How Much Good Could FinTech Do, If FinTech Could Do Good?

Courtesy of Bryane Michael

Financial technology (or FinTech) represents the corporate social responsibility of the 2010s. The very name increasingly represents something wholesome: reshaping social impact and promoting FinTech4Good, and stepping up to tackle the challenges caused by the COVID-19 crisis. Yet, just like the corporate social responsibility (CSR) wave of the 1990s and the socially responsible investing (SRI) wave of the 2000s, both the data and the regulation of FinTech look primed to make FinTech just another fad—unless we right-regulate this time around.

The Illusory, Marginal Social Benefits of FinTech

FinTech’s social impacts, however measured, seem marginal at best. As measured by the economic development achieved from giving bank accounts to the poor, different regressions point to different conclusions. FinTech companies thrive even when other banking systems already provide plenty of capital. Wealthy households generally do not lack access to financial services; for most authors, FinTech’s promise lies with the rural, unbanked population—a huge population of potential entrepreneurs who could get their businesses and lives going with the help of FinTech. In the US, with a smart phone and some business savvy, FinTech might help the poor and those cut off from public services. But without an internet connection and a personal mobile device, FinTech may leave you behind, as in parts of Africa and the developing world.

FinTech can help facilitate a range of services that extend far beyond online banking. Online finance gives citizens the chance to pay for (or collectively organize) social services like health and education – even if such payments come in the form of blockchain payments or even blockchain grades! If you include in the FinTech rubric related technologies that give citizens a voice on social policy (like how we treat marine life or run our courts), FinTech’s appeal seems obvious.

Yet, just like traditional banking took decades and decades to expand (along with the social, political and economic institutions that such banking helped foment), so too will FinTech. Cheerleaders for FinTech see M-Pesa as the cure for all the developing world’s needs and the way to achieve the UN’s Agenda 2030 (which brought the SDGs into existence). However, FinTech’s effect on sustainable development will most likely be marginal, and contingent on how we legislative/regulate it.

The Benefits May Be Less Than We Think

Our research cites the many studies, funded by the UN or by the international development community, showing how much capital FinTech could marshal in support of the UN’s 17 Sustainable Development Goals (SDGs). The calculations range anywhere from $2 trillion to $100 trillion! In some models, such as the study below (reprinted from Figure 6 in our original paper), FinTech could actually hurt sustainable development. With estimates all over the map, how can regulators possibly know which FinTech rules to adopt?

Our own study shows FinTech’s very mitigated effect on large-scale ‘good’ (as measured by things like the UN SDGs). Instead of trillions, our research points to billions—or about 10% of the required SDG amount. Yet, this amount isn’t fixed in stone. The proponents of CSR and SRI wrongly thought they could let markets decide which rules would work. Instead, legislation (or at least regulation) has the power to decide whether CSR, SRI, or in our case FinTech, helps raise money for social benefits like the SDGs.

Regulating FinTech’s Silver Linings

Unlike in the 2000s and 2010s, we have data today that can provide real-time feedback on FinTech regulation. Do we choose a highly legalistic law, like Mexico’s, or a laid-back one, like Taiwan’s? Each jurisdiction will have a different “mix” of FinTech rules  depending on what combination will raise the most funds for SDG-like goals. Already, we have bevies of regressions and other analysis showing which FinTech and FinTech-like laws led to progress on the SDGs in the past.

Evidence-based FinTech regulation—especially regulation hoping to grasp the positive externalities or benefits that the UN and its supporters hope for—increasingly relies on several methods. Internal audit, long confined to the domain of bean-counters, can reveal exactly where FinTech monies go on a community-by-community basis. We now have enough data on databases like OECD to strategically redesign existing and new projects in a way that regulates socially-productive FinTech pieces into them. Finally, cross-country econometrics will represent a cornerstone of any evidence-based FinTech4Good. Since we do not have time to wait for a long time series for each country’s experiences with FinTech and financial innovation, cross-country data represent a easy (though potentially misleading) source of empirical information about how we can better regulate FinTech. Where FinTech would hurt more than it helps, data can help prevent costly FinTech re-regulation later.

Conclusion

FinTech4SDGs offers a unique challenge and opportunity that past reform movements lacked. If CSR and SRI relied on good intentions and preconceived philosophies, FinTech regulations can be based on econometric and other data. Such data can guide the drafting of rules that enable FinTech to serve its main purpose: providing credit, resources, and even “plumbing” for finance. Furthermore, each country can tailor its FinTech laws to help achieve its specific SDGs. To promote the potential social benefits of this growing area of finance, econometric evidence should play a critical role in the next wave of FinTech rulemaking.

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