Of fintech, blockchain, and cryptocurrency

Driven by advances in and adoption of cloud technologies, big data, Internet-of-Things, and artificial intelligence, fintech has reached mainstream
By now, fintech has reached widespread stature amongst professionals and ordinary people due to the heavy use and promotion of local banks investing in it, the accelerated growth of start-ups playing in this space, and the bitcoin, cryptocurrency, and blockchain frenzy the past couple of years.

It has reached mainstream consciousness due to the accelerated growth of start-ups playing in this space, driven by advances in and adoption of cloud technologies, big data, Internet-of-Things, and artificial intelligence. This is evidenced by the more than eighteen fold increase in global investment from $930 million in 2008 to more than $16.8 billion in the first half of 2018, according to a KPMG study.

Fintech and financial inclusion
If you’ve been living under a rock, you probably didn’t know that the term is a portmanteau of financial technology to describe the emerging financial services sector that use technology and innovation to compete in the marketplace of traditional financial institutions and intermediaries.

The concept is not new; in fact, fintech has been around for several years now with the emergence of PayPal and other financial technology companies during the dotcom era. It has reached mainstream consciousness due to the accelerated growth of start-ups playing in this space, driven by advances in and adoption of cloud technologies, big data, Internet-of-Things, and artificial intelligence. This is evidenced by the more than twelvefold increase in global investment from $930 million in 2008 to more than $12 billion in 2014, according to an Accenture study.

Fintech participates in and disrupts four main areas of the financial system namely payments (e.g. digital wallets and peer-to-peer payments, investments (e.g. equity crowdfunding and peer-to-peer lending), financing (e.g. crowdfunding, micro-loans and credit facilities), and insurance (e.g. risk management and microinsurance). Other areas include surrounding services such as financial advisory and data security. These have spawned other portmanteau words such as bankingtech (banking technology), paytech (payment technology), weathtech (wealth management technology), insurtech (insurance technology), lendtech (lending technology), and even regtech (regulatory technology).

Notwithstanding its business prospects, fintech has piqued the attention of governments and international institutions to help alleviate the gap in financial inclusion. Why? Because financial inclusion is an age-old global problem wherein over 2 billion people globally have no access and can’t use mainstream financial services to capture opportunities and reduce vulnerability. For example, in India, Indonesia, and Vietnam, a staggering 53 percent, 64 percent, and 69 percent, respectively of the population have no bank accounts, according to a World Bank study.

In the Philippines in 2015, about 69 percent of adult Filipinos did not have bank accounts of their own or maintained one with someone else. This is far higher than the global average of 38%, the developing economy median of 46 percent, and the East Asia and Pacific average of 31%. Not only that, more than 90 percent of microenterprises and SMEs in the country and other ASEAN member-countries operate entirely outside the formal financial system.

In addition, only 3 percent of the adult population have a credit card, and only 4 percent makes and/or receives mobile payments using a mobile phone.

The root-cause has been on both the supply and demand sides. On the supply side, delivering financial services on a nationwide scale requires huge investments in branch offices, infrastructure, and people; hence, scaling and return on investments are business issues.

As regards the demand-side, the disadvantaged population is slow in using and availing of financial services due to low financial literacy, low and cyclical incomes, minimal collateral to offer, and limited credit which is used primarily for personal consumption such as medical emergencies and celebrations.

This is where fintech has the potential to address these issues by scaling expeditiously at low cost, at the same time educate and advise the less privileged on financial literacy to ensure payments of microloans and insurance.

One celebrated case is that of M-Pesa in Kenya which started in 2007 as an electronic money transfer product that enables users to store value on their mobile phones. It is now based on a platform of electronic units of money that can be used by Kenyans for multiple purposes including transfers to other users, payments for goods and services, and conversion to and from cash, access to their bank accounts, saving money, buying insurance, and taking out credit using their mobile phones.

In 2006, only 18.9 percent of the population had access to formal financial services such as banks, insurance service providers, microfinance banks and deposit-taking cooperatives (SACCOs).

By 2016 about 75 percent of the population were able to access, as reported by Njuguna Ndung’u, Associate Professor of Economics, University of Nairobi.

How M-Pesa was able to do this entailed Kenya’s various stages of virtuous frontier innovative process enhanced financial inclusion. Apart from a conducive regulatory framework, key to its success was fostering partnerships amongst telco companies, financial intermediaries and banking system, and other stakeholders in order to generate endogenous demand for further sector development. Most of the stakeholders agreed to use this platform instead of developing their own and compete against each other.

There are already a number of successful and profitable fintech companies that address such pressing issues. One is PayActive, a US-based start-up which partners with employers to provide smartphone-accessible accounts to the employer’s workforces. As the employees earn hourly wage, their wages are deposited daily into their PayActive accounts. This allows them to have access to viable alternatives to conventional expensive lending products that lead individuals into a downward spiral of indebtedness.

Another example is BIMA, an international microinsurance firm that focuses on millions of people across 21 markets, who are previously shunned by traditional insurers. It has swiftly grown to deliver insurance and medical services through mobile networks across Asia and Africa, reaching 20 million underinsured people. It has started operations in Philippines recently.

There are other Philippine-fintech start-ups raging from remittance services for OFWs to payments, crowdfunding, and others. There are more than 60 fintechs in the country as reported by Fintech News Singapore, but many of them play in the areas of mobile payments and wallets and do not address the issues of financial inclusion.

Innovation in financial inclusion is not only about finding new technologies and ways of transferring money or paying a merchant, but about helping people in the grassroots to be financial literacy, to save their income, and to have access to credit. Innovation happens when all sectors collaborate instead of compete with each other, coupled with a supportive regulatory environment.

Blockchain and cryptocurrency
At the core of fintech’s future is blockchain. Don and Alex Tapscott, authors of Blockchain Revolution, define it as “an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”

Imagine a giant spreadsheet that is duplicated millions of times across a network of millions of computers across different places. This network is then designed to regularly update the file. Then information in this file is shared across different users and continuously reconciled. This is how blockchain works.

The spreadsheet analogy is actually a digital ledger that is created through a data structure and shared across a network of computers across the globe. The blockchain database is not stored in any single location; hence, the data it keeps is truly public and easily verifiable.

First conceptualized by Satoshi Nakamoto in 2008, the first blockchain was implemented the following year as a core component of bitcoin, a type of cryptocurrency, where it serves as the public ledger for all transactions. Today blockchain is not only used for bitcoins and is a software protocol on its own.

A key feature of blockchain is its state-of-the-art cryptography, which is changing and challenging the existing security paradigm. Established security models, such as those used in credit card payments, are building walls to lock people out of the network, handing out encryption keys only to people that are allowed access a certain information.

Blockchain’s model, on the other hand, allows each participant on the network to have access to the ledger and manipulate it in a secure way without the need for a central authority. It is all about letting as many people in as possible. In fact, the more people that have the ledger and participate in the validation, the harder it gets to hack or break the system.

In contrast with blockchain, cryptocurrency has to do with the use of tokens based on the distributed ledger technology. Cryptocurrency is a digital currency formed on the basis of blockchain’s cryptography feature.

Blockchain is the platform where cryptocurrencies ride. The blockchain is the technology that serves as the distributed ledger that forms the network. This network creates the means for transacting, and enables transferring of value and information.

Cryptocurrencies are the tokens used within these networks to send value and pay for these transactions. Anything dealing with buying, selling, investing, trading, or other monetary aspects deals with a blockchain native token or subtoken which can be cryptocurrencies.

Blockchain, together with cryptocurrencies, has a huge potential to transform the financial services sector. Already many financial institutions globally and a few ones locally are either implementing or exploring distributed ledger technology, while others have been actively investing time and funds in this area.

As an example, Deutsche Bank has been exploring various use cases of blockchain in areas like payments and settlement of fiat currencies, asset registries, enforcement and clearing derivative contracts, regulatory reporting, KYC, AML registries, improving post-trade processing services, etc. It has been experimenting on these technologies at their innovation labs in London, Berlin and Silicon Valley.

Locally, Union Bank of the Philippines launched in 2018 the first blockchain-based platform for a fast and cost-effective way to communicate policy and procedural guidelines and regulatory requirements. In July this year, Unionbank successfully piloted the transfer tokenized fiat from OCBC Bank in Singapore to an account in Cantilan Bank, a Surigao Del Sur-based rural lender via UnionBank’s blockchain platform.

Hence, blockchain can disrupt and overhaul a legacy global banking system and lead to much faster payments by removing intermediaries. There is likewise huge potential for blockchain to streamline business-to-business (B2B) payments and address the persistent long-standing issues in cross-border friction and large payment volumes that are often exclusive to B2B. Other examples of potential blockchain technology applications include currency exchange and foreign exchange.

Despite the potential benefits, financial institutions need to carefully prepare for it by bringing together the whole ecosystem of stakeholders, such as regulators, governments, banks, and academics, along on the journey to ensure successful implementation. Institutions should collaborate to explore and develop new uses for blockchain that could deliver expected and needed business value.

The author is the president and CEO of Hungry Workhorse, a digital and culture transformation consultancy firm. He teaches strategic management in the MBA Program of De La Salle University.

Source: https://www.manilatimes.net/2019/08/30/sports/sports-top/of-fintech-blockchain-and-cryptocurrency/608260/

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