The United Nations Environment Programme released a detailed report yesterday analysing how developments in Financial technology (Fintech) can enable the achievement of its Sustainable Development Goals (SDGs), which it calls FT4SD (Fintech for sustainable development). The report points out that to achieve the SDGs and create an inclusive, green economy, the financial systems needs to be revolutionised or reformed, so that private capital can be re-deployed. The report looks at the drivers, requirements and barriers for the same.
Fintech is defined as covering a wide range of technologies and applications, from mobile payment platforms to high-frequency trading (HFT), crowdfunding to virtual currencies and blockchain. Disruptive innovations in Fintech are predicted ‘threaten the viability of today’s financial sector business models, and indeed the effectiveness of current policies, regulations and norms that have shaped modern finance’.
The report highlights three technologies as the key to the ongoing transformation: Blockchain, the Internet of things (IoT) and artificial intelligence (AI). The authors explain the drivers behind their choice, saying that IoT and AI enable the ‘animation of the physical world’, enabling physical and natural assets, machines, and physical and natural infrastructures to sense and interact with each other and respond in in real time. While, smart contracts on the immutable distributed ledger of Blockchain will allow real economy assets, infrastructures and processes to interact with the financial system in predictable ways and with unprecedented business models. Blockchain could solve problems of trust, information asymmetry, and economics of small transactions without the, eliminating the requirement of the current costly and complex risk infrastructures and central intermediaries.
UNEP starts with 8 ‘how’ questions, such as financial inclusion for underbanked, unbanked and SMEs and effective and providing efficient financial markets with a level playing field and with market integrity for long term real economy investors aligned with the SDG agenda.
Fundamental effects of Fintech are listed as below:
- Increased access and decentralization of the financial system
- Increased transparency, accountability and collaboration across sectoral boundaries
- Improved risk management and diversification
- Lower costs through improved efficiency, speed and automation
- Increased competition
- Redefining how we can better account for (sustainable) value
Explaining the last point, the report says “we can create a system of accounting that brings us into the 21st century, migrating away from the reductionist double-entry bookkeeping invented by Pacioli in the 1300s – with an approach that looks beyond numbers in ledgers and utilizes machine learning, multiparty computation and algorithmic representation to redefine “value””. This might be key to how governments approach Fintech.
To achieve the goals, industry-wide standards would have to be set and inter-operability ensured. There will be challenges in migrating away from legacy IT infrastructure and there will be resistance from the inertia of incumbent business models.
The report goes on to use the example of the Internet, born from a US DARPA project, to demonstrate how governments can play a key role as inventors and/or funders at the infrastructure-building stage of Fintech. Governments can also create mission-oriented policies, drawing on frontier knowledge to tackle big challenges, facilitate market creation and put in place support mechanisms.
UNEP envisions multi-stakeholder partnerships, including incumbents from financial industry, FT4SD start-ups, regulators, policymakers, real economy and philanthropic players for fulfilling the transformative potential of Fintech.
*The UNEP report: Fintech And Sustainable Development: Assessing The Implications