Two Faces of Change Finance & Development, September 2016, Vol. 53, No. 3
New financial technologies hold both promise and pitfalls
The technology and financial sectors have a long symbiotic history. In almost any finance textbook, technology, together with deregulation, is deemed to be the main driver of the exponential growth in finance in the past 50 years. Finance is the biggest focus of technology firms, and technology (particularly information and communication) is a big budget item for banks and other financial sector firms. This is not surprising because finance is ultimately the business of collecting, storing, processing, and trading in information, unbounded by geography.
When the textbooks are revised in the next decade, they will still mention the key role of technology in finance—but with one difference. They likely will highlight how a new breed of hybrid financial technology firms—the so-called fintechs—transformed the financial sector when they went from supplying technology to financial firms to competing against them.
New applications of technology in finance have no doubt made consumers’ lives easier in myriad ways—automated teller machines (ATMs), debit and credit cards, and Internet banking, to name a few.
Broad impact But financial technology affects more than just consumers. Financial firms’ entire operations are built around their increased ability to capture and process data thanks to quantum leaps in computing power. These advances have also spawned innovations such as complex options and multilayered securitization—which, for example, package loans into securities that transfer risk from the lender to the securities buyer.
But the most important dividend of the interplay between technology and finance may well be the rise in the number of people around the world who have access to, and use, financial services (often called financial inclusion). The application of existing and widely available technologies such as mobile phones in developing economies has helped them leapfrog market development and bring millions of people into the formal financial system for the first time.
The future promises more change, driven by fintech, a label that is variously used to describe products, product developers, and operators of alternative systems. These fintechs, some owned by tech companies and e-commerce players, have already rolled out applications that propel new ways of making financial transactions. They...