FinTech is conquering mobile phones, with an increasing amount of people around the world using banking apps. These kinds of digital services also offer an enormous opportunity for people to attain more prosperity, particularly the poor. Because FinTech enables the ‘unbanked’ (the billions of people without bank accounts) to use an efficient and reliable financial system for the first time, which allows them to participate in the economy. As with every new technology, however, this potential is not without its dangers. The following is a guide to what FinTech is, how it is developing and what to watch out for.Imagine you want to go for dinner with friends at the end of the month, but don’t know if you have enough money left or not. So you ask the finance app on your smartphone. The app has saved all of your account movements, and provides you with all of the information you need related to your current account balance, as well as the upcoming costs you will have to cover before the end of the month, such as rent, electricity, and the like. And it turns out that yes, you can afford that dinner, so you order and pay for a taxi with another app. In the restaurant, your finance app informs you that due to the cost of the taxi, dinner is no longer on the cards, and you can no longer pay for it digitally. An acquaintance then sends you 100 euro in real time. Dinner is served!
This scenario is partly fiction, but our daily financial dealings will soon resemble it. Today, it is already possible to check your finances and pay for things using your smartphone. Tomorrow we will be able to send money via voice commands, take out or give a loan with a single click, and have our finances managed by intelligent software. This is being made possible through financial technology (or FinTech for short) and FinTech companies. This new technology will make daily life easier for us – but along with these new possibilities, also presents some new challenges.
- Robo-advisors manage your portfolio automatically
But what exactly is FinTech? FinTech refers to internet-based financial services and their apps and uses. FinTech facilitates crowdfunding, crowdlending, automated portfolio management through robo-advisors, as well as personal financial management services through financial assistant apps (FAA). FAAs merge users’ bank and credit card accounts and the management of all ingoing and outgoing payments into one app. Some FinTech can also already handle voice commands, e.g. “Send Thomas €100 via the MyPayApp for the food last night”.
In Germany, for example, FinTech company N26 has an app that enables payments to be released to other N26 customers via voice command, without the need to open an additional banking app. The company also has voice-controlled credit and insurance services in its portfolio. In any case, payments will become even more digital in future. According to estimations by the advisory firm Nielsson, over 1.5 billion people worldwide will be using digital payment methods by 2018. This will be of particular benefit to the poor.
- The internet is closer than the next bank
In India, for example, the government is supporting FinTech directly via the People’s Wealth Program. They are prioritising financial infrastructure over the construction of physical banks. In Kenya, for years now, the world’s largest money transfer system MPesa has been enabling digital payments for a wide range of services. You don’t need a bank account to use the app, with cash able to be exchanged for credit at kiosks and other locations. Two-thirds of the Kenyan population already regularly use MPesa for handling payments, and roughly 30 percent of local GDP is processed via the app – a number which is set to increase. There are already similar services to MPesa in around 20 developing countries. According to The Economist, it is easier today to order a taxi via app in Nairobi than it is in New York.
By 2014, mobile money systems were already available in 85% of sub-Saharan countries, 75% of Southeast Asian nations and 65% of countries in the South American and Pacific regions. Mobile money transfer and payment services also heavily reduce the previously-high fees for international money transfers. As many people receive their main income from family members working in foreign countries, digital infrastructure frees them from monetary middle-men and local banks, if they ever existed in the first place. Take Pakistan, for example, where repayments can be made across the whole country using the Small World app. All that is required is an internet connection, which is much more common in many regions than a local bank.
- Investors don’t earn any interest via social lending
A Worldbank study in 2014 also showed that 12 percent of the population of sub-Saharan Africa used so-called “mobile money” accounts. In Asia, too, there has also been a growing development in terms of app-based cashless payment systems, particularly in China, India and Myanmar. It is estimated that by 2020 in India alone around 500 billion dollars will be transferred via digital payment methods, which would account for 15% of India’s GDP. Interestingly, cashless societies are advancing more rapidly in developing and emerging nations than in most OECD countries. It is easier, for example, to send money to your smartphone contacts with one click via the Chillr app in India, an emerging economy, than it is in the financial centres of Great Britain or the USA.
App-based services are also increasingly enabling the brokering and borrowing of credit. In Delhi, Mumbai and other large cities in India, microloans can be facilitated via apps such as moneytapp or IndiaLends, without need for security. The Zidisha app is another example of how trips to the bank are being rendered obsolete – all important documents are loaded into the system via the app, which allows people to obtain credit within minutes. Borrowers pay a moderate interest rate of around 1.5%.
Zidisha is a platform for social lending. The app directly connects small producers from developing countries with private investors. The small producers post their loan applications for their production needs (such as a sowing machine or a computer) on the platform. Investors receive no interest on their microloans.
- Financial inclusion moving ahead in leaps and bounds
In Kenya, the Mfarm app offers a virtual marketplace for agricultural products and information about local prices, as well as the possibility for producers to pool small product ranges and services together in a way that satisfies customers’ expectations. The app not only gets rid of the need for intermediaries, but can also be used to handle payments, thanks to its integration with MPesa. This allows small producers to gain financial independence and directly market their products themselves. Initial studies show that this leads to an increase in their productivity and income. On a macro-social level, FinTech has the potential to encourage productive investments, combat corruption and encourage effective taxation.
The expansion of digital financial infrastructure in countries such as India, China and Kenya is also making it possible to integrate the ‘unbanked’ (people without bank accounts) into the financial system. This financial inclusion unleashes not only economic potential for companies (so many new potential customers!) but also provides many people with an enormous opportunity to improve their economic situation. As with 3D printing, financial inclusion is also moving ahead in leaps and bounds. Because there is no comprehensive banking system in developing and emerging countries, a large developmental leap is now required. Through this so-called ‘leapfrog effect’, digital technology is able to overtake the development of traditional banking systems in order to facilitate broader access to financial systems.
- Thanks to improved AI, apps are providing answers to more and more financial questions
Thanks to artificial intelligence, this financial system is also becoming smarter, turning its apps into little financial advisors living in our pockets. Apps such as Cleo or Olivia can already answer their users’ questions about financial management via chat, such as how much money they would have to save in order to pay for a holiday in three months’ time. They advise users not only about their saving goals, but also remind them of these goals when they spend money.
Commitment or goal-oriented savings apps send users email reminders about their savings goals and give them tips on how to save. In an experiment conducted across Peru, Bolivia and the Philippines, Yale economist Karlan and his colleagues have shown that such app-based cues can influence people’s behaviour. Regular communication between users and applications lead to improved savings outcomes in comparison with negative incentives such as the threat of losing interest when targets are not reached.
Based on behavioural research, HSBC is currently developing an app intended to influence consumer spending habits. Providing information such as ‘‘You spent more money this week than last week’’ should enable more rational decision-making, without compromising the autonomy of the user. With improvements in AI, apps will be able to provide answers to more and more financial questions, and will manage the finances of their users with increasing autonomy.
- New dependencies are emerging through FinTech
Because AI’s lifeblood is data, FinTech also presents a significant challenge in terms of data privacy. Regulation will be crucial in determining how FinTech companies are allowed to handle user data. Information regarding the payment histories or credit histories of their users could be sold to insurance companies, creditors or telecom companies as a side product. Like all technology, finance apps demand new skills from their users. Along with a certain amount of financial expertise, basic digital literacy is also required in order to be able to reap the rewards of new FinTech applications responsibly, independently and safely.
This is particularly true in emerging countries. Over three-quarters of people in India possess little economic literacy and hardly understand the consequences that digital finance products can have for their lives. Ultimately, FinTech and FAAs also create new dependencies, because the use of FinTech applications rely on technological infrastructure, a permanent electricity supply and access to mobile phone networks. Cash and physical banks should therefore not be neglected, as they are particularly necessary in times of crisis.
On a fundamental level, we need to ask ourselves uncomfortable questions about the autonomy of users decision-making, and about the ways in which their behaviour can be influenced. This is the conclusion reached in a study by Mathew Tiessen, a cultural and communications researcher from Toronto: ‘‘By providing customers with the appearance of access and interactivity, app-based banking allows the financial system to extend its ability to track, surveil, judge, influence and control credit-seeking populations in ever more precise and predatory ways.’’
The new dependencies and opportunities related to FinTech in a nascent cashless society will define the discussions of the future. What can artificial intelligence be permitted to decide? How should intelligent FAAs be regulated? What still counts as money? Meanwhile, FinTech continues to develop. In 2030, people’s daily financial lives will be much more digital and automated than they are today. But despite all the temptations and prospects for a simpler life, we must also ensure that this technology is brought under control – in daily life, politics and society as a whole.