“Despite some threats that FinTech presents, it has immense potential that outweighs the challenges by leaps and bounds.”
Green Finance can be defined as an umbrella term for investments flowing into sustainable development projects and initiatives, manufacturing of sustainable products, and policies promoting a sustainable economy. FinTech is the usage of technology to change the financial landscape. Recently, the number of FinTech startups in India and their collective market shares have increased phenomenally. This has been observed in various aspects such as increasing penetration of smartphones, the digital revolution brought about by Jio which drastically expanded internet access in an affordable way, and government policies such as SEBI which allowed “sandbox testing”. Sandbox testing refers to a small study where startups are allowed to test their business models in an artificial environment- on a small number of customers with few regulations while still ensuring sufficient safeguards for the investors and customers.
The Paris Agreement and Sustainable Development Goals, set to be achieved by 2030, have posed major challenges for every nation. To achieve these goals, substantial investments are a pressing priority. These financial investments would then have to flow to different enterprises and corporates working for the cause of sustainability. However, traditional or existing financial structures, especially the ones established in developing countries, may prove to be too slow and inefficient to provide adequate funding to accomplish the desired goals in time. Thus, governments need to leverage the massive potential offered by FinTech. This leveraging would have two phases. The first includes tapping the complete potential of FinTech to provide credit and other financial services to businesses whose needs are not being met by the traditional financial structures on account of heavy collateral requirements, procedural delays, lack of access to banks, amongst other reasons. The second would be to ensure that at least a significant chunk of these financial services flow towards businesses and start-ups which are working towards the cause of sustainability.
With their lower costs due to fewer requirements of physical infrastructure, greater accessibility, and tailored products, FinTech companies can provide hasty and hassle-free credit to various organizations. In Sweden, a FinTech startup created a smartphone-based way of accepting payments called iZettle, which subsequently generated financial reports for businesses. This supported businesses to be in a better position to understand buying patterns and other information pertinent to their businesses, at much lower costs. Another case in point would be the ING Bank, Turkey which enabled people to apply for loans via SMS or web applications and be notified when their loans were approved. The ease of applying and availing of a loan led to an increase in the demand for loans, loan disbursal by the bank, and greater economic growth on account of the multiplier effect. This essentially meant that every loan offered to businesses generated greater employment as the businesses hired more employees to meet the human resource needs for their expansion plans. Subsequently, the hired employees would spend their income elsewhere generating further sales and employment for someone else. This would eventually, drive the economic growth of the nation. Focusing on India, the vast database generated by the GST fillings of the government department can assist businesses in determining the creditworthiness of a particular business and help them seek funds to fulfil the goal of sustainability.
DIRECTING THE FUNDS TO SUSTAINABLE CAUSES
Along with the ease in availing credit, simultaneous government policies, that promote entrepreneurship in sustainable projects, would be needed to direct this extra credit towards businesses working towards sustainable development. Furthermore, FinTech’s ability to analyze extensive data about each business could be leveraged by the government to track sustainable development. Armed with adequate knowledge, the government could provide incentives to businesses and/or FinTech companies who are providing financial support to businesses working for the cause of sustainability. Countries would have to make National Plans to ensure that there is a strategic flow of finance to the startups manufacturing sustainable products or providing sustainable services. Unless national targets are set, governments would not be able to track the efficiency of their policies, identify loopholes, and address those issues.
DIFFICULTIES AND CHALLENGES
However, to tap the full potential of FinTech, policymakers will need to resolve a few issues that FinTech brings along with it. The biggest challenge would be that of regulation. Technology is constantly expanding boundaries and with that, it is making regulation an increasingly challenging task for policymakers across the world. With limited budgets, outdated infrastructures, and constrained capacities, many governments are finding themselves incapable of preventing the scope of fraud, money laundering, and other illegal activities from expanding as a result of technological innovations. Also, the protection of consumer privacy is another major challenge. While governments may be making it mandatory for companies to ask for explicit permissions before extracting, recording, and storing consumer data, a lot of people are naive in this regard and might not be aware of the true value of their data that is being taken away. The extraction of data, of this kind, does not only breach the privacy of consumers but also creates a disadvantage for smaller businesses that do not have access to such data. Secondly, the greater accessibility to financial structures and particularly, stock markets that FinTech carries with itself may also prove detrimental up to an extent. This widely accessible data might invite naive investors to invest in the stock market without knowledge which could lead to massive losses. They will end up losing substantial amounts of money which might deter them from investing money into any business, shortly. Another concern facing FinTech would be unemployment generation. Automation of many functions of the financial landscape would cost several people their jobs and the governments would have to create other jobs to redress job destruction.
Despite some threats that FinTech presents, it has immense potential that outweighs the challenges by leaps and bounds. Not only does FinTech act as a potential solution to the problem of seeking funds for the businesses that work towards sustainable development but it can also be leveraged by governments in various other ways to meet the SDG goals by 2030. FinTech could place mechanisms to check any possible market crashes or other risks which could prove to be detrimental to the smooth transition towards sustainability and the growth of the global economy. FinTech has the potential to analyze transactions happening via its digital marketplace on a real-time basis with the help of algorithms which could raise a warning if any risk is detected. FinTech could also be used for the creation of a carbon-trading marketplace. It would be highly cost-efficient and since carbon trading is likely to happen on an international scale, a global platform could be created by FinTech. Moreover, it would ensure improved transparency and consequently, greater accountability especially for governments who will be checked on each transaction involving carbon emissions. Thus, it becomes imperative for nations across the world and especially, those who suffer from the lack of financial inclusion to tap the vast potential of FinTech and direct it towards sustainable economic growth of their nations.
- FinTech, Green Finance and Developing Countries by UNEP; May, 2017.
- 2020 Global FinTech Index by Findexable.
- FinTech, Green Finance and Developing Countries by UNEP; May, 2017.