A visitor uses a smartphone at the Mobile World Congress in Barcelona last week. February 23 Photo: AFP
Inside Out
by David Dodwell
Inside Out
by David Dodwell

Fintech a boon for the unbanked but a nightmare for regulators

Revolution is being driven by two very different populations

This weekend, this old dog learned a new trick – part of a belated effort to earn some “street cred” with our millennial generation: I learned an “Hour of Code” – basically an idiot’s guide to how to write computer code, and how it can be fun.

The initiative, courtesy of Microsoft and our Apec Business Advisory Council (Abac) meeting in San Francisco and Silicon Valley, is part of a campaign through schools worldwide to raise knowledge about the basic principles of computing. It was also intended to demonstrate that even a “homo geriatricus” like me was not a lost cause to the digital revolution that is now consuming us.

There of course can be nowhere better to taste and feel the digital revolution enveloping us than California. Briefings from Google, PayPal, Facebook and even the Dolby sound studios demonstrate clearly how digital stuff is now emigrating from the geek’s laptop to embrace every waking aspect of our work and personal lives.

One of the reasons the emergent disrupters are so unstoppable is that the incumbent banks still disserve large communities across the world

And I’m not just talking about video games and smartphone apps. We are talking at last of developments that will have profound and helpful impacts on all aspects of our lives. We are for example talking about boring tractor manufacturers like John Deere that now have 200,000 “autonomous vehicles” – which means driverless farm vehicles – ploughing fields and sowing and reaping crops across the United States – and placing sensors in vehicles and around farms that “allow your land to talk to you” – telling you which soil is in need of more water, or has too little fertiliser.

We are told that there are six drivers of this digital revolution: 5G telecoms, artificial intelligence, big data, the internet of things, driverless vehicles, and 3D printing. Get your head around all of those, and you have a fighting chance of keeping your head above water in the digital universe that is being colonised by the millennials and our grandchildren.

But most of the weekend’s discussion in San Francisco was tailored graciously to the intimidated, ageing brains of us “pre-millennials”. PayPal’s simulated adult playrooms introduced us gently to their moneyless universe. More challengingly, we were sucked into the mind-altering universe of financial technology (fintech), where mysterious phenomena like block-chain, data analytics, mobile wallets and the internet of things have spawned new age financial companies that are in turn exciting, and scaring the pants off the world’s banking titans – companies like Kabbage, which uses big data and electronic credit checking to extend loans to even the smallest of companies within minutes of their loan applications being submitted.

Already it is clear that the fintech revolution is being driven by two very different populations: radical new start-up disrupters who are using the potential of new technologies to develop fundamentally new ways of living our financial lives; and incumbent behemoths that have on the one hand recognised that unstoppable forces have been unleashed, and on the other have seen economies and efficiencies embedded in the new technologies that can save them big money, improve services to customers, and help them retain their hard-fought competitive leadership.

One of the reasons the emergent disrupters are so unstoppable is that the incumbent banks still disserve large communities across the world. It is estimated that 2.2 billion people worldwide still have no bank account, nor access to bank loans – a huge “unbanked” population that with new technologies can provide rich pickings for the new disrupters. In the Philippines, it is estimated that 69 per cent of adults are “unbanked”, and 64 per cent in Indonesia. Even mainland China (21 per cent) and Thailand (27 per cent) have substantial “unbanked” populations who are now being tantalised by smartphone financial services.

But what is exciting for us consumers is becoming a nightmare for regulators around the world. Already the banking behemoths are protesting that the horrendously burdensome regulations introduced since the 2008 global financial crash make it hard for them to compete with these spritely new disruptors. While they are spending large sums to make sure they can use the new technologies for driving efficiencies down to their own bottom lines, they are at the same time protesting that these pesky start-ups have unfair advantages because their new business paradigms duck around current regulatory regimes.

But these protests are pushing regulators into an awkward corner. They are under strong pressure to let innovators flourish if they can improve services to consumers, and give the millions of “unbanked” first-time access to bank loans. But, perhaps inevitably, they don’t yet have the core knowledge and skills to draft regulations for the upstart disruptors. They don’t have staff with the skills needed to draw up appropriate regulations. They don’t know how to gather the digital data arising from the digital revolution. They don’t know how to ensure data security. They are uncertain about how to regulate cross-border transfers. And worst of all they don’t know how to respond to the calls from incumbents for a “level playing field” that would subject the new disruptors to the same regulations that incumbent banks are struggling with.

The regulators gathered in San Francisco over the weekend seemed to agree that the best response is to let the disrupters disrupt. They said new companies should be allowed to go into the “sandbox”, to experiment under very light regulation unless and until something happens that potentially harms customers. I am sure the Goldman Sachs and JP Morgans of this world don’t like the idea of the sandbox, but on balance I like it. Let the disruptors make mischief, unless or until the potential emerges for customers to be harmed.

Hong Kong of course has a huge stake in this revolution. Finance Secretary John Tsang has moved early and quickly, almost a year ago setting up a steering group to advise the government on how to develop Hong Kong as a fintech hub. Only Singapore has moved as fast.

Odds are that we are set for a titanic battle in the next few years between the new disruptors who are capturing the full potential of new technologies, and existing banking giants who want to take advantage of the technologies without losing their hard-earned market leadership. For us as customers, it likely means cheaper, better services. For regulators, it means headaches. But what revolution is possible without a few headaches? Even an old dog knows as much.

David Dodwell is executive director of the Hong Kong-Apec Trade Policy Group