Democratization of financial services — enabling advanced financial tools for everyone

If the phrase it takes money to make money is accurate, what about those that don’t have any? Financial services traditionally focus on using wealth to create more wealth through saving and investing. However, now new technologies and business models are opening up economic opportunities for many more people, democratizing financial services.

With significant cost efficiencies, global distribution and new regulatory outlooks that reward innovation, fintech companies and person-to-person (P2P) solutions can scale faster and broader than ever before. The hope is that soon everyone in the world will be able to access services that help them create financial stability, growth and prosperity.

Generating wealth for the wealthy few

There are numerous examples of financial services bias towards wealthy clients:

• Overdraft fees that penalize the poor
• High stock prices and minimum investment vehicles that limit participation
• Restricting investment in new companies to sophisticated investors
• Identity requirements and other restrictions that together prevent 1.5 billion people from enjoying financial inclusion

It’s understandable why traditional financial service organizations would focus on higher-income clients, as the profit levels are higher. There are substantial costs for operating any financial services operation, including security, regulatory compliance and other risk-related costs. With traditional overhead requirements, gaining low-value clients often wasn’t worth the acquisition efforts involved, economically speaking.

Physical branches and paperwork, which needed to be manually processed, analyzed and stored, helped create a high-cost and cumbersome business model. With limited competition and staid, historical practices that were employed industry-wide, the incentive to change was lacking.

After all, providing financial services to the middle-class and above produced enormous wealth for the industry.

Fintech and a new world of opportunities

The financial services industry has always been a keen technology adopter when those technologies have offered solutions to deal with vast data volumes and gain operational advantages. Historically, it was custom technology solutions such as big mainframe computers and dedicated communication lines.

But now fintech is a regular part of our lives and drives innovation in the industry, both in front-end experiences and back-end processes. Some of the driving forces propelling fintech forward include:

• Data and AI — collecting and analyzing massive data sets to better target opportunities and avoid pitfalls
• APIs — integrating services from multiple sources into a cohesive single offering
• Payment innovations — digitalizing transactions for more straightforward and less expensive payments, while also enabling more complex payment models
• Transparency — improving methods to monitor, audit and assess marketplace participants to advance trust in the system and encourage participant responsibility

From payments and lending to insurance, asset management, and equity finance, fintech is touching every aspect of the financial services sector in various ways around the world, driving significant change. In deposits and payments, mobile-only banks, digital wallets and peer-to-peer payments provide more ways to conduct business transactions that are fee-free and not burdened by excessive bank reconciliation processes.

New regulatory frameworks for expansion

Financial services are a highly regulated industry — as they should be. However, if regulations don’t accommodate the technological possibilities that are emerging with fintech, innovative services will be hindered or worse yet, remain unrealized. As the fintech industry is vital to growing the economy, perceptive governments will create the right mix of regulatory environments that both protect consumers and enable and encourage technological innovations.

One such regulatory trend is open banking, the set of laws, technical specifications and implementations worldwide to improve customer-consented secure sharing of personal financial information. Safely opening up banking information accelerates the ability for new services to come to market and deliver value.

Regulation technology (regtech, as it’s commonly known) is also contributing to the rapid expansion of the industry. The ability to improve onboarding, monitoring, detection and reporting has simplified complex compliance requirements, improved fraud prevention measures and created new approaches to dealing with risk.

New ways of delivering and thinking about financial services

Improving financial services isn’t simply about doing the same things, but faster and more comprehensively. Instead, it’s about developing and taking advantage of whole new opportunities that were never possible beforehand.

The financial services industry is creating a whole new field, embedded finance, that enables organizations to easily add a financial service or technology to their offerings. These integrations allow financial services providers to expand customer relationships, increase revenue and profitability, and deliver new services and innovative offerings without all the time and cost of traditional customer acquisition. For consumers, that means more access and simpler, more efficient onboarding.

To put this in perspective, while initial stock-trading apps were much like computer stock-trading programs, now platforms like Robinhood allow users to engage in fractional share purchases and commission-free investing. Instead of limiting access to financial professionals and the well-off, stocks can now be bought by almost anyone, anywhere.

Bitcoin and other cryptocurrencies are financial instruments not created by central banks and large institutions, but by code that (theoretically) can be run on any computer. People can invest using their digital wallets and take total ownership and control of their own crypto assets.

Financial services based on P2P activities are pointing the way to whole new ways of doing business. Crowdfunding platforms have already gained traction. Decentralized finance (DeFi) allows people to make loans, participate in capital pools and leverage token assets in ways that were unimaginable even a year ago. DeFi bypasses the middleman and all their biases and fees, allowing investments to flow more easily to projects.

One vision of the financial future is that all assets become tokenized and easily exchanged instantly by any person. Need a new water pump for your neighborhood? Create a new token, finance it online and distribute dividends to any global citizen who participates. The process can be all automated and instant. And there will be many other opportunities and innovations to explore.

The concept of financial inclusion need not be limited to getting a bank account. Micro-businesses can establish their corporate structures without reams of paperwork and get loans to scale quickly from sources far beyond traditional financing. People can invest in local businesses or global entities guided by advice from open-source robo-advisers.

Access to advanced financial tools for all

Everyone should be able to participate in the coming financial services revolution. Of course, there will still need to be significant work to ensure that important elements like legitimacy, trust, safety, privacy and integrity of the financial system are maintained and expanded.

Just as opening the power to vote to all citizens has created free and open democratic societies, the democratization of financial services will have profound effects. With more information and more ability to control their economic outcomes, people will be better able to get the resources they need to prosper. Economic uncertainty will diminish. Enabling sophisticated financial tools for the masses will unleash new levels of growth to lessen the scourge of poverty and all it brings with it.