FinTech’s opportunities and risks, and the importance of regulation for the protection of human rights

by Amanda Gu, Universal Rights Group NYC Asuntos contemporáneos y emergentes, Blog, Blog, Universal Rights Group NYC

Financial technology (FinTech) has been described as a harbinger of change, one that could  impose a new regime of streamlined finance. Although there is some merit to the potential of these services to revolutionise finance, reduce inequality and accelerate development, like any other technology, they require regulation to safeguard against abuses that could have serious human rights impacts. The United Nations (UN) has recognised the financial benefits of this emerging technology in helping to achieve the Sustainable Development goals, although the current lack of regulation around FinTech leaves much room for improvement. 

The uses of FinTech

Financial technology (FinTech) describes new technology that is used to automate the delivery and use of financial services. These services aim to facilitate both commercial and individual financial operations and processes through specialised software and algorithms, which are increasingly accessed through smartphones. This broad range of services most notably includes blockchain technologies, smart contracts, robo-advisors, cryptocurrencies, and digital cash services such as Paypal or Alipay. 

The benefits of FinTech are substantial and multifarious, ranging from streamlining lending processes to providing financial services to underbanked or unbanked areas that are ignored or underserved by traditional banks or mainstream financial services. These areas are often not only disadvantaged or low-income districts, but also fragile and conflict-affected states, especially ones amid a crisis. During the Ebola virus outbreak, the government in Sierra Leone turned to mobile wallets to fund the efforts of emergency response workers, which shortened payment times and minimised fraud, according to the United Nations. Likewise, Liberia was able to make mobile payments to health and education workers who worked in areas periodically cut off during the rainy season, thereby helping to maintain critical social services. On a larger scale, there are ongoing efforts in African countries to use FinTech to improve tax collection and facilitate trade between governments, which are currently bogged down by bureaucratic processing backlogs.

In regions with more established financial services, FinTech can also be employed by financial institutions to streamline the lending process. By optimising efficiency and boosting productivity, FinTech can help financial institutions increase the rates of customer retention through the provision of more customer-friendly services. These services are beneficial to consumers that would have otherwise abandoned the account opening process at traditional financial institutions, often due to identity and authentication issues. Many small business ventures across the United States have also benefited from the use of alternative lenders that rely on FinTech to increase accessibility and accelerate the ‘approval for finance’ rate. Both governments and private entities appear to be interested in the development of FinTech, as more than US $50 billion has been invested in almost 2,500 companies worldwide since 2010. 

FinTech and sustainable development

FinTech has become a focal point in the financing of The United Nations’ 2030 Sustainable Development Goals (SDGs), as it has been explicitly pushed as a method for achieving financial inclusion, which is an important step in eradicating poverty and hunger as well as achieving gender equality and economically empowering women. On 26 August 2020, United Nations Secretary-General António Guterres, together with Co-Chairs Achim Steiner and Maria Ramos, launched the report of the Task Force, People’s Money: Harnessing Digitalisation to Finance a Sustainable Future. Guterres noted FinTech’s importance to ‘financial inclusion’, and how the international community has ‘just begun to tap the potential of digital finance and investment’. This task force was established as part of a broader Roadmap for Financing the 2030 Agenda for Sustainable Development: 2019-2021, which seeks to harness the potential of digital revolution to accelerate the financing of the Sustainable Development goals — an agenda which would require between $5 to $7 trillion per year, according to Mr. Guterres in 2018. The COVID-19 pandemic has only expedited the popularity of digital finance, demonstrating their potential to provide relief and support for millions of individuals and businesses.

Certainly, there is great potential for this new method of finance to help individuals and stimulate economies. In terms of financial inclusion, in Sub-Saharan Africa countries only 20% of the population owns a bank account, compared to 92% in advanced economies and 38% in non advanced economies. The shallowness of these financial systems can be attributed to a mix of underinvestment, poor infrastructure, and comparatively lower levels of financial literacy

Yet because of its early adoption of FinTech, the region is now the global leader in mobile money transfer services, with close to 20% of GDP in transactions occurring through mobile money, compared with just 7% of GDP in Asia and less than 2% in other regions. The number of African FinTech startups has risen by 51% by early 2020, an increase fueled by various virtual banking projects, consumer credit checks and finance apps, which have raised nearly $350 million during the first quarter of 2020. South Africa led the way with $112m in investments, followed by Nigeria, which raised $74m, Kenya at $62m and Egypt at $51m. Combined, the African Union’s 55 member nations have the potential to generate a (GDP) of $3.4 trillion, according to the World Bank.

FinTech sparks privacy and predatory lending concerns 

Despite the massive potential of FinTechs to facilitate lending, investment, and trade, the lack of regulation is problematic. There are major privacy concerns that have yet to be addressed — FinTech companies rely on big data to shape and customise their services in accordance with market trends and demands, as lenders in this area often utilise this data in place of traditional credit ratings. Big data often contains personal data and sensitive data, making it essential that FinTech companies comply with data protection laws (such as the GDPR). 

Predatory lending practices and the lack of loan regulation in developing nations are of serious concern due to  a lack of regulation of this new technology. This is exemplified by the Kenyan model, in which new mobile apps deliver cash to millions of Kenyans who then struggle to repay these expensive loans–which can be up to 100% annualised and lead to a perpetual cycle of debt. 

The role of international institutions

Despite the many potential benefits of FinTech, these new services require regulatory standards on both a domestic and international scale, due to their cross border spillover effects. Currently, there is a great need for international organisations like the UN to help provide guidance for States on how to regulate these digital finance systems and build the foundations for a sustainable and rights based digital ecosystem. The Digital Financing Task Force, charged with implementing the UN’s Call to Action, has affirmed the need to build inclusive financial infrastructure in a manner that aligns with the development of people’s capacity and rights. 

Individual suits against malpractice may not be as less effective at changing broad industry behavior, and while government regulation can help realign company incentives and provide greater consistency for international markets, countries may struggle with coordination with other states on issues of privacy rights, competition, fraud, technology, and security, all of which are critical for dealing with FinTech. This is why there needs to been international oversight, perhaps in the form of international agencies or organisations capable of responding to multinational entities and cross-border transactions, in order to address the inevitable challenges FinTech brings

The United Nations influences how trans-national commerce is regulated, and hence its emphasis or lack thereof on the regulation of FinTech has many implications. Rather than just promoting FinTech in order to increase financial ‘inclusion’, the UN must also consider ways to address the potential repercussions of FinTech gone wrong. At the next reaffirmation of the Human Rights Council’s The Right to Privacy in a Digital Age resolution, it would be beneficial to add FinTech to the list of concerns over ‘increasingly powerful data-intensive technologies’ which could give states and businesses an unprecedented ability ‘to conduct surveillance, analyse, predict, and even manipulate people’s behavior’. It is also crucial that the Digital Financing Task Force ensures that the push for financial empowerment does not result in ballooning individual debt. Technology is not inherently good or bad, and an unregulated, international implementation may not lead to beneficial outcomes.  

FinTech is another technological domain with massive potential to generate change brought about by the growing digitalisation of the world. Whether that shift will increase financial inclusion for disadvantaged or ultimately exacerbate existing economic inequalities will depend on how governments and international organisations regulate the rise of new FinTechs.

 Featured image: Austin Distel, Unsplash

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