The topic of this edition is super important to our team: how FinTech innovations are changing the world in both positive and negative ways.
If you make mobile payments via PayPal, use online banking, or support worthwhile causes or projects on Indiegogo or GoFundMe, then you are a user of FinTech. Currently, one out of three people across 20 major world economies claim to be using at least two FinTech services. In India and China, Asia’s top FinTech funding hubs, more than half of consumers use FinTech services like money transfers, financial planning, borrowing, and insurance.
The main innovative edge of FinTech lies in providing financial services to people who don’t normally have access to conventional banking services. In the world today, approximately 1.7 billion adults lack a bank account. But with an emphasis on flexibility, speed, inclusiveness, and transparency, FinTech allows consumers to open bank accounts, take out loans, transfer money, or buy life insurance on a smartphone, bypassing the hefty fees and regulatory restrictions of traditional banks. Little wonder, then, that 82% of financial institutions expect to increase FinTech partnerships in the next three to five years, according to a PwC report.
Poverty Relief and Ending Debt Bondage
Among FinTech’s main beneficiaries are impoverished and underprivileged. A study by MIT found that access to mobile money has reduced extreme poverty by 9.2%, while increasing daily per capita consumption by an average 18.5% among female-headed households. FinTech solutions such as InstaReM and WorldRemit allow migrant workers to send remittances home faster, safer, and cheaper. According to a World Bank estimate, traditional remittance services suck up almost 7% of the total amount sent, removing over $16 billion from developing economies.
FinTech and Modern Slavery
Migrant workers are instrumental to many economies, particularly in Asia where more than half of global migrant workers originate and work. Most global human trafficking is for the purpose of labor, and the unifying characteristic for most modern slavery is debt bondage. Workers are forced to pay illegal fees for jobs, which are then financed by illegal loans, with passports and other travel documents used as loan collateral. Accordingly, finance and FinTech are at the heart of modern slavery, but also serve as the most powerful force for its eradication.
Hong Kong serves as a microcosm of the broader global problem. Around 385,000 migrant domestic workers contribute an estimated US$12.6 billion to the city’s economy (or 3.6% of GDP), but only 18% of these workers have bank accounts. Many therefore resort to borrowing money from loan sharks, with employment agencies and moneylenders often collaborating in their exploitation of these workers.
Domestic workers in Hong Kong spend over a third of their wages to pay back loans and fees to recruitment agencies. When Canadian entrepreneur Jared King learned of the issue from Joy Tadios-Arenas, an expert on migration and a former assistant professor at City University of Hong Kong, the two created Lender Friend (now renamed Good Financial), an FSI portfolio company that allows workers to borrow money at the low interest rate of 1.7% (compared to 2.5% charged by other licensed lenders, or 10-30% by illegal lenders) while providing free consultation. The social enterprise hopes to save domestic workers HK$100 million over the next five to seven years by reducing interest rates, which can prevent migrant workers from becoming victims of debt bondage.
More Than Just Financial Services
Startups are by no means the only businesses getting into FinTech — think Apple Pay and Alipay. Last year, ride-hailing service Grab became one of Southeast Asia’s largest non-bank financial firms by raising US$200 million to expand its FinTech offerings, now also providing lending and payment services to unbanked and underbanked consumers, as well as micro-entrepreneurs and small businesses through its FinTech arm, Grab Financial.
Contributing to the success of this joint venture between Grab and Credit Saison, one of Japan’s largest financial consumer lending companies, is the Grab app, which processes more than a billion transactions annually, and user habits such as transport movements and geo-locations and financial habits, which can be used as an alternative resource to measure credit ratings.
Through its partnership with Chubb, the world’s largest publicly traded property and casualty insurance company, Grab will not only offer insurance solutions for its driver-partners, but will also look into offering personalized insurance solutions to private-hire drivers in Southeast Asia through leveraging data technology from its platform, including telematics, machine learning, and predictive analytics.
From Ant Financial Services Group, originated from Alibaba’s Alipay, to Apple Pay Cash, Amazon’s Amazon Pay, Amazon Cash and Amazon Lending, tech and e-commerce giants including Google and Facebook are eager to have a finger in the FinTech pie. With Ant Financial valued at US$150 billion last year, US$62 billion more than Goldman Sachs, it is not difficult to understand why.
Born out of the general mistrust in the banking system after the global financial crisis, the ubiquity of mobile devices, and a significant increase in widely accessible data, FinTech is widely believed to be a key to a future of increased fairness and inclusiveness.
But FinTech is not without its negative impacts. Just a few days ago, the world’s first case relating to losses generated by an automated money manager went to court. While the victim – a Hong Kong tycoon who lost more than US$20 million – was clearly injured by the decisions of a supercomputer, who should bear responsibility for the losses?
Similarly, the partnership between Grab Financial and Chubb has generated concerns about data privacy: does Grab Financial have the consent of its driver-partners when sharing their data with the insurance provider, and to what extent do the driver-partners understand how their data will be used?
A study of 52 digital lenders has found that the policies of internationally based digital finance providers were “longer, more difficult to read, and less understandable than the privacy policies of traditional US-based financial institutions.” The study’s technical analysis confirmed that none of the policies provide specifics on the types of data that will be collected or how it will be handled. Moreover, there is widespread misuse of cryptographic algorithms, including the use (by 17 of the 27 apps studied) of algorithms that have long been publicly deprecated — algorithms that are listed as beyond their useful lifetime and therefore inherently dangerous.
From poor encryption algorithms to ambiguous terms on data collection, Patrick Traynor, author of the CFI report, finds the FinTech sector’s insufficient maintenance in cybersecurity and data protection very concerning, and he thinks FinTech companies need to think about what data they are taking, why they are taking it, and for how long they are storing it.
So what do you think? Will FinTech lead to greater financial inclusion and transparency, or exclusion and disparity? Join the conversation! Sign up for our FinTech Ethics and Risks course today.
