In our fast-paced lives, we rarely stop to consider in detail the issue of social value when it comes to major transformations in the market economy.

Last year’s BBC Reith Lectures, delivered by the former Governor of the Bank of England, highlighted this point. Mark Carney’s lectures interrogated assumptions and theories of value from objective economic value theory to subjective value theory. He suggested that the failure of economic actors to prioritise social value over financial value helps to explain three of the great crises of the 21st century: credit, COVID-19, and climate.

He explained that we have witnessed a drift from moral to market sentiments in which value has been standardised and is defined by the price of things: “Market value is taken to represent intrinsic value, and if a good or activity is not in the market, it is not valued. We’re approaching the extremes of commodification as commerce expands deep into the personal and civic realms. The price of everything becomes the value of everything.”

His lectures were a warning against unbridled faith in market forces without reference to social value. He quoted Italy’s former finance minister Tommaso Padoa-Schioppa with approval: “when we grant an entity infinite wisdom, we enter the realm of faith.”

The FinTech disruption

When it comes to the FinTech space, much optimism exists about the wisdom of market forces to create innovation and disruption.

The technological solutions that have emerged to fix an industry that was battered and bruised in the 2007-2008 crisis have promised to democratise finance, boost competition, and realign power dynamics by placing financial control into the hands of the consumer.

But has such optimism, particularly in relation to digital finance in Europe, entered the realms of fantasy and faith?

A report published recently by the RADIX Centre for Business, Politics, & Society can help to answer this question – Building Digital Finance in Europe: FinTech for Social Value.

The detailed report, co-authored by Joe Zammit-Lucia and Ismail Ertürk, is invaluable reading for anyone wishing to understand the FinTech ecosystem in Europe and the role that public policy must play to shape its future.

We spoke to the author and entrepreneur Joe Zammit-Lucia who co-founded RADIX in 2016 – a think tank for the ‘radical centre’ based in the UK, and, in 2020, the RADIX Centre for Business, Politics & Society based in Amsterdam that focuses on aligning public policy with responsible business.

For Zammit-Lucia, RADIX is not like a traditional think tank: “We want to stimulate ideas wherever they come from.”

He also explained that RADIX is interested in “systemic change rather than in tweaking the current system.

“The current system of an essentially financialized political economy has run out of road and something new has to emerge. We’re interested in what that might be and how to contribute to that thought process.”

The report analyses the FinTech industry, the impact of the pandemic, the differences between ‘fin’ and ‘tech’, and the public policy implications for digital finance. As Zammit-Lucia said us, it seeks to explore “how public policy can help drive how digital finance evolves across Europe.” Such implications, we are told, “are substantial and far from straightforward.”

What about European citizens?

But for Zammit-Lucia, there is a much wider question that needs to be explored first: What can digital finance do for citizens in Europe? and…

“What is digital finance for?

“Is it that we’re just going to do exactly what we’ve done before, but now online, as opposed to doing it with bits of paper or visiting the branch? Or is this an opportunity to transform the financial services industry?”

Zammit-Lucia explained: “The financial services industry is no longer fit for purpose. Instead of doing what it’s supposed to do, which is to be the lifeblood of the economy and encourage industry to develop, it has become an extractive industry. Because of its intermediation effects, it can extract high rents from the economy because every time we want to do a transaction, they have to be there, so they take money out.

“As FinTech players in this space rush to build viable businesses, my own fear is that the bigger question of ‘what is it all for’, just disappears from the face of the earth.”

At #DisruptionBanking we have reported on parts of the world where digital finance undoubtedly offers tangible benefits to society, for example, in terms of financial inclusion in India. But for developed western economies, have we considered in detail the full implications and potential benefits and risks digital finance offers to citizens, or has our confidence been blinded by faith? This is a question Joe wants more commentators and industry insiders to consider.

“I haven’t seen a comprehensive answer, which is the next stage we want to take this project to: which is to draw up a map of where the opportunities are for digital finance to deliver social value.

“Because the danger, I think, is that this digital finance ecosystem will simply get sucked into the mainstream banking industry through acquisition, or because FinTech becomes merely back-end service providers to the big banks and disappears as an industry of its own. Or FinTech will try to mimic the big banks, driven by where the money is or by the constraints of regulation.”

Zammit-Lucia is worried this will betray the promise of FinTech to be an effective solution to a broken financial services industry: “So we get nothing new in the end. Shaving a cent off transaction costs or being able to do a money transfer in two minutes instead of 10, is welcome, but it’s hardly going to change the world. Because it doesn’t change anything in terms of the fundamental structure of what the financial services industry is delivering.

The report, therefore, hopes to stimulate discussion and highlight areas of the financial sector where digitalisation could bring about societal benefit. And it is not just within banking where such opportunities for disruption and improvement exist.

“There are other parts of the financial services industry – pensions and insurance, for example, which are huge asset owners and have a huge impact on people’s lives – where there isn’t the same amount of talk around digitization and what it can deliver.”

When it comes to the pensions industry, for example, it is not just that public trust in the industry can be shattered by stories like the Woodford debacle.

It is also the fact, as Zammit-Lucia explains, that in the field of asset management, the existing structure of the pensions system witnesses a vast proportion of an individual’s contribution going to a private pension fund where much of it then ends up shrinking over time due to management fees.

“If you could reduce that amount by 20 or 30 per cent through digitization, and give that money to pensioners, that’s a huge social benefit that has the potential to deliver significant social value in the form of a more secure retirement for millions of people.”

The key question, which Zammit-Lucia thinks we should answer before embracing digital finance is therefore: “What are we going to get out of it as citizens. I’m not interested if digitalization is going to improve the margins of the big banks, that’s of zero interest to me as a citizen. The question is: ‘What is it for and what value are we delivering to citizens and our societies?’

“We’ve had a lot of hype about ‘banking the unbanked’. But I don’t see any evidence that much of it is happening. And when you get to other areas where people have talked about social benefit, like improving lending to SMEs, for instance, I don’t know what evidence there is that digital finance can actually improve risk management or that the regulators will allow loans with a different type of backing for risk than the big banks are forced to do.”

One might suggest that a social benefit of digital finance is that it has made it easier for individuals to invest through online and app-based trading. However, Zammit-Lucia advises caution: “It’s very exciting maybe technically that I could buy a Tesla stock tomorrow, but from a regulator’s perspective that’s a nightmare because it’s drawing people to putting money into things that they have no idea about.”

Zammit-Lucia’s comments reflect a similar concern that was recently raised by the SEC: The SEC’s Office of Investor Education and Advocacy issued an alert on January 14, urging investors to use caution before investing in IEOs through online trading platforms.

The greatest risk that Zammit-Lucia sees for European FinTech, however, is that the: “Sector will disappear as an independent industry and just be eaten up by the big banks and Big Tech”.

This points to one of the benefits for Europe of having a vibrant and healthy FinTech ecosystem: to help avoid it being swallowed up by American or Chinese competitors, as has happened to a large extent when it comes to Big Tech. The report therefore offers a detailed framework to facilitate a discussion as to how this can be achieved.

Zammit-Lucia said the integrity of digital finance in Europe depends on the availability of long-term finance.

“European FinTech is not going to be successful as an independent industry if its dependent on Anglo Saxon style, early-stage venture capital. It’s all going to be eaten up.”

Back in May last year, #DisruptionBanking took a closer at the state of European innovation, with several opinions available to our readers to look back on and see where we were a mere few months ago.

For Europe to be competitive, therefore, we asked how the legislators and regulators can hope to keep up with the fast-paced nature of innovation in digital finance.

Zammit-Lucia added: “The regulators and legislators understand that they’re behind. But it’s a very delicate balance that they need to strike in this industry. There’s a desire to open things up for innovation, rather than looking backwards, but how you balance that with financial stability is a big challenge.”

One of the solutions to this problem that the report suggests is ‘open strategic autonomy’ in the EU, UK, and other relevant nations in the vicinity to create a digital finance investment fund. The report suggests this fund should contain “patient capital”. A focus on added social value, and an independent governing structure that would enhance Europe’s digital finance capability and offset the lack of long-term capital investment that has checked the growth of digital finance in Europe thus far.

“This pan-European fund, if it ends up funding quite a big chunk of the industry, could set rules for the fund that would essentially drive the industry without those rules having to go through the laborious and contentious legislative process.”

Another issue Zammit-Lucia sees for digital finance is trust: “How do you build trust into the system?”

We all know how devastating the global financial crisis was in destroying public trust and confidence in the financial system. Zammit-Lucia is worried that after the crisis, “beams and struts” were placed onto the existing system without anybody asking, “How we start evolving towards a fundamentally new system”.

Clearly, as Zammit-Lucia stated, “System change is not something that happens overnight. With the financial system, you have to find a way of changing the engine on the aeroplane, while the aeroplane is still flying.”

Conversations around trust, social value, and the purpose of digital finance need to be acted upon, Zammit-Lucia said. Although these conversations are starting to be had, Zammit-Lucia said “They risk getting lost in day to day operational and financial pressures.

“The things that don’t fit on a spreadsheet end up getting ignored.”

Nevertheless, Zammit-Lucia explained that digital finance offers a unique opportunity: “We have the opportunity to shape the system because of its infancy. But the question is, are we taking the opportunity to shape it? Or are we just letting it run into the structure and culture of the existing financial system?

Zammit-Lucia observed the FinTech industry is quite reasonably focused on survival and growth. Therefore, he thinks it is important that commentators and experts start a serious conversation to ask the wider questions about social value which are not being discussed enough within the industry: “Where can we put the most effort in order to use digital finance as a catalyst to improve what the finance system as a whole does for us as people?”

RADIX’s report has undoubtedly started a dialogue and has detailed several policy proposals that offer the chance for digital finance in Europe to have a sustainable and socially beneficial future. Policy makers and industry leaders should think about how they can design a strategy that deals with the report’s focus on industrial policy, competition policy and regulation, and how it can align with social policy objectives. 

We can therefore conclude that digital finance in Europe can bring about social value to its citizens if a frank and open conversation is had that leads to structural and meaningful change.

This interview was first published in Disruption Banking

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