Fintech: Offering Financial Inclusion in an Increasingly Decentralized World?

Shelby Challis

Last month, I had the opportunity to attend MoneyConf 2016, a two-day global conference that focused on technological innovations within the financial sector, otherwise known as the Fintech industry.

This year’s conference was hosted in Madrid, and brought together disruptive startups, entrepreneurs, investors, and some of the world’s leading financial institutions. The event drew 1,855 attendees from 62 countries around the world.

The discussions focused primarily on 14 topics relating to Fintech, including big data, banking infrastructure, and regulation and cyptocurrencies.

I sat down with two speakers from the conference to discuss the ways in which Fintech is revolutionizing financial systems and the governance structures that fundamentally underpin it.

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We discussed the attempts of centralized governance structures to regulate an increasingly decentralized industry, and the inherent trade-offs that these structures face in terms of having to mitigate risk, while also potentially disincentivizing both innovation and growth. We also spoke of the potential shift away from traditional banking structures to startup challengers, (whether market lenders or small banks), and the implications of that shift for our regulators. Lastly, we looked at the social impact of the digitization of banking and what those impacts mean for some of the world’s most economically disenfranchised people.

Chris Skinner, the bestselling author of Digital Bank and current Chair of the European networking forum, the Financial Services Club, sat down with me to discuss the Fintech industry’s governance structures, and his views on the different regulatory environments that could either stifle or encourage innovation in this field.

Skinner compared the United States system of decentralized regulation to the United Kingdom’s  centralized system. Ultimately, he sees the decentralization that characterizes the US, and the resulting multiple regulatory agencies with which an emerging Fintech company must comply, as stifling growth and innovation. He compared this to the UK, where Fintech companies are only required to comply with one set of regulations, administered by a centralized agency.

I asked Skinner if he could comment, from a regulator’s perspective, on balancing the need of allowing for growth and innovation, while also trying to mitigate risk and the need to assert government control. Skinner noted that “the thing about innovation is that you have to be willing to embrace failure.” He went on to explain that the UK system, where supports have been provided to Fintech startups, has been helpful in bringing down the barriers to entry. One example Skinner pointed to was the Bank of England’s Fintech Accelerator, which works in partnership with Fintech firms to deploy innovative technologies that support the Bank’s mission and overall operations.

I also had the opportunity to sit with Warren Mead, KPMG’s global co-lead for FinTech. Mead currently leads KPMG’s challenger bank and disruptive banking segment.

We discussed the potential shift away from traditional banking structures towards emerging startups, and the advantages and disadvantages that could arise as a result of this shift. Mead argued that in the absence of an economic shock, claims that a significant shift is taking place might be misplaced. Governments and consumers alike have the tendency to be risk averse when it comes to their banking services. However, he stated that the one great advantage of challenger startups is new technology. Technology could have the effect of breaking down some of these barriers to entry by providing greater cost efficiencies, and providing faster and more accessible means of unlocking consumer capital.

money confI asked Skinner and Mead what they believed to be the greatest threat to the Fintech industry over the next five to ten years. Mead replied that the biggest challenge is essentially an economic one — most companies have yet to go through an economic cycle. Therefore, their ability to withstand an economic shock has yet to be tested. Skinner emphasized the unpredictability of outcomes relating to political change, such as events like the Brexit referendum, and the unintended consequences that such these events could bring.

Finally, we discussed the social implications of the increasing digitization of our financial systems. Skinner argued that Fintech, by allowing greater inclusion in the financial system, will transform our societies by giving the most economically disenfranchised segments of the population access to capital. Skinner explained that developed economies currently have 2 billion people who are banked, leaving much of the rest of world with no access to financial services. It is when you are denied this access that you end up paying a lot more to handle your own capital. (Yet another example of how the poor pay more.) Skinner argued that with the rise of the mobile phone network, we are beginning to see the 5 billion people that were previously excluded finally gain access to cheap financial services.

The idea that a mobile identity can enable financial inclusion is the basis of a current project being undertaken by the United Nations (UN), a project in which Skinner himself has been involved. The UN is currently trying to develop a blockchain ID system that could be uniquely identified by biometrics — in other words, an international ID system. Skinner stated that this digital identity project is slated to be implemented by the year 2030.

One of the primary benefits of achieving a blockchain ID system is that we would be able to track some of the most socioeconomically vulnerable segments of the population. For instance, it is currently impossible to accurately track all of the women and girls who are being trafficked in the sex slave trade due to the fact that most have no record of ever being born. Creating this digital identity would assist governments in their efforts to track, trace, and serve these vulnerable individuals.

Fintech is a disruptive industry. Whether that disruption is fundamentally altering our traditional banking structures and centralized governance systems, or bringing down barriers that for too long have worked to deny the poor access to financial services, it is an industry that is worth watching.

Shelby Challis is a 2016 Master of Public Policy candidate at the University of Toronto’s School of Public Policy and Governance. She previously completed an Honours Bachelor of Arts degree in Political Science at the University of Toronto, and has since worked for the Ministry of Health and Long-term Care. Her policy areas of interest include healthcare finance, labour relations, and security management.

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