How policymakers can make the fintech revolution a force for good

Andrea Lagna - Lecturer in International Management and Innovation at the School of Business and Economics, Loughborough University

M N Ravishankar - Professor of Globalisation and Technology, Loughborough University

Fintech innovations leverage a variety of mobile and digital technologies that could reduce existing barriers to the use of financial services. Such barriers include poor people’s difficulty in accessing financial services due to geographical distance or poor people’s inability to understand how to use financial services. The most famous example of fintech’s developmental potential is the Kenyan mobile money service M-Pesa.

In a word, a vision of fintech-led financial inclusion burst on the global scene during the last decade. This vision takes to heart the United Nations’ Sustainable Development Goals (SDGs).

Although the Kalifa Review touched upon fintech’s role in enhancing financial inclusion (see eg, on page 33), it did it in a perfunctory manner with limited attention to the entrepreneurs, organisations and technologies involved in fintech-led financial inclusion—let alone the social impact and dark sides of fintech innovations.

What should policymakers do to put financial inclusion front and centre in the UK fintech agenda? Based on our analysis of the Kalifa Review and our recent research on fintech-led financial inclusion and digital social innovations, we recommend three points.

First, the Kalifa Review did not pay attention to the business strategies and business models of financial inclusion-seeking fintech firms. Inclusion-focused fintech organisations are highly exposed to failure when trying to scale and sustain their impact-oriented business models. They typically manage twin and mutually incompatible organisational identities, that is a socially oriented identity and a business-oriented identity. For example, a firm could face internal conflicts when taking money from investors who are less interested in the firm’s financial inclusion aims. Similarly, senior management teams can struggle to attract and retain talented employees, who may want to switch to less socially focused fintech companies that pay better salaries.

Policymakers should gear the Kalifa Review’s recommendations concerning investments, skills and the ‘scalebox’ initiative towards enabling the scaling up and success of purpose-driven fintech firms. The latter should be allowed to balance the hybridity of social and commercial objectives without the risk of drifting away from their impactful mission.  

Second, fintech firms deploy a wide range of digital and mobile technologies to deliver financial services. However, the Kalifa Review did not consider how such technologies can be designed and implemented in pursuit of financial inclusion. Policymakers should make sure that regulatory initiatives such as sandboxes—where practitioners can test fintech services in a controlled regulatory environment—result in the development of technologies that can be ‘appropriated’ by financially excluded people depending on their needs and habits.

Third, the Kalifa Review underestimated the dark sides of fintech innovations, especially when applied to the financial inclusion agenda. The World Bank and other international development organisations are supporting fintech as a powerful enabler of financial inclusion and poverty reduction in line with the UN SDGs. However, it is far from clear whether fintech-led financial inclusion has a positive impact on the financially excluded and poor. It is unclear whether fintech interventions can really help the poor escape poverty, when too often the poor have no political means to challenge the unequal power relations at the root of their financial exclusion and hardship.

Furthermore, the fintech revolution highlights how fintech firms can use digital technologies to ‘de-risk’ those who have no bank accounts and credit histories. Fintech innovations promise to use alternative data derived from unbanked individuals’ behavioural patterns—such as their use of mobile phones or social media—to create algorithms that evaluate their creditworthiness. The Kalifa Review largely ignored the impacts that alternative credit algorithms have on poor people’s agency and empowerment; how alternative credit algorithms may reproduce existing forms of social discrimination; and the risks of transforming the poor into generators of securitised assets to be traded on global financial markets.

In fact, it is crucial to remember that fintech innovations are in many cases about for-profit firms offering market-based solutions to problems of financial exclusion. Such firms may be focused more on advancing their own commercial interests rather than working to achieve sustainable developmental goals. Besides intruding into poor people’s lives and commodifying their digital footprints, fintech firms may lower risk assessment standards to increase profits and externalise the costs deriving from a default—potentially compromising macro-financial stability.

The Kalifa Review set out an important agenda in support of innovative and competitive financial technologies in the UK. However, it simply jumped on the ‘fintech for financial inclusion’ bandwagon and failed to properly explore fintech’s potential for generating social impact. We encourage policymakers to consider our three points above and take significant action in support of fintech-led financial inclusion. To do so, they should meaningfully engage with civil society organizations, journalists and academics who are investigating the risks of the fintech revolution and how financial technology can truly be a force for good.