Alex Floate, a member of our Emerging Fellows program devotes his eighth blog post to the possibility of establishing an alternative finance. The views expressed are those of the author and not necessarily those of the APF or its other members.
Access to information creates an informed populace, makes people’s lives better and democratizes society. That was the idea behind the public library, and the mantra of idealists in the early days of the internet. Twenty plus years into that era we are still waiting on the full promise of a connected world. In the area of personal finance, we have seen small successes as banking, credit scoring, money and investment management have moved online. Increased access and information have been realized in these areas, and in some cases has brought investing and money management opportunities to people who never considered anything but savings account. However, these improvements have not brought life-changing experiences to most, and the economic paradigm we operate under appears to be more of the same, but with apps!
Where the most success has been achieved is with those who previously did not have access to mainstream banking or financial systems. Some of the early players, such as PayPal and Alipay created the means for moving money from one entity to another. Doing so allowed many who did not have conventional accounts to participate in the broader economy by having a cost effective alternative. Personal investing companies like Acorns are bringing saving and investing to the masses by stealthily increasing every transaction you make with your debit or credit card to the nearest dollar, then investing those extra pennies into exchange-traded index funds. The appification of finance is the first and most obvious sign that personal finance is changing, but there are bigger movements ahead.
Open banking is a new concept that relies on networks and the sharing of both personal and financial institution data across these networks. The goal is providing consumers with better information as institutions provide data about their services that conform to an unbiased and transparent standard. This allows for better competition between participating banks and institutions resulting in lower fees and borrowing costs for consumers. Conversely, institutions have access to the history of potential customers and allow them to more accurately configure and offer products based on the risk profile as seen through transactions, and not through 3rd party credit agencies.
As the world becomes a global marketplace for finance, blockchain will be the technology that will facilitate it. Blockchain will be the means by which transactions are secured, trust is established, and value is traded. Currently we use intermediaries to reduce the risk of transacting with third parties, especially when crossing jurisdictions or borders. This raises the cost and complexity of those transactions which blockchain promises to reduce. This may even result in a complete remake of retail import/export chains as people are able to transact directly across borders. Additionally, blockchain coupled with open banking will elevate peer-to-peer lending to a level where nearly anyone with assets can participate in the capital income economy.
Empowering individuals is the promise and goal of personal fintech and alternative finance. However, as with any economic system there are issues and areas that the promise may not cover. How will the average person create value that can be leveraged across fintech and the web? Those with assets, products or services that are in demand will be poised to take the most advantage; those whose only asset is non-skilled labor will be left out. Although technology is just a tool, those tools enable humans to create and build better lives for the creator, owner and user of those tools. There is never any promise that a tool will bring universal prosperity, but we should be aware of the potential effects of any new technology. For these new financial tools and systems, we need to understand will they truly help the greater good, or just create another seemingly insurmountable divide in our society?
© 2019 E Alex Floate