Indeed, many people are no strangers to these technologies. AI and machine learning are used to analyze massive amounts of data, enabling service providers to get to know their customers better or conduct due diligence on a scale not previously possible. At the architectural level, cloud computing and quantum computing have enabled the scalability, flexibility, and speed needed to handle massive amounts of data.
We’ve also seen how blockchain has transformed the way data is collected and authenticated, laying the foundation for cryptocurrencies and NFTs. There are now numerous opportunities in specialized functions such as cybersecurity to keep the fintech ecosystem safe, as well as in the development of APIs (Application Programming Interface) that allow different applications to work together.
These technologies have transformed financial services, from payments to lending to investing and insurance. Loans and insurance applications can now be validated and processed faster. Investors can easily trade with AI portfolio management tools and high-frequency trading. In fact, with the advent of cryptocurrency, even the notion of money is being questioned.
Crypto and FOMO
When cryptocurrencies were first introduced, they were greeted with enthusiasm, as were most technological leaps. Because of this, markets are characterized by bubbles and collapses, Fang noted. The fear of missing out (FOMO), fueled by social media, the media and the influence of figures with market-moving power like Elon Musk and Cathie Wood, spurred many to jump on the cryptocurrency bandwagon.
At the same time, financial platforms like Robinhood have made cryptocurrency trading accessible to the masses in the form of commission-free trading via a mobile app. Fang warned that platforms that play investing tend to make investing seem cheap and easy while underestimating the risks investors face.
In the crypto world, the peer-to-peer system of money is designed in such a way that everyone is responsible for their actions and money. While removing the middlemen smacks of freedom, it also means there is neither backing nor the possibility of a government bailout should things go wrong.
About governance and ethics
Traditionally, financial services such as banking and insurance are heavily regulated to align providers with mandatory standards and ethical behavior. While technology has drastically changed how these services are delivered, the fundamentals of finance remain.
On the other hand, tech companies – which mostly operate in less regulated environments – are racing ahead in the fintech landscape. As such, the entry of tech companies into a traditionally highly regulated space has created regulatory loopholes that need to be closed. Regulation just isn’t moving as fast as technological developments. For example, blockchain technology is designed to decentralize data management, authentication, and protection. Unlike a bank, it cannot be shut down by the government.
While blockchain proponents insist that the technology’s distributed architecture cannot be hacked, the reality is that cryptocurrencies are being stolen on a daily basis. At the national level, the introduction of digital currencies by central banks can put masses of data in the hands of governments, giving them unmatched power and surveillance capabilities, Fang warned. Ultimately, the merits of technology depend not only on design, but also on human actors and governance, she said.
On a positive note, some regulatory convergence is being observed as governments make banking licenses mandatory for mobile banking service providers. On a global level, the Basel Committee on Banking Supervision plays an important role in setting cryptocurrency standards and regulations.
Can fintech be a force for good?
The disruption of the financial sector has forced financial service providers to disrupt themselves to keep up with technology and become better. By lowering the cost structure of delivering financial services, fintech is lowering the bar and making financial services more accessible to more people. Ultimately, fintech can reduce inequality by enabling financial inclusion.
In 2007, telecommunications companies Vodafone and Safaricom revolutionized banking in Kenya with the mobile banking service M-Pesa. In a country where only 14 percent of the population had a bank account, the service made it possible the vast majority of Kenyans belong to the country Financial system without the need for bank accounts or credit cards. By improving access to financial services and enabling trade, technology has has lifted over 2 million people out of poverty over the years.
In another example, Insurtech (the combination of insurance and technology) uses blockchain technology to improve access to insurance. Insurers like AXA offer customizable insurance – called parametric insurance – to compensate their customers against the likelihood of predefined parameters, such as floods or droughts. By lowering the cost of insurance while offering broader, customizable coverage, it bridges the gap with traditional coverage. This has enabled companies that typically fall through the cracks – like small farmers – to manage risk and achieve more with limited resources.
Don’t lose sight of the basics
Ultimately, not all financial and economic problems can be solved by technology. To assess the merits of technological innovations and solutions – including fintech – Fang asked managers and consumers to focus on these questions:
- Does the business have a real purpose?
- What problem is the company trying to solve?
- Is it using the right way to solve it?
- What are the incentives behind the offer?
“We need a healthy understanding that technology will not solve all problems,” Fang said. “At the end of the day we still need a verdict.”