Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
Maame Aba Asiedu
(UGSOL ’24)
‘Fintech is not only an enabler but the driving engine.’ Pierre Gramegna
Introduction
The traditional financial sector has seen clear disruption in recent times from advances in financial technology (Fintech). Its rise has revolutionised finance, eased the banking sector and made financial transactions simpler and more available for consumers through efficient, affordable and accessible services. This has inevitably contributed to economic development as shown in a study which revealed that, during the Covid-19 pandemic, countries more advanced in Fintech saw higher growth in gross domestic product (GDP).[1]
To this effect, this essay strives to provide a comprehensive overview on developments in Fintech and how it affects economic development, and offers ways in which it should be regulated. To achieve this objective, this paper first defines economic development and Fintech and then establishes the link between Fintech and economic development. Thereafter, it will demonstrate the ways in which developments in Fintech affect economic development and suggest ways it should be regulated. Finally, a conclusion will provide a summary of the impact of Fintech on economic development and show the need to implement the regulations proposed.
Economic development
‘…Just so, the great cold of poverty and economic stagnation is merely the absence of economic development.’ Jane Jacobs
It is not easy to find a single and comprehensive definition of economic development. The International Economic Development Council (IEDC), however, defines it as a programme, group of policies, or activity that seeks to improve the economic wellbeing and quality of life for a community.[2] It has also been defined as a process of structural transformation with continuous technological innovation and industrial upgrading.[3]Ultimately, economic development seeks the improvement of a society’s wellbeing and standard of living. Economic development is often confused with economic growth which distinction should be made clear. Economist Amartya Sen refers to economic growth as one section of the economic development process. It is an increase in GDP and a focus on market productivity, while economic development is the improvement in the quality of life and standard of living within a growing economy. According to economists Todaro and Smith, economic development is the eradication poverty and curtailment of inequality. Economic growth thus, fosters and is a facet of economic development.
Fintech and its developments
The word ‘Fintech’ lends an easy interpretation. Simply put, it is the use of technology to enhance the delivery and use of financial services. The Bali Fintech Agenda defines Fintech as ‘advances in technology that have the potential to transform the provision of financial services’. Its rise is spurred by the seismic expansion of internet access and use of technologies especially, smart phones. Financial technological developments before Fintech include the laying of the first transatlantic cable in the mid-19th century and first ATM in 1967. In more recent decades, the world has experienced Fintech’s leaps in innovation with the introduction of Bitcoin in 2009 and peer-to-peer payment systems in 2011. Today, there are 300,000 Fintech start-ups globally with the Fintech space now worth approximately US$179bn.[4]
Correlation between Fintech and economic development
Todaro and Smith indicate that development includes the acceleration of economic growth, the reduction of inequality, and the eradication of poverty. The impact of Fintech encapsulates these factors. It has speeded-up economic growth, reduced inequality and reduced poverty in many countries. The UN General Assembly’s compendium titled ‘Transforming our World: the 2030 Agenda for Sustainable Development’ reveals the impact of financial technology in hastening economic growth through digital inclusion.[5] In Kenya for instance, Fintech has lifted about a million people from extreme poverty and combated inequality by giving many ‘unbanked’ access to financial services through the mobile money service ‘M-Pesa’ which has significantly improved standards of living through the greater financial inclusion it has brought about. Reports show that Fintech fosters annual economic growth by up to 2.2 per cent.[6] Observing its influence on economic development, the inextricable link between Fintech and economic development is established.
How developments in Fintech can affect economic development
The ways in which developments in Fintech can have an impact on economic development are profound.
Developing agriculture
‘Investments in agriculture are the best weapons against hunger and poverty and they have made lives better for billions of people.’ Bill and Melinda Gates Foundation
Ancient civilizations like ancient Egypt, Nubia, and Mesopotamia remind us of that agriculture is essential in an economy’s development. Today, the World Bank indicates that agriculture accounts for four per cent of the world’s GDP; but in developing countries, it is more than 25 per cent.[7] With the knowledge that problems in agriculture will negatively affect economic development, Fintech helps in agricultural transformation through innovation for farmers. In Kenya, Fintechs like Apollo Agriculture aids small scale farmers to maximise their profits by transforming subsistence farming to commercial farming, helping farmers like Magaret Chinero Sigei who used to harvest ten bags of produce to now harvest 25 bags after using Apollo.[8] By using satellites to monitor crop growth over seasons and providing this data to farmers, people can make better decisions about their crops and increase yields. Apollo also contributes to financial inclusion by providing mobile money accounts and building credit scores so farmers can secure loans. With many intermediaries absent, the cost of financial services is lower, resulting in higher productivity, increased employment and the more efficient production of food.
Fostering innovation
Using innovation, Fintech generates numerous products and services which have speeded up money transfers, reduced transfer costs and increased access to capital, spurring economic growth. An example of these innovations is digital banking which offers products and services at lower costs than traditional banks. Digital-only banks also render cheaper services to customers with the same quality as traditional banks since human resources and infrastructural costs have been reduced. However, one profound innovation is the use of artificial intelligence (AI) in financial services like robo-advisors. By using a personalised portfolio, they offer automated financial advice, manage investments and offer investment plans.
Working towards financial inclusion
‘Economic development cannot take a nation forward on its own […]. We need to take care of the poor, deprived and left behind sections of society.’ Narendra Modi
Fintech has paved way for a financially inclusive society through its products, services and the smart phone by bringing f inancial services to those who could not access them before. For example, as mentioned, the Kenyan mobile money service, M-Pesa, has helped lift approximately one million people out of poverty.[9] Additionally, money can be raised through crowdfunding. The UN High Commissioner for Refugees (UNCHR) used this to bring relief to the refugee plight, so refugees can complete their education.[10] Furthermore, by using digital payments, people can have improved access to clean water. Water payment’s digitisation project in Tanzania tripled water utility payments and reduced the waiting time of water collection from three hours to ten minutes on average within a year.[11]
Fostering innovations in the health sector
Fintech innovations help many people deal with healthcare emergencies in a better way. Through financing and digital payments, healthcare service providers can reach out to people in rural areas who have inadequate access to healthcare. For instance, in Bangladesh, innovations in Fintech enabled the mobilisation of health agents in the community to register more than a million new mothers to a maternal health programme through the platform ‘MAMA Bangladesh’.[12] Mothers receive important health information from pregnancy all the way to infancy. Additionally, the low costs that accompany registration, payment of premiums and receiving disbursement, make micro health insurance affordable and practicable for people. In the United States, the Fintech health innovation, Oscar Health, makes it easier to make health claims at a reasonable cost. Through these innovations, people’s wellbeing is promoted.
How developments in Fintech should be regulated
There are risks associated with the Fintech industry that pose a threat to consumers and to the environment. It is therefore necessary that they are curbed to ensure the safety of consumers, the environment and the digital environment in which payments are made. This can be done in a number of ways.
Strengthen cybersecurity
The first step in regulating Fintech is to reinforce cybersecurity. The vulnerability of the Fintech industry to cyberattacks cannot be overemphasised. This because Fintech f irms hold consumers sensitive information, attracting cybercriminals. In 2022, hackers stole approximately US$15m worth of Ethereum, US$18m worth of Bitcoin and other cryptocurrencies.[13] This essay recommends that latest approaches in data security such as encryption and tokenisation,[14] which is the conversion of sensitive information into secret codes and tokens (generated number) respectively, should be employed. With tokenisation, information can be decrypted which can be read using distinctive databases known as ‘token vaults.’ These token vaults can even be encrypted to strengthen security further. Fintech security policies do require passwords but these are not enough. Security risks can be reduced by forcing consumers and employees to have regular password changes. For example, some online banks require their users change their passwords every three or six months. This can be imitated. The One-Time Password (OTP) system where the app generates a new and unique password every time a user logs in or makes transactions used by some digital banks is also feasible. Consumers too, when using the internet should use a Virtual Private Network (VPN),[15] which disguises online activity and encrypts online connection, giving the user more privacy and circumventing cybercrime. Use Fintech regulatory sandboxes This essay also suggests that approaches such as Fintech regulatory sandboxes should be used to regulate Fintech. They give innovative businesses in Fintech a testing ground to experiment with their new products and services under the eye of a regulator before it is brought to the market.[16] In 2021, the Bank of Ghana launched an innovation and regulatory sandbox pilot to foster a regulatory environment promoting Fintech innovation.[17] By using a regulatory sandbox, regulators ensure that Fintech innovations operate as intended, solving problems without creating new ones. Regulators, by gaining an understanding of a product or service being tested first-hand can ensure it is sustainable and minimises risks. They will also be able to better draft regulations to cover areas of Fintech that were initially unclear or non-existent due to their unfamiliarity with the new product or area. Through regulatory sandboxes, a safe space for Fintech innovations and ideas is created for mutual benefit. The main aim is to integrate regulations and compliance with the rapid growth of Fintech companies.
Governments should increase and tighten restrictions on Fintech operations
This essay proposes that more work should be done to tighten restrictions on the activities of Fintech industries. Laws on Fintech firm restrictions should be introduced not just to protect the consumer but also the environment, from the impact of energy intensive digital currencies like cryptocurrency. For example, limits should be placed on the amount of energy crypto- mining operations can use, and renewal of air permits should be denied if cryptocurrency firms are not willing to cut down on plant emissions. Laws can also be passed which halt moratoriums on ‘proof of work’ operations,[18] which is a much more energy-intensive way of mining cryptocurrencies. In New York for instance, lawmakers have passed a bill that will halt proof of work operations for two years. Governments should also encourage Fintech businesses to use regulation technology, to help adhere to regulations through supervisory practices tailored for Fintech apps.
Close the digital gap by investing in Fintech
It is important that investments in soft and hard infrastructure favourable to Fintech are prioritised especially in Africa. Statistics indicate that internet penetration in Africa is below the global average of 59 per cent and that only 26 per cent of the population has internet connectivity.[19] Fintech is a big user of internet connectivity and digital technology. With high demand for digital financial services, it is important that this digital gap be bridged by investing in increasing access to connectivity, particularly 4G networks and broadband as well as quality digital infrastructure. Fintech will then be able to grow rapidly and thrive in a digitally inclusive environment.
Digital currencies like cryptocurrencies should cut down on energy use
The rate at which digital currencies consume energy is alarming. Considering the global aim to reach net-zero emissions, the problem that cryptocurrencies create on the environment looms large. Bitcoin, the most popular cryptocurrency consumes half a percentage point of the electricity consumed globally.[20] This essay suggests that cryptocurrencies should move away from their ‘proof of work’ model,[21] an energy-intensive approach of validating transactions using several computers within the blockchain network, and instead adopt ‘proof of stake model’ which requires only a single validator and is more energy efficient.
Conclusion
To summarise, this essay has made apparent the impact developments in Fintech have on economic development. This is demonstrated through the role of Fintech in developing agriculture, fostering financial inclusion and reducing poverty levels as well as spawning technological innovations including innovations in the health sector. Developments in Fintech have touched on the three factors required for development mentioned in Todaro and Smith’s definition of development mentioned in the main text. It is therefore indisputable that developments in Fintech impact on economic development. The credible impact of Fintech on economic development however, may not be sustained if it is not regulated to reduce or avoid risks. Strengthening cybersecurity, using regulatory sandboxes, bridging the digital gap in countries and ensuring that Fintech industry operations are environmentally friendly are means that should be adopted to regulate developments in Fintech. When these regulations proposed above are adopted and properly implemented, economic development is assured
Endnotes
[1] ‘Countries with better FinTech development saw greater GDP resilience, employment during Covid-19: report’, Business Wire, 31 October 2022 www.businesswire.com/ news/home/20221030005051/en/Countries-with better-Fintech-development-saw-greater-GDP-resilience employment-during-Covid-19-report accessed 30 December 2022.
[2] ‘What is Economic Development?’, Province of British Columbia www2.gov.bc.ca/gov/content/employment business/economic-development/plan-and-measure/ economic-development-basics accessed 30 December 2022.
[3] Justin Yifu Lin, ‘New Structural Economics and Industrial Policies for Catching-Up Economies’ (2017), Science Direct www.sciencedirect.com/science/article/ pii/B9780128041376000085 accessed 30 December 2022.
[4] Josh Howarth ‘57+ Incredible Fintech Stats (2022 2024)’, Exploding Topics, 14 January 2022 https:/ /explodingtopics.com/blog/fintech-stats accessed 30 December 2022.
[5] United Nations ‘Transforming our World: The 2030 Agenda for Sustainable Development’, https:// sustainabledevelopment.un.org/content/ documents/21252030%20Agenda%20for%20 Sustainable%20Development%20web.pdf accessed 30 December 2022.
[6] HM Queen Maxima of the Netherlands, ‘Igniting SDG Progress Through Digital Financial Inclusion’ UN, 2018, p3 https://sustainabledevelopment.un.org/content/ documents/2655SDG_Compendium_Digital_Financial_ Inclusion_September_2018.pdf accessed 30 December 2022.
[7] World Bank, ‘Agriculture and Food: Overview’, www. worldbank.org/en/topic/agriculture/overview accessed 30 December 2022.
[8] ‘How fintech is helping small-scale farmers become profitable producers’ FT Food Revolution, YouTube, 10 March 2021 www.youtube.com/watch?v=tqHbHEtERAo accessed 30 December 2022.
[9] See n 6, above
[10] ‘How a crowdfunding campaign is empowering refugees to access higher education’, Times Higher Education, 26 January 2021 www.timeshighereducation.com/hub/ unhcr-un-refugee-agency/p/how-crowdfunding campaign-empowering-refugees-access-higher-education accessed 30 December 2022.
[11] See n 6, above, p17
[12] Ibid, p11
[13] Dr Rey LeClerc Sveinsson, ‘Top 10 Data Breaches So Far in 2022’, 2 August 2022, ERMProtect https:// ermprotect.com/blog/top-10-data-breaches-so-far in-2022 accessed 30 December 2022
[14] Andrew Burak ‘CyberSecurity in Fintech: How to Develop a Secure Fintech App’, Relevant Software, 2 January 2021, https://relevant.software/blog/cybersecurity-in-Fintech accessed 30 December 2022.
[15] ‘15 Things You Didn’t Know About the Fintech Industry,’ YouTube, 7 October 2020 www.youtube.com/ watch?v=uwsoyTPAduY accessed 30 December 2022
[16] Jeremy Quainoo, ‘Fintech Regulatory Sandbox Explained (What, Why, How)’, YouTube, 17 October 2021 www. youtube.com/watch?v=tIWf2mvOtM0 accessed 30 December 2022.
[17] Bank of Ghana, ‘Bank of Ghana Sandbox Pilot’, Press release, 25 February 2021.
[18] Itai Agur, Xavier Lavayssière, Germán Villegas Bauer, ‘How Crypto and CBDCs Can Use Less Energy Than Existing Payment Systems’, IMF, 17 June 2022 www.imf. org/en/Blogs/Articles/2022/06/16/how-crypto-and cbdcs-can-use-less-energy-than-existing-payment-systems accessed 30 December 2022.
[19] Ana Paula Pereira, ‘IMF Calls for Tighter Crypto Regulation in Africa as the Industry Unfolds’, Cointelegraph, 24 November 2022 https://cointelegraph. com/news/imf-calls-for-tighter-crypto-regulation-in africa-as-the-industry-unfolds accessed 30 December 2022.
[20] Courtney Lindwall, ‘Crypto Has a Climate Problem’, NRDC, 3 February 2022 www.nrdc.org/stories/ crypto-has-climate-problem accessed 30 December 2022
[21] See n 18, above.
[Disclaimer: This article was originally published by the International Bar Association on behalf of the IBA Foundation as one of the winning essays in the Lex: lead Group Annual Scholarship Competition 2022]