How Fintech Is Changing The World (And How Blockchain Is A Part Of This)
It is regularly spoken about how fintech can be a power for good, both for increasing the user-friendliness of financial services and for bringing financially excluded individuals around the world into the financial system. In my previous article, I summarized how blockchain works, and how the some of the innovations it brings are relevant to the two billion individuals globally who are unbanked. It is heartening to see widespread and growing support for fintech companies and innovations, and blockchain in particular, being shown by countries in the Middle East, given that it is estimated that 80% of the world's unbanked live in Muslim majority countries.
However, with all the talk of fintech and blockchain, I often feel that the "why" about the importance of all this gets forgotten. Why does access to modern financial services help improve the lives of the unbanked? Why is fintech so important to solving the global issue of financial inclusion? And why will fintech do this, when nothing else before it has? After all, banking has –in some form or another– been around since before the Ancient Greek and Roman periods. The first banking systems were founded to facilitate trade in the MENA region, however, today, 86% of the population in MENA are excluded from financial services. Why have banks throughout history exclusively served the wealthiest in society, when by the very virtue of being able to access banking services, these people have been able to grow their wealth further?
As I outlined earlier, blockchain reduces and manual processes, and therefore the time taken, in sharing and updating information. This is not only a major advantage to the customer, but also to the bank or other institution processing information– as they can now do so far more quickly and efficiently. In this sense, blockchain is no different to almost all other fintech innovations. They all focus on improving the customer experience, efficiency for the financial institution, and often both. Modern fintech innovations (such as blockchain) are just the latest in a series of innovations that have occurred to date, including the introduction of core banking systems in the 1970's and 80's, the introduction of ATMs in the 1990's, and the introduction of mobile money (e.g. M-Pesa in Kenya) in the 2000's.
Possibly the first modern example of fintech including financial inclusion is the introduction of core banking systems in the 1970's. Before the introduction of core banking systems, each bank branch manually processed its own transactions by hand. Unsurprisingly, this was a labor-intensive process– and consequently a very expensive one. These costs were passed onto consumers. Only the wealthiest could afford to sustain these costs, and therefore, only the wealthiest had a bank account. Core banking introduced an IT system that allowed a network of bank branches to all be connected, and log and settle transactions on the central "core" IT system. This drastically reduced processing times and costs to the bank of providing a simple bank account, meaning that banks could profitably bank less wealthy customers for the first time. In Europe, in the period between 1975-1985 that core banking systems were introduced, the number of people with bank accounts tripled. People could, often for the first time, receive interest on everyday savings; and get finance to start businesses, finance major purchases such as houses and cars; all of which helped contribute to an increase in standard of living. Another example is the aforementioned M-Pesa. By simply allowing customers to access finances via their mobile phone –close by and convenient, unlike the few bank branches around in Kenya– M-Pesa tripled financial inclusion between 2006 (the year before its launch) to 2013. It is estimated to have directly lifted 850,000 people out of poverty, with up to 50% of Kenya's GDP flowing through M-Pesa.
So, it is clear that fintech innovations will allow greater access to the financial system for unbanked individuals. Blockchain is widely anticipated to be the latest in a line of fintech innovations to shape the future of our economies and business ecosystems. The next wave of innovation could make financial inclusion possible for all, and the need for this in the MENA is especially pressing, given the astonishing amount of financial exclusion in the region. But how will bringing these people into the financial system change the world, or even the business landscape? And how will this affect us as individuals?
Bringing an individual into the formal financial system allows them to build a credit history, access credit, start companies, pay for goods and services online, among many other things. All of these actions help individuals grow their wealth and improve quality of life. In the UAE, Moody's research implies that a 20% increase in card penetration would bring a 0.5% increase in GDP, worth $8 billion a year, and generate 100,000 new skilled jobs. It creates a raft of new opportunities in online retailing, credit and lending, loyalty and many other areas. People can access the world of opportunity that the privileged few of us couldn't imagine our lives without.
Fintech innovations are changing the face of companies. 20 years ago, it was inconceivable that a company in the UAE without stores could grow from nothing to being a sustainable and profitable business sold for $650 million within 12 years- this year, Souq.com has done just that. And this achievement has been realized with 86% of the population unable to access its services- imagine the opportunity if we get this population into the financial system, and able to purchase goods and service online.
Blockchain is an important fintech innovation- it will allow companies and individuals to agree and settle contracts and transactions very quickly and efficiently, and removes the need for intermediaries or central counterparties. This is especially relevant within Islamic finance –one of the core principles of which is to have enforceable contracts which are fair, transparent and agreeable between parties– where the opportunity to help its community is largest. The huge potential reduction in cost of transactions that blockchain brings means its reach and potential impact is enormous. It is important to remember that blockchain is just the latest in a long line of fintech innovations that have changed the face of business for consumers– however, this time, it really could make the final leap required to making the world a fairer, more inclusive, and more prosperous society– and this will benefit us all.