Technology can help democratize financial services

Financial Services Update

The author is a professor of financial economics at Imperial College London

The economic losses caused by the pandemic were partly obscured by the extraordinary support provided by governments around the world. By September, many pandemic relief measures in the United States and the United Kingdom will begin to gradually end. This will expose the uneven impact of the pandemic, with low-income and low-wealth families being the most severely affected. Wealth inequality, which was a serious problem before the pandemic, is now becoming more extreme.

Although we have seen progress on a global scale in recent decades Reducing the ranks of the extremely poor, There is a huge wealth gap between the growing middle class in the world-and a huge difference Between the middle class and the very wealthyDuring the epidemic, wealthy families Expanded its lead over poor countries, Partly because they can save more. However, the high returns on long-term venture investments such as stocks and housing also benefit the wealthy, who have easier access to high-risk financial markets and can borrow at unprecedentedly low interest rates.

Privileged financial channels for the rich are an enduring feature of globalization.The disadvantages of poor families can be significant: for example, in India, the cost of sub-optimal financial arrangements Estimated It accounts for 10% of the actual annual income of a typical middle-class family.

An obvious problem is that the fixed costs of providing financial services make small-scale investments and borrowing expensive. Many financial products have stable income and expenditure flows and cannot meet the needs of poor families with unstable cash flows. The poor also often lack the social networks and privileged education needed to understand profitable investment opportunities. They also don’t have time to defend against financial service providers who exploit their customers’ weaknesses.

The good news is that we now have an extraordinary opportunity to make a change. Economies destroyed by the pandemic are looking for ways to increase efficiency and unleash the entrepreneurial instincts of those who have been locked down for more than a year. In this severe period, technology has always been the only way to communicate with others, leading to people becoming more and more familiar with tools that can reduce the cost of basic financial services. Perhaps most importantly, it is now generally recognized that social stability is threatened by inequality in wealth, race, and gender.

What can we do to expand access to affordable high-quality financial management? Family financial arrangements reflect the huge diversity of their economic environment, so financial instruments must be customized. The challenge is to do this in an affordable way, even on the small scale needed by poorer households. Technology is an important part of the solution because it allows low-cost processing of small transactions and can adapt to changing environments, such as variable income.

However, technology evangelism has its limitations. In order to build a healthy household financial system, technology must be regulated to encourage innovation while prohibiting exploitative or value-destroying behaviors, such as amplifying existing biased credit scoring algorithms, or encouraging small investors to purchase overpriced “memes” “Smartphone trading of stocks.

With these warnings in mind, there is now a way to improve the lives of millions of people by providing cheap customized financial products. For example, the establishment of the national postal service opened up new possibilities for small-scale commerce in the 19th century by reducing costs. In a similar way, properly regulated technologies can expand access to financial services in the 21st century.

Harvard University Economics Professor John Campbell contributed to this article

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