JULIA KAGAN, former editor of Consumer Reports, defines financial technology (Fintech) as new technology that seeks to improve and automate the delivery and use of financial services. Kagan notes that fintech is used to help companies and consumers better manage their financial operations, processes, and lives through the use of specialized software and algorithms that are used on computers and mobile devices.
Fintech now describes a variety of financial activities, notably money transfers/remittance services; billing and payment services; blockchain and cryptography; retail banking activities such as money deposit, withdrawal and credit services; and raising capital for a business startup. Fintech solutions also allow for these activities to be conducted without recourse to a traditional financial institution such as a bank.
By 2023, the global fintech market is expected to be worth over USD305.7 billion, with a compound annual growth rate of 22.17 percent (20182023). Notwithstanding the expected growth in the fintech sector, many countries are struggling to keep pace with respect to new regulations and the development of the overall eco-system to give effect to a thriving sector.
A perennial challenge for many small businesses, irrespective of the country and level of development of the economy, is getting paid. In a number of countries, there are also large swaths of the population who remain unbanked, both customers and firms. In this context, fintech solutions can help to bring the unbanked into the formal sector.
Furthermore, fintech, which by nature is disruptive, allows both businesses and consumers to democratize away from large, entrenched financial institutions. At times, these large institutions impose high transaction fees which are not always transparent or predictable. Fintech solutions can help to get around some of these problems.
Notwithstanding the importance of fintech, an appropriate balance still must be struck between creating an enabling environment and the need for good regulatory practice. Therefore, there still needs to be laws and regulations to facilitate this kind of activity to address challenges around standards, criteria and transparency among others.
Essentially, the regulatory ecosystem for fintech needs to be as facilitatory as possible. On the one hand, there can be no ‘free for all’. However, on the other hand, the regulatory environment cannot be such that it disincentivizes entrepreneurs.
There are numerous benefits to be derived from having a thriving fintech sector. First, the more an economy is seen as supporting or facilitating the sector, the more it can position itself to attract foreign investment both in the sector itself and the broader digital economy. Furthermore, fintech and the wider digital economy can have significant competitiveness and productivity- boosting benefits, since enhanced access to digital products and services can help to optimize processes and production, reduce transaction costs, and transform supply chains in a manner that benefits both businesses and consumers.
An enabling ecosystem which allows fintech and the digital economy to flourish can also allow firms and consumers to access cutting-edge services and technologies at competitive prices. Additionally, in the same way that fintech allows firms and consumers to democratize away from large, entrenched financial institutions in the domestic market, it also allows for democratization in terms of access to the global market. Here, firms and consumers can access foreign markets in ways previously only feasible for large and established companies from advanced economies.
As the digital economy continues to develop at pace, several countries are establishing and strengthening their technology centres. The most famous of these is Silicon Valley in the United States. However, countries such as Mauritius, Chile, Taiwan, South Africa and many others have also established these technology centres as a way to further integrate into the global digital economy.
The key takeaway here is that all countries need technology that can accelerate their economic development efforts, not hold them back. Small states can also participate effectively in the global digital economy by creating indigenous solutions, including fintech innovations. However, these efforts must be assisted by a regulatory environment which enables, and not disincentivizes innovation. There must also be a broader business eco-system which allows these innovations to thrive.