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Fintech is redefining financial services landscape in unprecedented ways

Meghnad Desai
Fintech,  financial services landscape, oil price, monetary policy,  hyperinflation,  Bitcoin,  Cryptocurrencies,  retail banking
Fintech, financial services landscape, oil price, monetary policy, hyperinflation, Bitcoin, Cryptocurrencies, retail banking

It may not seem like it, but we are living through a single, if not more, revolution in the idea about and reality of money. During the 1970s, due to US abandonment of the gold-dollar link, oil-price spike and the resultant hyperinflation, monetary policy and central bank independence became much-debated topics. The quantity of money in circulation became the objective of monetary policy as the variable to control. Money proved slippery when it came to defining it. Was it cash or credit that needed regulating?

Whatever the conceptual problems, monetary policy won pride of place, and a Great Moderation prevailed between Keynesians and Monetarists. Confidence in market efficiency and rational expectations facilitated financial innovations, which led to excessive credit creation and the crash of 2008.

Also read: Why Jan-March is a dismal quarter with no hope of reversal for India Inc

Now, ten years on, we are in another world. It is the world of cryptocurrency and fintech. Cryptocurrencies were news a while ago when Bitcoin holding became profitable. But the logic behind Bitcoin is the old anti-inflationary concern about retaining value of money against excessive creation of money supply by central banks. That no longer seems to be the problem. Indeed, except for oil and primary commodities, inflation seems to have disappeared from daily life. Central banks cannot seem to generate inflation to reach their target number of 2.5%. There is a whole host of cryptos, but they have lost their shine.

It is fintech which is now ushering a new revolution. Giving the CD Deshmukh Lecture at RBI on Thursday, April 25, Agusto Carstens, the former finance minister and Central Bank Governor of Mexico, who is now at the Bank of International Settlements in Basel, dealt with the twin topics of financial inclusion and fintech. The rapid growth in fintech-mediated financial transactions over the last five years is breathtaking. Unlike with previous revolutions, emerging market economies are not left behind. Indeed, it was the very paucity of access to financial institutions which helped innovations like Kenya s Mpesa to facilitate financial transactions via mobile telephony. In India, the ubiquity of mobile subscribership has aided the creation of technologies for easing financial inclusion and successive governments have been committed to it. The Jan Dhan scheme has made bank accounts almost universal.

There are two sorts of issues raised by fintech. One is that the old-fashioned retail branch banking is under threat of extinction. In UK, High Street bank branches are closing down. ATMs plus online banking reduce, if not remove, the need for face-to-face banking. Indeed, I observe in London that having to go to your bank branch is necessary only for those who have issues of adequate balance. Live retail banking has become an inferior good!

Thus, banks may become like high-class legal practices used by only high-value clients. The rest of us need hardly visit a bank. In India, the demonetisation experiment has accelerated the use of electronic payment technologies. India could soon see a steep decline in the amount of currency needed to meet transaction demand for money. This would probably rank as the biggest benefit of DeMo.

But Carstens pointed out dangers here as well. One is the prospect of increasing concentration in the banking sector. Fewer banks will survive the rapid redefinition of client needs. Market concentration brings with it risks of monopoly power and the need for the policymaker to enforce competitive norms. Readers will have noticed that a recent move for the merger of two large banks in Germany raised a debate about its desirability. As of now, the Deutsche Bank and Commezbank have given up the idea, but bank mergers or takeovers will become frequent. Competition policy may need to be internationally coordinated since fintech makes remote transactions easy.

Of course, the conventional issues of monetary policy such as rate setting and an anti-inflationary stance will not go away, but, obviously, the old-fashioned ‘demand for money’ equations will need to be rethought. Central banks may need to alter interest rates much more continuously rather than on set occasions. Markets have now the wherewithal and the analytical knowledge to be able to handle frequent small changes that the central bank may think necessary. There is no reason to insist on 25 basis points change at a time.

Carstens also raised the vexed question of data ownership and privacy. Our devices know more about us on a daily, if not minute-by-minute, basis than even we do. The principal providers are few and very large oligopolies. We sign some agreements with them, but we know we are on a losing wicket. The new technology has made data a resource from which these companies can make profit. If, in the old days, socialists thought profits come from exploitation of labour power that a worker sells to the capitalist, it is we ourselves who generate surplus value for the Amazons and Googles by providing our data. Profits come from your consumption of data over your smart phone! The concentration of power in the hands of these four or five large producers of smartphone services is enormous. It is a global problem and will need global solutions.

The author is prominent economist and labour peerr