We know Silicon Valley likes to think it is making the world a better place. So it is no surprise that Facebook wanted to ram home the message that Libra, its digital stablecoin, is going to help the world’s poor. From the White Paper:
Our journey is just beginning, and we are asking the community to help. If you believe in what Libra could do for billions of people around the world, share your perspective and join in. Your feedback is needed to make financial inclusion a reality for people everywhere.
Setting aside our cynicism about the nobleness of Libra’s aims for a moment, the view that fintech — that is the digitalisation of financial services — has aided financial inclusion is well founded. M-Pesa, a mobile payments technology has given millions in east Africa access to basic financial services. IndiaStack has more recently done a similar thing for people in the world’s second most populous nation.
But it isn’t the whole story, as highlighted by a collection of remarks published earlier this week by the Bank for International Settlements assessing the welfare implications of digital innovation.
We’d recommend giving the entire paper a read. Here we’ll stick to a few points. The first is that, as this chart shows, fintech has indeed helped bank the world’s poor and drive down the cost of remittance payments from overseas.
When it comes to lending practices, however, it is not at all clear whether tech bridges or widens the inequality gap.
In the first place, post the subprime crisis, we ought to question how sustainable it is to lend significant amounts to people that have in the past been underserved by banks and who may not have the resources to service the debt.
The press generated by Apple and Goldman Sachs freezing out certain sorts of people from their new digital retail offerings has been ample. However, as Jemima wrote, it does not confirm that lending by fintech favours the rich any more disproportionately than one might fairly expect. It’s just not clear how the algorithms are making decisions in the first place, so it is difficult to tell whether or not there is more of an inequality bias than already exists.
It does seem however, that, in terms of what has happened to biases since the advent of digitalisation that racial discrimination has gotten worse.
Even if the cost of credit declines overall, it may benefit some groups more than others. For instance, using data on US mortgages, one recent study finds that black and Hispanic borrowers are disproportionately less likely to gain from the introduction of machine learning in credit scoring models, suggesting that the algorithm may develop its own bias.
When it comes to the so-called “Matthew effect”, it seems that while in theory fintech gives poor people more access to savings products in practice the digitalisation of elements of wealth management helps the richer get even more rich.
The BIS saves the most egregious example of fintech widening the gap between the very rich and the rest till last, however. What is it? Well wage growth, which for tech workers has been pacy, for everyone else rather less so.
Fintech paradoxes, blacklist edition – FT Alphaville
Fintech as a gateway for criminal enterprise – FT Alphaville
Algorithmic discrimination – FT Alphaville
Breaking insurance models with big data – FT Alphaville