Some of the news is positive, some negative. Yet the groundswell of young people demanding accountability and responsibility for sustainability in economic and political decision-making continues to multiply.
Financial organisations need to pay attention to this market in order to tap into a significant positional advantage – a future market populated by the next generation of global citizens and consumers of financial services.
It is now more critical than ever to build an organisational culture within the financial system that blends conduct, structure, performance, trend analyses, and privileged insights on the real players of the future.
The culture should also embrace uncertainties and disruptions, balance flexibility with organisational commitments, and develop strong convictions on how to stitch all this together into a viable strategy and action plan to deliver competitive advantages for financial services well into the future.
Enter FinTech in the shape of four technology families: The Internet of things (IoT), big data, artificial intelligence, and blockchain.
The ability to make better decisions and meet the UN’s Sustainable Development Goals stands at the heart of the “FinTech revolution”, with FinTech drawing strongly from the ‘data revolution’ built into IoT, big data, AI, and blockchain.
These technologies have the power to provide information, context, data, and the tools to build a more sustainable and equitable world, for example through building economic capital alongside social and economic inclusion, protecting natural and human environments across vast areas of the globe, or building smart cities that could conserve valuable non-renewable resources.
How do these four technology families support FinTech, and what are the possibilities they generate to meet the challenges?
IoT represents internet-connected devices such as smartphones, cars, home appliances, weather stations etc, which (apart from monitoring information of users of such devices, their consumption choices, locations etc) can also be used to track information on human and environmental developments across a wide arc.
Satellite internet connectivity allows for remote monitoring of human and natural systems. This information can be fed into the things people use with such connectivity.
The flow of streams of data from multiple sources, such as IoT, results in enormous digital databases, so-called big data. Big data is characterised by datasets produced in high volume, large variety, high velocity, high value and dependable veracity.
Information available in volume, value, velocity, veracity and variety, and the ability to record, classify, curate and apply them in real time, are goldmines for enterprises engaged in managing and monetising important businesses in banking, healthcare, weather monitoring, ecologically significant projects, and so forth.
Investment in these projects and enterprises represents a significant portion of the assets side of a financial institution, and FinTech is designed to use relevant data from these sources to make better decisions, especially when financial investments with global-scale impact are being considered. Cases in point are the Belt and Road Project and the Arctic Drilling Project.
Artificial intelligence applies machine learning to big data to ‘learn’ and build advanced use algorithms to enable pattern recognition, fraud detection, complex data organisation, and context recognition so that the flood of data can be curated, organised and managed for use at different levels within, and for the purposes of, an organisation.
Blockchain’s main functionality is the tracking of every single piece of digital data from its source to its end use within a peer-to-peer network and use of encryption to enable decoding of the streams of information end-to-end. Blockchain can ensure the integrity of the information, to both providers and users of the data.
With these powerful new resources to hand, digitalisation could conceivably disrupt and recast the US$300 trillion global financial system. For example, UN Development Plan principal project catalyst Simon Zadek recognises that FinTech’s main thrust to date has been in improving financial inclusion, but it could equally be possible to mine the power of FinTech to:
Ensure that financing decisions commit additionally to social and economic values built on the principles of justice and equality for all, manage climate risk and ameliorate the problem of climate and economic refugees through responsible project and infrastructure financing, and support universally equitable and fair labour standards
Strengthen financial autonomy for women through the use of blockchain integrity.
Fund distributed solar technology through crowdsourcing and thereby preserve non-renewable resources and facilitate mobile payment systems for poorer communities.
One can also imagine FinTech being harnessed to augment global efforts to provide equitable access to education for all (which is now recognised as a basic human right); access to clean energy; and providing humanitarian assistance and ‘e-identities’ to growing numbers of people displaced due to war, drought, disease, famine, and natural disasters. We are just scratching at the surface of the enormous possibilities here!
The role for regulation and compliance
By making the gathering, usage, and movement of data faster, cheaper and more reliable, FinTech will provide the key for responsible decision making.
FinTech will be central to how we pay for goods and services as individuals, and to our values and relationships to the goods and services that we choose to buy.
Communities of consumers, as well as employees of organisations, are beginning to think in terms of a ‘climate neutral relationship’ with the planet. Their brand loyalties will depend on which providers of those goods and services respect that relationship.
At a much broader level, ensuring that financing decisions to produce those goods and services also weigh social and environmental impacts, climate risks, community welfare and so forth will become the key to ensuring brand loyalties for the financing institutions.
With the coming together of many technologies, regulatory, and compliance teams will have to reconfigure how they view the development of sound standards and practices to benefit local and global sustainable development.
To do this, they will also need to have a grasp of the plethora of scientific evidence warning of the impacts of global climate change, as well as other factors that have institutionalised inequality of opportunity, through globally destabilising events such as political discord, war, drought, famine, poverty, and so forth.
The conversion of information into knowledge, through verifiable data collection, enables industry leaders, regulators, and business and compliance teams to have a readily available platform to make decisions that are sound and robust for the planet as well as for the industry’s bottom line. This benefit has already been demonstrated in other initiatives.
Blockchain has graduated from its original conceptualisation as a technology for enabling crypto currency to a platform used by environmental protection agencies such as the World Wildlife Fund in Australia, Fiji and New Zealand to ensure the integrity of sustainable food supply chains tracking edible fish and other products from ocean and farms to homes.
It is easy to imagine how banks could capitalise and monetise the opportunities created in the examples above to demonstrate cleaner asset creation initiatives on their own balance sheets.
Nevertheless, financial system regulators, standards setting authorities and business teams must adapt while they enter the uncharted territory opened up by FinTech, and will need to maintain the three key principles on which financial systems have been built over centuries.
These are: financial stability, a competitive platform to promote market efficiencies, and protecting customer and other data that have been the exclusive and confidentiality protected foundation of banking but which are now facing transparency onslaughts from the global information highway enabled by the IoT, AI and blockchain.
FinTech also creates specific challenges for the legislative system, central banks, and supervisors. For example, the technological revolution demands new skillsets in order to balance prudential oversight with a rapidly moving business environment.
There is a need to embrace a global approach and for collaboration between international financial and non-financial peers in areas such as data rights, cross border movement of information and funds, grappling with cross jurisdictional mandates necessitated by global information flows and perhaps even creating a single global web of jurisdiction (a kind of ‘super-regulator’) to cope with the new reality of conducting business in a globally democratised business environment.
Repositioning regulation as principally a ‘principles-based approach’ rather than one tied to specific technologies, business forms or product types may advance the effectiveness of a global ‘super-regulator’ and may be the key to a successful regulatory development within a business environment turbocharged by the techno revolution.
Finding a balance
Several further potential downsides to FinTech have to be recognised and dealt with responsibly by regulators and compliance teams.
If financing decisions are made from purely automated data production and analytic capability, outliers such as poorer or higher risk borrowers may be excluded as well as those needing finance for unusual or innovative projects. Until now, regulation and standards development have focused more on financial inclusion and consumer protection rather than on how to regulate to avoid systematic exclusion of assets that fall outside of the normal.
Secondly, digitalisation increases transparency of financial decisions but by facilitating democratised usage (moreover, globally) it may also open up new and previously untapped avenues for illicit financial flows, expose customer data, and increase systemic risk as well as create moral hazards through peer-to-peer lending. Policies, regulations, and standards are just beginning to correlate these risks and tackle this problem.
However, while FinTech regulation is clearly needed in unprecedented new directions and levels, it needs to be balanced against the risk that too much regulation may inhibit consumer-friendly innovation. While the US has a long history of fostering innovation and enterprise even within FinTech (because of its state and federal banking systems), this is not replicated anywhere else in the world.
So it seems reasonable to assert that, while it is not yet the silver bullet for promoting the sustainable geo-economic services of the future, FinTech has a great opportunity to be at the vanguard of transforming financial services from being purely focused on shareholder value towards taking greater responsibility for global stakeholder value.