FinTech Could Help Achieve Full Financial Inclusion
By Javier Saade for Huffington Post
Capital is to economic development and finance what location is to real estate. And the world of finance is undergoing staggering innovation – some call it the “Wall Street and Silicon Valley stew.”
The application of technology and innovation to the financial services sector, aka FinTech or Digital Finance, has boundless promise. Capital is the foundation of a free-market globalized machine. Liquidity is the grease that lubricates the gears of that machine. The regulatory regimes that govern the financial sector – from capital markets to small business loans to consumer credit to transactions to currency exchanges to insurance underwriting to investment advice – constitute the instruction manuals to use the machine. And those instruction manuals are constantly updated.
We are currently in the midst of an incredible confluence of potentially seismic macro trends that touch every soul. Those trends include the biggest generational wealth transfer ever, democratized technology-driven everything, and big data coupled with cloud computing and networked devices. The economic and social promise of all this incredible action, which is in no small part driving FinTech innovation, could help usher in a world which enjoys much more inclusive financial services and capital access.
Let me tell you why I believe FinTech has such huge potential to deliver broadly inclusive capital access. Here are three telling markers: M1 global money supply ~$25 trillion, DTCC settled trades per year ~$24 quadrillion and the value of global equity and debt combined ~$300 trillion. Add derivatives and transactional velocity considerations to these massive numbers and you are way deep into the quadrillions. And what excites me the most is that the commercial opportunities are matched by social impact that is equally massive.
My perspective has been informed after a 20+ year career in the private and public sectors investing capital, starting and growing small companies, and providing strategic advice to multinational corporations. Recently I stepped down from a President Obama appointed role as Associate Administrator of the U.S. Small Business Administration where I led its investment and innovations programs overseeing tens of billions of dollars being invested in innovative and high-growth businesses across the land. Additionally, I held a seat at the U.S. Securities and Exchange Commission‘s Advisory Committee on Small & Emerging Companies. This exposure coupled with my conversations with hundreds of CEOs and the investors that bankroll them, has strengthened my vantage point.
Even with the speed of technological change and level of modernization the world has experienced in the last 20 years, hundreds of millions of small enterprises and over two billion people around the world still have little or no access to financing or investment capital. This inhibits economic growth and development and is one of the reasons gaps in wealth creation continue to widen. There are several factors fueling this disparity. First, underserved populations have little experience or knowledge about financial services. Second, the traditional, highly regulated capital providers have little knowledge about these populations. Third creditors have limited and inflexible data driving lending decisions. And fourth, the connective tissue between financial institutions and underserved populations is lacking because origination costs are high inhibiting profitably scaling.
However, FinTech is enabling incumbents and disruptive new entrants to build sustainable, profitable and cost-effective bridges between those that hold purse strings and those who most need what’s in the purse.
Lets define FinTech, a blanket term used to encompass a lot of different things. It describes a new and emerging financial services sub-sector as well as any innovation applied to traditional financial services including the back-end of established consumer and trade institutions. Innovations across the board – financial literacy, retail banking, investment advice, crowdfunding, capital markets, microcredit, small business financing, transactions and payments, currency exchanges, remittances, and other areas – are seeing simultaneous and significant levels of change and innovation.
The Economist Intelligence Unit (EIU) did a recent survey of 200+ bankers and FinTech executives and the biggest takeaway is that it will be a mix of FinTech new entrants and FinTech-using incumbents that will “split” this massive market. Each will dominate certain sectors, some niche and some not so niche. EIU predicts that this coopetition between banks and startups in the consumer space will yield us with a world in which today’s large financial institutions will continue to exist, but their delivery of services will be different and thus the consumer is the true winner at the end of the day.
The combination of cross cutting innovation with concurrence is what makes the space, broadly defined, so potentially transformative. Venture capitalists agree as they have invested over $30 billion over the last half decade in young companies. The landscape is very dynamic with thousands of players as evidenced if you look at Venture Scanner’s competitive intelligence and maps of small companies against financial services sub-sectors. Further illustrating the depth of digital finance, Toronto-based StartUp Management takes blockchain technology aka BlockTech, and maps it against 27 categories. Blockchain, by the way, is expected to have applications that go way beyond finance.
This ecosystem’s developments are ushering a new era of innovative financial services that have the potential to touch everyone on the planet. That innovation is making the entire financial sector value chain scalable. Driving this financial innovation is very cheap and abundant computing power, distributed and mobile services and the promise of big data captured via alternative sources of networked devices. This exciting combination eases access on-ramps for the under-banked and enables capital providers to better and differently build the credit and risk models that drive their lending decisions.
No matter how you look at it, financial services is one of the largest sectors of the global economy and all of this innovation has the potential to create fundamental changes, if applied appropriately. A McKinsey & Company study highlighted some very interesting innovations – lenders using new alternative data models to cut credit losses in experimental forays for lower-income communities by 20 to 50 percent while also doubling application approval rates. Innovative mobile operators, and utilities are tapping new forms of data to find new customers and provide them with services. This is a double-edged sword for many of us – think spam and micro targeted social media ads. But for populations that don’t have a credit history, let alone access to it, just being in the mix is a big leap forward.
The opportunities are endless. Providers of credit have new ways and will soon have more ways to effect capital deployment and risk assessment in highly impactful and low-touch/cost ways. The low cost implications to deliver at scale using technology have big societal impact potential. The reason, I believe, lies in the fact that companies have the opportunity to profitably serve huge swaths of unbanked and under-banked people and companies. This in turn will lead society to move much more forcefully towards full financial inclusion.
Imagine what this would mean!