By Lily Fang
SINGAPORE — One of the greatest promises of fintech is to enable more people to have access to a broader set of financial services with increasing convenience at lower costs. In short – Financial inclusion. Indeed, this is the general promise of innovation: improving people’s lives.
Innovation has generally delivered on this promise. One inspiring story is M-pesa, a Kenyan mobile payment app that allowed people to deposit, receive, and transfer funds all through the mobile app, without a bank account.
Other stories include innovations in insurance. Tech-driven micro-insurance providers can automatically pay out to poor farmers simply based on satellite data of weather conditions, skipping the lengthy and expensive process of claims filing, verification, and processing. And there are many more.
But can there be too much of a good thing? The answer is yes.
Take, for example, Robinhood. The trading platform that enabled – and enticed – millions of retail investors into the stock market by the promise of zero-commission trades, simple, seamless mobile interface, and a gamified trading experience.
Robinhood put a downward price pressure on traditional brokerages, many of which followed suit and offer zero-commission trades. Disruptive? Yes. But unequivocally good? Hardly.
The GameStop saga that unfolded in early 2021 exposed the danger of a gamified experience among millions of unsophisticated yet raucous retail traders, and it shone a light on a question that previously would only interest a few academics working in the arcane field of “market micro-structure”: Why is Robinhood able to offer zero-commission trade? Is Robinhoold altruistically subsidising trades?
The answer is no: Robinhood’s profit model is not based on trading commissions, but “payment for order flow”, an arrangement by which Robinhood receives hundreds of millions of dollars by selling retail investors’ order flows to entities such as high frequency traders, which profit from trading against such order flows.
As another example, consider PayPal’s introduction of a service that allow anyone with a PayPal Cash account to buy and sell cryptocurrencies. On its own website, PayPal dubs this “Crypto for the people”. The service offers a lot of convenience: you don’t need to worry setting up a separate crypto trading account, storing your crypto keys, cold storage, etc. Far less obvious to the novice trader is that PayPal’s service comes with quite a hefty commission: 3% to start. But more important, the simplification and gamification of the whole experience make retail investors overlook how risky crypto really are, or even the need to understand what crypto are.
Finally, take the examples of red-hot payment fintechs such as Affirm, AfterPay, which, by allowing shoppers to “buy now pay later” are believed to be disrupting the traditional credit card model. While shaking up the Visa MasterCard duopoly is welcome, the easier it is to “buy now pay later” the more risk there is that consumers would end up over-buying. At the end of the day, there is still consumer financing involved in “buy now pay later”.
Comparing these examples, one can conclude that in under-developed markets, the benefits of fintech is often clear. But in highly developed markets where consumers are already well-served, the case is often less clear. There is a particular danger associated with the simplification and gamification of financial transactions that could bring more harm than good to both the consumers and the financial system.
Think about what led us to the 2008 financial crisis. At the end of the day, it was cheap loans and lack of underwriting standards. Everything moved too quickly. By making everything so simple and accessible, we are inevitably throwing away some necessary checks and balances, even in people’s thinking process when they make consumption and investment decisions.
There is a reason that there are rules and regulations for the financial industry. We want to guard against over-regulation, but at some level, certain “speed bumps” serve as guard rails to make sure things do not spin out of control. There is a danger that purely tech-driven “disruption” inadvertently removes all speed bumps and guard rails.
In Facebook’s early days, the company’s motto was “move fast and break things”. Facebook has certainly broken a few things, even though one could argue it delivered tremendous value to various stakeholders, shareholders of Facebook being one. But the overall benefits and costs of Facebook to the society is an interesting question. There is a tendency for technology evangelicals to bring the ethos of the tech world – faster, more convenient, more “inclusive” by breaking down all barriers – to the rest of the world, including the finance world. It is important to rethink where the balance should be.
Lily Fang is Professor of Finance and The AXA Chaired Professor in Financial Market Risk at INSEAD
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