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Underestimate the fintech revolution at your own peril

 

Who the hell wants to copy a document on plain paper???!!!” Rejection letter sent to Chester Carlson, inventor of the Xerox machine in 1940.

“This 'telephone' has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us.” Western Union internal memo from 1876.

History is replete with people’s failures to anticipate the impact of technological change. Are we making the same mistake with financial technology (fintech)? Could it, in fact, be the next revolutionary technology to boost economic growth?

Financial innovations are unlike other inventions in that they can directly impact the efficiency of the financial sector, which is how savings and investment are intermediated in an economy - and which then affect growth.

Yet fintech is part of the digital economy that has produced innovations that have transformed the way we live, even as productivity growth has been slowing across advanced economies for decades. It is captured in the Solow paradox: The computer age is seen everywhere except in the productivity data.

The Financial Stability Board divides fintech into five broad categories: payments, clearing and settlement; deposit, lending and capital raising; insurance; investment management; and market support. Fintech has made most inroads in the area of payments and less in the others.

According to Bank of England Governor Mark Carney, FinTech’s potential is to unbundle banking into its core functions — such as settling payments and allocating capital.

So far, it’s the more open financial markets that have seen fintech develop rapidly. One example is the e-payment system M-Pesa, which operates in Kenya, Tanzania and elsewhere, and is one of the biggest fintech success stories since its emergence just a decade ago. By effectively transforming mobile phones into payment accounts, M-Pesa has increased financial access for previously unbanked people. The permissive stance of the Kenyan central bank allowed the sector to develop rapidly in one of East Africa’s most developed economies.

This is consistent with a Bank for International Settlements study that found fintech is most prominent in countries with less stringent banking regulations, higher incomes and less-competitive banking systems.

Today, there are 110,000 M-Pesa agents, which is 40 times the number of ATMs in Kenya, according to the World Bank.

M-Pesa is an example of how fintech has disrupted the financial sector and increased efficiency across the economy.

If fintech can improve financial inclusion elsewhere as it has in Kenya, then it would more efficiently channel savings into investment in industry, infrastructure, human capital — the very sorts of capital that would raise growth in emerging economies in which an estimated 1.7 billion people worldwide who do not have bank accounts.

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