Technology can help democratize financial services
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The writer is professor of financial economics at Imperial College London
The economic damage caused by the pandemic has been partly masked by the extraordinary levels of support provided by governments around the world. In September, many pandemic relief measures will begin to end in the United States and the United Kingdom. This will expose the uneven impact of the pandemic, with low-income and low-income households being the hardest hit. Wealth inequality, already a serious concern before the pandemic, is now even more extreme.
While over the past decades we have seen progress globally in to narrow the ranks of the poorest, there are huge disparities in wealth within the world’s growing middle class – and huge differences between the middle class and the very wealthy. During the pandemic, wealthy households have widened their lead over the poorest, in part because they were able to save more. But the high returns on long-term, risky investments, such as stocks and housing, have also benefited wealthy people who have easier access to risky financial markets and have been able to borrow at unprecedented interest rates.
Privileged financial access for the rich is a lingering feature of globalization. The disadvantage for the poorest households can be substantial: in India, for example, the cost of sub-optimal financial arrangements was estimated to 10 percent of the actual annual income of a typical middle-class household.
One obvious problem is that the fixed cost of providing financial services makes small-scale investments and borrowing expensive. Many financial products assume stable income and expenditure flows and do not meet the needs of the poorest households who live with irregular cash flows. Poorer people also often lack the social networks and privileged education needed to learn about lucrative investment opportunities. They also lack the time to defend themselves against financial service providers who exploit customer weaknesses.
The good news is that we now have a tremendous opportunity to make changes. Economies devastated by the pandemic are looking for ways to achieve efficiencies and unleash the entrepreneurial instincts of those who have been stuck for more than a year. Technology has been the only way to communicate with others during these dark times, leading to more familiarity with the tools that can lower the cost of basic financial services. And perhaps more importantly, it is now widely recognized that social stability is threatened by inequality in the dimensions of wealth, race and gender.
What can we do to expand access to affordable, high quality financial management? Household financial arrangements reflect the enormous diversity of their economic circumstances, so financial instruments need to be personalized. The challenge is to do so at an affordable price, even on a small scale that the poorest households need. Technology is a critical part of the solution as it enables small transactions to be processed at a lower cost and can adapt to changing circumstances such as varying revenues.
Technological evangelism has its limits, however. To build a healthy family financial system, technology must be regulated to encourage innovation while prohibiting exploitative or value-destroying behaviors such as credit scoring algorithms that amplify existing biases, or smartphone commerce that encourages small investors to buy overvalued “meme” stocks.
With these caveats in mind, there is now a way to improve the lives of millions of people by providing inexpensive access to personalized financial products. By analogy, the establishment of national postal services opened up new possibilities for petty trade in the 19th century by reducing costs. Likewise, properly regulated technology can expand access to financial services in the 21st century.
John Campbell, professor of economics at Harvard University, contributed to this article