Digital finance is the unexpected revolutionary – but which side will it take? With the help of digital finance, urbane consumers can glide gracefully and seamlessly through their shopping experiences, migrants far from home can move hard-earned money cheaply to their families, small businesses can access credit lines in minutes through big data-driven profiling, and savers can navigate their investment opportunities with pinpoint accuracy. Will digital finance, then, deliver an all-purpose public good, or do we first need to manage possible constraints or even downsides?
A new generation of intermediaries are reinventing the financial system, breaking down the old value chains with its many profit-taking intermediaries. New financial technologies have earned moral credentials by enabling low-cost financial inclusion. Now, they are in the early stages of being used to build bridges between financial and environmental benefits. The UN Environment Programme (UN Environment), through its ground-breaking Inquiry into Design Options for a Sustainable Financial System, has just published ‘Fintech and Sustainable Development: Assessing the Implications,’ which identifies a host of ongoing experiments, and many options for scaling and furthering innovation in leveraging fintech for environmental gains.
Digital finance has the potential to overcome some of the pervasive barriers to deploying private finance for the wider good, and so to improve environmental outcomes. On the supply side, digital finance reduces costs and increases speed, providing a foundation for identifying and creating profitable green savings and investment opportunities. Trine, a Swedish tech start-up, enables savers in downtown Stockholm to profitably fund distributed solar energy systems in rural sub-Saharan Africa. On the demand side, similarly, reduced financing costs and pay-as-you-go access to clean energy opens up new markets, particularly for poorer consumers. Kenya’s M-KOPA is leveraging the hugely successful domestic, mobile payments platform, M-PESA, to open up clean energy to poorer communities.
The prize could be very large. ANT Financial Services, with 450 million users of its mobile payments platform in China alone, has launched a “green energy” app that rewards users for reduced carbon use, revealed through a set of algorithms that translate individuals’ financial transaction data into an estimate of their carbon-foot. To scale up this and other innovative green digital finance initiatives, UN Environment, in partnership with ANT, is launching the Green Digital Finance Alliance at Davos in January 2017. Extending just this single carbon-saving rewards initiative across a number of payments platforms could engage hundreds of millions of individuals in making carbon-saving lifestyle decisions on a daily basis.
Fintech is not a solitary, technological disruptor. It is part of a broader technological ecology that centrally includes the “Internet of Things” and Artificial Intelligence. As such, it will increasingly ‘animate the physical world’, integrating physical and natural assets by enabling interactions with each other that in turn drive sensing and responding to each other in real time. Just as blockchain technology will create a ‘history’ to money in revealing where it has been and what it has done, so will the lifecycle of products become an easily traceable experience along with its interaction with the environment and its financing. The impact of this technological surge goes beyond enabling new decision-making opportunities based on objective data and new business models. Behavioral norms will also be reshaped as personal and group identities are increasingly shaped through virtual experience. ANT’s carbon-saving initiative is closely tied not only to its financial services proposition but also to its social media strategy, in recognition of its potential for eliciting even greater behavioral change.
All revolutions come at a price. Incumbent financial institutions that cannot evolve rapidly, and the people dependent on them for their livelihoods, will be the first to pay as they are cut out of profitable parts of the financial value chain. The eradication of Kodak and Nokia in the face of early-stage digital upheaval comes to mind as minor rehearsals of what is to come. The misuse of new financial technologies is inevitable, although every effort must be made to prevent it. Loss of privacy is the most visible penalty, which is likely despite noble efforts at creating safeguards. Less visible are negative effects of disruption of existing markets. Michael Lewis revealed in his best-selling book ‘Flash Boys’ the negative impacts of high-frequency trading on the financial returns from our lumbering, 20th-century pension funds. Regulation itself will be a casualty, at least for a while, as financial regulators struggle to oversee and guide an ever-more complex, dynamic and virtual financial system. Some commentators, such as the FT’s Izabella Kaminski, have argued that the commoditization effects of speed and big data itself undermine the conditions for sustainable development.
It is certain that fintech will reshape the global financial system and its relationship with both the societies in which we live and the ecosystems on which we depend. Harnessing technology for the greater good has been a challenge throughout history. In that sense, aligning digital finance, and its close cousins, to the imperatives laid out in the Sustainable Development Goals (SDGs) is just another iteration of such efforts. Some solutions will be framed by compliance, some by standards and the rule of law, and others by riding the technological wave through innovation. Here, we would emphasis three, related solution arenas.
First, the digital finance community needs to be rapidly aligned with sustainable development imperatives to prevent the emergence of a new generation of incumbent, problematic financial institutions.
Second, financial policy makers and regulators need to embrace sustainable development as core to their engagement with the fintech community, most immediately in their ongoing ‘regulatory sandbox’ experiments.
Third, the sustainable development finance community is woefully ignorant of the significance of these developments and needs to wake up and engage now, or it risks becoming irrelevant, or worse.
2017 is the year where green digital finance can come of age. Germany’s presidency of the Group of 20 (G-20) is taking on themes of “digital” and “resilience,” and is considering fintech as part of its focus on green finance. At the same time, the G7 under Italy’s presidency will explore how to channel finance to “green SMEs,” including the role played by fintech-powered financial innovations. Governments from Singapore to Morocco and Argentina can integrate digital finance into their sustainable development financing plans, and coalitions such as the Green Digital Finance Alliance can mobilize collective action by leading financial institutions and their stakeholders.
Simon Zadek is co-Director of the UNEP Inquiry into Design Options for a Sustainable Financial System, and Visiting Professor and DSM Senior Fellow at the Singapore Management University. He can be contacted at firstname.lastname@example.org and blogs through www.zadek.net. The Inquiry’s publication, “Fintech and Sustainable Development: Assessing the Implications”, and other publications can be downloaded at www.unepinquiry.org. Information about the Green Digital Finance Alliance can be obtained from email@example.com.