Financial Technology (FinTech) is an
exciting area to be in at the moment. Recent technology has opened up almost
unlimited possibilities and disruptive businesses are using technology to undermine
established global players.
Even before the 2008 financial crash, many people had begun to realise that the financial system was profiting only a small group, as private citizens were burdened with bailing out major global banks.
Deeply entrenched services, practices,
and products at traditional financial firms weren’t evolving for their
customers’ needs. They were also maintaining old banking practices, for example
the transfer of funds should take seconds, yet still takes days. So new
platforms popped up to offer brand new services such as TransferWise and Monzo.
Just look at how Monzo has managed to
disrupt the banking sector with its app-based current account, in the process
becoming the fastest growing bank in history!
But success stories like Monzo aren’t based on one technology alone ‒ it’s the combination of technology layers that allow for disruptive new approaches to finance.
Let’s take a look at the innovations coming through and how they will combine to turn FinTech into a force for good…
1. Distributed ledgers
Blockchain is the most widely used and well-known distributed ledger. Essentially, Blockchain is a public ledger of transactions. When a transaction occurs, it is added to the Blockchain. Other technologies can then reference the transaction, call up transaction history, and use the data in other novel ways. The fallacy here in this false messiah, is that it would require a limitless amount of energy to scale this globally.
The important thing to know about Blockchain is that it is public and cannot be edited, making it reliable and transparent. While the technology and purpose are sound, the scalability issue needs to be resolved.
Consider how the Blockchain could be
used to ensure sustainable and ethical purchases. A resource, such as a tree or
mineral, is added to a Blockchain including reference information about where
it came from, who the supplier was, the original costs, etc. Whoever then buys
the raw material can check its history to ensure it came from an ethical source
and that the works received a fair income.
This process then continues throughout the supply chain to the consumer.
Most people want to buy ethical and sustainable products but, currently, it’s impossible to know the full supply-chain history. Distributed ledgers will be used to provide the complete history of a product, right back to the raw materials, embedding economic justice into every product. This will allow consumers to make informed purchasing decisions which will, in turn, drive improvements to the ethics and sustainability of supply chains.
Until we fix the problem around the inequitable exploitation of workers in developing countries, we will continue to unconsciously dine on the suffering people in developing nations to fuel our economies. A great example of this is the fuel that runs our cars, how do you know that this fuel was not harvested from conflict countries where the local people have been robbed of their resources? Would you consent to this? Are you aware of this? As consumers people do not want to be complicit in the death and destruction of other communities, that is why transparency is so important and as our director of communications Kevin Jackson says, there is a tsunami of transparency coming to all brands.
Brands need to be on the right side of history.
Take our current forestry project in Costa Rica. We want to ensure the protection of the local environment and help develop the local economy. By feeding the development through a regulated financial exchange which improves on the scalability of the Blockchain’s technology, we can ensure that developers are fulfilling their promises to provide sustainable wood while reinvesting into the community. The same approach could be applied to almost any product.
Imagine being able to find out exactly where your coffee was grown, how the farmers were treated, whether they were paid a fair price, and how the coffee has been processed along the way, that would provide a sense of meaning and fulfilment as you drink your morning cuppa. You could ensure that every sip was ethical and cruelty-free. That’s exactly what a number of key technologies are already doing – and we want to scale this to many other products.
2. Decentralised Exchanges
In the Western world, financial services make up a sizeable chunk of the economy. In the UK, the financial sector contributes 6.5% of total GDP
The reason the financial sector is so large is that it has become involved in almost every aspect of finance, from personal loans to government debt, home insurance to credit default swaps (CDOs), and, importantly, business loans. What’s more, while usually only acting as an intermediary for these services, financial firms earn a commission on everything they touch.
Essentially, financial services firms are expensive middlemen who have worked their way into almost every aspect of society.
Decentralised exchanges don’t rely on middlemen. As the name suggests, the exchange itself is not centralised in any particular location or around any particular company. Some even use alternative currencies like Bitcoin and Ethereum to facilitate exchanges. As such, they remove the power and profitability from a small group of financiers and put it into the hands of the customers.
In the future, decentralised exchanges will play an important role in the democratisation of money and finance. People will be able to choose where to put their money, towards what initiative or cause, and move their money around at will without the complex and expensive middlemen. Platforms such as GSI Exchange and Binkabi.io are already offering a solution for issuing, trading and financing commodities on the blockchain, creating the potential to trade anything on a decentralised exchange.
3. Smart Contracts
Smart contracts use the Blockchain and decentralised exchanges to enact specific terms automatically, using technology. A simple smart contract used for a token purchase, for example, could state that when the sale is closed that x-amount of tokens will be transferred to the purchaser in exchange for x-number of Ethereum. The investor essentially buys the contract which is then executed automatically when the sale is closed. While this is a fairly simple example, there are almost infinite ways smart contracts could be applied. The technology is also developing at a rapid pace, allowing smart contracts to be applied in more cases than ever.
Again, smart contracts will cut out the expensive middlemen, allowing for direct and secure agreements between two parties without the need for financial advisors and lawyers. This will make it cheaper and easier for businesses to create deals and provide an additional level of security.
Small businesses will be able to float stock options without the need for a centralised stock exchange, freelancers and sole traders can ensure they are paid on delivery of the work, and charities can automate large chunks of their financial admin…just for example.
Applied to things like economic development, smart contracts could be developed to help build investor trust around assets that are owned by the indigenous people of a developing region. A smart contract could, for example, ensure funds are automatically distributed from escrow simultaneously into stakeholders’ accounts when the product has made it through the supply chain and all ethical standards have been met, all without having to pay expensive lawyers and financial middlemen.
Smart contracts, if constructed in the right way, can provide this level of transparency, efficiency and trust in all transactions, levelling the playing field for countries that have been left behind by investors.
Crowdfunding platforms have been around for almost 10 years now and have developed from simple reward-based platforms like Kickstarter into sophisticated equity investment platforms like Crowdcube, which attracts millions in capital.
One of the main allures of crowdfunding is that entrepreneurs can connect with potential customers to raise finance without risking losing a controlling stake or having an angel investor meddling in their business idea. Additionally, individuals can easily and cheaply own stakes in a number of companies they want to support, without all the complexities and costs of the stock market.
Essentially, crowdfunding allows anyone to become an investor rather than reserving that right exclusively for a capitalist class. This puts even more power into the hands of customers to drive innovation ‒ instead of being led by market forces and submitting profit to already wealthy individuals, customers can use their money to direct the market by helping businesses get started while enjoying a share of the profit.
In the future, Blueprints will be launching a joint-venture for decentralised exchange that will integrate all these technologies. Enabling a crowdfunding platform for development projects with an equitable share to the locals. Allowing individuals to support development projects around the world, where people can participate with money, time, or resources to advance the project, tracking its progress as it develops. This will allow them to make scalable investment returns while generating a positive social impact, which due to changing consumer demands will be absolutely correlated in the future. More and more, people are demanding that the products they consume are based on the values they want to live by.
As we can see, FinTech is redistributing financial power away from big, centralised businesses into the hands of individuals. Until we democratise finance we cannot claim to live in a true democracy.
Making finance democratic is a key step in our growth ‒ your money is a vote for the kind of future you want to see.
ABOUT THE AUTHOR
David Solomon is co-founder and CEO of Blueprints ‒ a FinTech company aiming to make international development fair and sustainable. David worked on Fixed Income Business Management at Citigroup and Salomon Brothers Investment Bank for five years before leaving to pursue his interests in social enterprise.
David was a pioneer of the Nation Building Initiative, a new blueprint for Impact Investment, as well as co-founder of the Financial Times Global Impact Summit. He has attended the World Economic Forum as a participant from 2013-19 and is an advisor to Heads of State, Kings, UHNWs, Leaders, Generals and CEOs on strategy.