies are on the horizon.
The question is no longer if, but when. About 90 percent of central banks are developing, launching, researching, or piloting their own digital currency. According to the Bank of International Settlements, central banks (representing about a fifth of global population) are likely to issue a general-purpose central bank digital currency (CBDC) in the next two years. A large majority of countries very well might have a CBDC in four or five years.
Emerging economies will probably lead the race. They are likely to move quicker and have higher adoption rates than advanced economies. For example, the Bahamas, the Eastern Caribbean, and Jamaica have all launched a CBDC. China too has been working on a CBDC since 2014 and began piloting the digital yuan as of 2020.
There are two main barriers for advanced economies to lead the CBDC race. The first barrier is the older demographic because the younger demographic is more likely to switch to digital payments. The second barrier is a heavy reliance on cards. CBDCs are poised to progressively replace cash, but cash will clearly be around for many years to come.
To listen to the audio version read by co-author Marion Labouré, download the Next Big Idea App today: