By Aurèle Cotton
In the minds of policymakers, digital finance is like climate change: it is still a distant prospect. Evidence points, however, in another direction. In many ways, digitalization is already revolutionizing financial services and how we manage our money. Think of mobile payments for instance, or trading apps such as Robinhood, which enable users to access financial markets with almost no commission. In some countries, digital finance has totally upended the market for financial services. Take Kenya for example, home to M-Pesa, a mobile-based money transfer service owned by Vodafone and Safaricom. In 2018, as much as half of the country’s GDP moved through mobile phones. The figure is approximated to be even higher in Zimbabwe, where EcoCash, a local equivalent of M-Pesa, rules the roost. In China, services such as Alipay and WeChatPay count over 1 billion users and are rapidly expanding across Asia. Even if traditional banks are proving harder to dislodge in Europe, some companies such as UK-based Revolut and Monzo are also making headway into the market for financial services and causing headaches to incumbents.
The Covid-19 crisis is proving to be a formidable accelerator for digital finance. During the lockdown, e-commerce has enabled millions of customers to shop online and get their food delivered directly at home. Governments also relied on digital channels – or “rails” – to quickly and efficiently roll out elements of their stimulus packages, such as direct payments and financial support to businesses. This was a wake-up call for many countries, which are now promoting digital finance as a component of their recovery plans.
Say hello to “Big Fintech”
The digitalization of financial services also comes with its challenges. One of them is market concentration. This is mainly because digitalization, among its many features, enables increasing returns to scale through so-called “network effects” and low marginal distribution costs. This in turn leads to the emergence of dominant companies able to dictate the rules and stifle competition in some sectors. Indeed, one of today’s buzzword is “Big Fintech”, a distant cousin of the now well-known “Big Tech”. By “Big Fintech”, we simply mean global platforms that already or plan to deal in financial services.
If the scope and range of activities of those platforms is wide – social media (Tencent, Facebook), e-commerce (Amazon), payment platforms (Alipay), … – they have something in common: a mountain of data accumulated over time that they are eager to monetize. Libra, Facebook’s still-to-be-rolled-out stablecoin, is a perfect example of such a strategy, as it would enable the company to further leverage its enormous user base to reduce its dependence on advertising.
Regulating the industry
Regulation – as it is common when it comes to technological change – is struggling to keep up. This is mainly because the digitalization of financial services raises trans-border questions that can hardly be addressed by national financial regulators alone – even though some, namely the American and Chinese ones, enjoy more leverage. For now, however, the focus has mainly been on the financial stability and money-laundering aspects of digital finance.
In this space, the Financial Stability Board, an organization set up by the G20 in the midst of the 2008-2009 financial crisis, has been particularly active. Traditional actors, such as the IMF, the World Bank and the Bank for International Settlements (simply put, the central bank of central banks), are also rising to the task. In 2018, the former two co-sponsored the “Bali Fintech Agenda”, which advanced a “framework of high-level issues that countries should consider in their own domestic policy discussions”. On cryptocurrencies, central banks are progressively closing the gap, but overall the global regulation landscape remains fragmented and narrow-focused.
Everybody expects the UN
Here comes the United Nations. On October 9, its Task Force on Digital Financing of the SDGs launched a Dialogue on Global Digital Finance, an initiative convened under the leadership of Switzerland and Kenya. Broadly speaking, it aims at providing a platform to develop and advance consensus on what should be the regulatory responses to the rapid development of digital finance. Representatives from key financial institutions, governments, regulatory bodies and fintech companies are expected to engage in this new endeavour.
The purpose of the Dialogue is also to connect the dots between sustainable development and the governance of digital finance. During a keynote address preceding the launch, Achim Steiner, UNDP’s Administrator and one of the co-chairs of the Dialogue, underlined how giving back people control over their own money could lead to better development outcomes and better alignment with the 2030 Agenda. He also emphasized the importance of giving developing countries – which are often experiencing first-hand the disruptions brought about by digital finance – a seat at the table. The appointment of Patrick Njoroge, the governor of the Kenyan central bank, as the other co-chair of the Dialogue certainly goes in this direction.
Other priorities, as identified in a landmark recent report of the Task Force, are the development of a set of principles to inform national and international action, as well as a strong emphasis on “innovative” corporate governance. For both components, the Dialogue intends on adopting a complementary approach that will account for the already-existing agreements in the field, such as the Bali Fintech Agenda mentioned above. A significant outcome would then be to integrate this agenda into the discussions at the intergovernmental level at the G20.
This very loose approach based on the UN’s convening power is quite different from what has been brewing in the United States recently. In the homeland of Big Tech, the mood is shifting and an increasing number of voices are calling for more regulation. On October 6, House Democrats released a massive report which lists a number of possible measures to address competition concerns, including a sweeping reform of antitrust law. Most Republicans, even if it is for different reasons, are also eager to reign in Big Tech. If the threat of a break-up is not quite yet on the table, such a course of action would significantly jeopardize the extension of those companies into financial services.
This attitude shift of the other side of the Atlantic could prove instrumental in mobilizing support for a principles-based approach at the global level as advocated by the UN. Some digital finance platforms have already felt the wind change and are increasingly asking for more regulation in the hope of shaping its outcome. The new UN track might provide them with such an opportunity.
Aurèle Cotton is a 1st-year MIA student at the Institute. A Swiss citizen, he is constantly on the lookout for the latest trends in International Geneva.
Featured photo: M-PESA kiosk outside Kibera centre, Nairobi – ©wrcomms – licensed under CC BY-SA 2.0