Discussion Distinguish factors within the global financial environment that affect international trade and commerce for multinational enterprises considering economics and governmental regulation To

FINTECH Mini-Case

Global Fintech1

Fintech—financial technology—will, in the eyes of some, revolutionize the world. To others, it is just the most recent evolutionary stage of the financial industry. It has, however, the power to overcome barriers of access and inclusion to people in many countries, altering the trajectory of economic betterment for many. Fintech could conceptually include any technology associated with the movement of or transactions involving money. The abacus, cash register, and automated teller machine (ATM) are all examples of financial technological developments. The term today is more commonly associated with online payments processing, such as AliPay, PayPal, or M-Pesa and cryptocurrencies like Bitcoin and Litecoin.2

2 Many of these developments and platforms use blockchain technology. Blockchain is an encrypted list of records, called blocks, that are linked together. Although fundamental to cryptocurrencies like Bitcoin, it is not a uniquely financial technology.

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But fintech is much more than just payments processing or cryptocurrencies.3 Developments in financial technology associated with Internet access and mobile communications can potentially disrupt nearly every dimension of financial services. At present, across the globe, from Kenya to Kathmandu, new platforms and processes and products are advancing as rapidly as most nations will allow them to. The potential for fintech across countries will in many ways cross three different axes of national development: (1) level of economic development, (2) financial sector infrastructure, and (3) bank/financial services regulatory landscapes. But like all technologies, they are not inherently good or evil; the societal outcome depends on how they are applied.

3 El Salvador in 2021 became the first country to declare a cryptocurrency, Bitcoin, official legal tender, money.

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Financial Landscape

Access to critical financial services, such as payments, savings and insurance, helps people improve their lives. But access is unequal and poor people and small firms typically have many fewer options. Fintech has shown its potential to close gaps in the delivery of financial services to households and firms in emerging markets and developing economies. Initially, such benefits were channeled via mobile money and digital payments solutions.

Research conducted at country and regional level, and more recently at global level, has shown the effectiveness of such solutions for financial inclusion. Other types of fintech firms, such as lending and capital raising platforms, are showing their potential to improve access to finance for underserved groups, including SMEs, although these platform solutions are still at an early stage in the majority of emerging markets and developing economies. Finally, firms that provide supporting services such as credit scoring or digital ID solutions are helping to expand the benefits of fintech across the entire financial sector.

—“The Global Covid-19 FinTech Market Rapid Assessment Study,” World Bank Group, 2020, p. 8.

What is fintech’s real potential? Which societal financial functions are likely to be impacted? A basic overview of which financial functions and services society utilizes has been somewhat missing from the discussion. The World Economic Forum offered up a basic description of the financial landscape, what it called the Wheel, a number of years ago that is helpful in understanding the multitude of financial service sectors that could potentially be impacted by fintech. The Wheel identifies six sectors of potential impact.4

4 “The Future of Financial Services: How Disruptive Innovations Are Reshaping the Way Financial Services Are Structured, Provisioned and Consumed,” World Economic Forum, Prepared in collaboration with Deloitte, Final Report, June 2015.

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PAYMENTS. The execution of payment processing for both B2C and B2B transactions was the first and generally easiest financial service to be impacted by fintech. The movement toward digital payments is already quite advanced in a number of nations where the people are often ahead of the institutions, both banks and regulators.

MARKET PROVISIONING. The development of technological data collection and analysis, some using artificial intelligence for rapid financial assessments, some using artificial intelligence, is expected to be a key area of impact. This sector is still considered in its infancy, as the artificial intelligence and big data necessary to support its use are still considered developing.

INVESTMENT MANAGEMENT. The increased reach of fintech to previously ignored and underserved demographic and income sectors (e.g., Robinhood) has already proven both powerful and disruptive. The promise of the developing world is enormous in changing spending/saving-investment behaviors.

INSURANCE. Access to insurance services, particularly affordable services, is one of the key development barriers in emerging economies. Insurance is often one of the requirements for acquiring and utilizing assets for business and economic development. But new digital insurance providers are rapidly changing who and what is insured at what costs.

DEPOSITS AND LENDING. This is one of the core traditional banking functions that is already undergoing disruptive change. Financial institutions have been rapidly adopting fintech apps for deposit taking but have been slow to advance the lending functions. Fintech lending has some of the greatest potential but also some of the greatest risks—for example, the experience China has had with peer-to-peer (P2P) lending—for the global financial system.

CAPITAL RAISING. Internet-based capital-raising channels such as crowdfunding have rapidly developed their own financial ecosystems. More innovation than disruption, fintech capital raising represents some of the greatest potential improvements in society through economic development.

This is just one taxonomy of societal financial functions. But regardless of how the financial service cake is sliced, it is clear that fintech’s potential to alter the lives of people in all countries and markets is real and, in many cases, already here. The recent global pandemic provided a multitude of examples of how fintech could provide more information and more financial services to people everywhere, partially in support of the world’s struggle to ease human suffering from COVID.

Digital financial services are faster, more efficient, and typically cheaper than traditional financial services and, therefore, increasingly reaching lower-income households and small- and medium-sized enterprises (SMEs). During the COVID-19 health crisis, digital financial services can and are enabling contactless and cashless transactions. Where digital financial inclusion is advanced, they are helping facilitate the efficient and quick deployment of government support measures, including to people and firms affected by the pandemic.

—“The Promise of Fintech, Financial Inclusion in the Post COVID-19 Era,” Ratna Sahay, Ulric Eriksson von Allmen, Amina Lahreche, Purva Khera, Sumiko Ogawa, Majid Bazarbash, and Kim Beaton, International Monetary Fund, No. 20/09, 2020.

Country Reach

One of the curious facets of fintech is that it may have the greatest impact on countries which are largely under-banked and, simultaneously, those that are over-banked.

Like mobile phones in countries without existing landline infrastructures, fintech can leapfrog the legacy physical infrastructure of traditional banking. It can potentially provide all of the basic financial services that the large marble-columned edifices have provided in older industrial markets for centuries at a fraction of the cost, both capital and operating. In these countries—for example, those in Sub-Saharan Africa—banking sectors are in some cases rudimentary, with a large part of the population not having access to traditional banking services. Here fintech can be fundamental, accessible at low cost, and powerful in reach. There is little to “disrupt”; here fintech can be seen in the role of a new financial infrastructure. And that can in turn act as a device for inclusion.

At the same time, fintech’s potential may also be quite impactful and disruptive in the older highly banked industrialized markets. These are markets—for example, the United States or Mexico—where banks have operated profitably for more than two centuries. They are established within a societal structure of laws, regulations, and institutions that shelter and protect their activities and markets. And that long-term protection has in many cases resulted in low rates of innovation, most importantly in the under-investment in digital and cellular financial services that many customers now desire—now that people have discovered what those services may offer and cost. The traditional highly banked developed markets may be ripe for fintech disruption, as new digital financial services may be much cheaper and more efficient than the bureaucratic, stodgy banking empires of the past. But that will only happen if they can break down the political power and breach the turf of the established institutions.

The one sector of possibly the greatest potential benefit in global business is digital lending. A naive or simplistic view of the world might be to visualize that the rich, highly industrialized countries, that play host to most of the world’s capital, could see massive opportunities in getting the capital to the business entrepreneurs, startups, and under-capitalized enterprises in the emerging world. This access, once again, has been somewhat denied as established banking industries in countries, not foreign investors or lenders, define the rules of access. Again, fintech innovations, like FairMoney in Nigeria or Goldman Sachs in Mexico, are finding their way through the forests of national regulatory barriers and data deficiencies to offer small enterprises access to capital.5

5 See for example “Why Goldman Sachs Is Interested in a Small Bike Shop in Mexico, Bank’s Credit Line to Fintech Firm Credijusto Is Latest Example of Growing Market of Alternative Lenders to Local Business,” by Robbie Whelan, The Wall Street Journal, March 14, 2019; and “FinTechs Find Lending’s ‘Atomic Data Points’ in Emerging Markets,” by PYMNTS, February 26, 2021.

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Cross-Border Potential

One example of the potential power of fintech for good is that of international money transfers. Migrant workers all over the world continue to suffer extremely high transfer costs, often ranging between 5% to 25%, to simply transfer the income they have generated in a host country back to their families and friends in their home countries.

International money transfers in many ways represent one of the biggest challenges of fintech: low-income populations, with no legal standing, political standing, or banking access, attempting to move small amounts of money across borders. Fintech firms have started building their own international correspondent relationships, some banking, allowing these transfers to bypass the legacy banking systems that exploited lower-income migrant populations. Unfortunately, that does not mean that the fintech providers do not similarly exploit low-income customers. M-Pesa, a payment processing platform founded in Kenya and then expanded to a multitude of countries across Africa, is considered by many one of the true success stories of fintech. But a multitude of studies have cited its monopoly status. With no real competitors, it has been able to charge high fees for its use. Once again technology does not assure healthy societal outcomes.

Promise and Peril

Probably no single case exemplifies the risks and rewards of fintech better than Alipay and China. China, all agree, is the leader in fintech development, in some ways because it is a nexus of both categories of markets described in the previous section—under-banked and over-banked. And China also offers a powerful device of expediting fintech—those most capable of embracing digital transactions are also those with some of the greatest income/wealth-generating capabilities. Oh, to be young.

Home to an old, bureaucratic, and politically powerful banking industry, it has seen the advancement of two of the world’s largest and most successful digital payments systems, WeChatPay (a unit of Tencent) and AliPay (a unit of Ant Group). These digital payments applications allow buying and selling of all things economic without the use of traditional cash, bank checks, or credit cards while operating outside the traditional banking system. AliPay, the largest, is a third-party mobile and online payment platform utilizing a Quick Response (QR) code on a personal phone to conduct electronically recorded transactions in an instant. As the world’s largest online payment platform it grew in market share and reach with the most advanced of consumers in Shanghai (over-banked) to the poorest of farmers in the inland provinces (under-banked).

In November 2020, AliPay’s parent company, the Ant Group, was 48 hours away from its initial public offering (IPO) when the Chinese government stepped in and stopped it. Expected to be the largest IPO in financial history, the Ant Group and its founder Jack Ma had purportedly grown so large and so powerful that Chinese authorities worried about its impact on their financial system’s stability. One specific activity was Ant’s role in originating loans, playing a middleman role in connecting borrowers with lenders (banks) through its digital interface. The fear was that it was starting to operate similar to bank lending seen in the U.S. leading up to the financial crisis of 2008, where a lack of prudent due diligence in lending led to subprime borrowing—and repayment delinquencies—at record rates.6 In the months that followed, the Chinese government rolled out a series of additional regulations to ensure that most lending remained in the hands of the banks themselves, for now.

6 Although Ant’s lending activities was the common explanation for the regulatory crackdown, it is estimated that total Ant lending was less than 1% of total Chinese bank lending.

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Fintech Themes

Fintech offers new and impactful opportunities for money and capital to flow outside the brick-and-mortar institutions of the past and present. Strangely, whether fintech will threaten the banks, partner with the banks, or both is dominating much of the discussion at present. Yet the banks or existing financial institutions are largely only distributors, the plumbing and plumber, moving the capital from those who have it to those who wish to use it. With greater capital freedom will come risks and failures that cause governments to take one step back with each two steps forward. Such is experience. The net result, that’s positive.

Mini-Case Questions

Why do you think fintech’s relationship to banking systems is the focal point of such debate?

Why has China proven to be the leader in fintech?

In your opinion, is fintech revolutionary or evolutionary?