We spoke with Paolo Sironi, IBM Fintech Thought Leader and author, to discuss transparency in fintech, emerging economies, and financial inclusion.
A highly involved expert in the industry, thought leader, IBM Industry Academy elected member; these are only some of Paolo Sironi’s roles in fintech. He has written multiple bestselling books such as ‘Financial Market Transparency’, and is co-host of the podcast ‘Breaking Banks’. Sironi advocates for a more transparent and trustworthy financial market and is passionate about developing the platform banking industry. In our conversation, he shared his vision on fintech’s potential to transform emerging economies, financial inclusion, and digital payments.
When discussing fintech’s potential to improve the financial market, an important distinction should be made between emerging and developed economies. As developed countries often have a more advanced banking infrastructure, they face more legacy problems to adopt digital innovation and update their business models. Instead, emerging countries are jump starting into the digital era, giving fintech an even greater potential to bring about significant economic changes there.
Paolo Sironi explains the opportunities for fintech in these emerging markets:
Emerging economies have tremendous economic potential which can be unlocked by fostering digital payments and open banking. Only by mobilizing micro business they can make finance more inclusive to service the needs of weakest links in emerging societies. However, this requires rigorous scanning of digital offers to make sure potential scammers are walled off.
Sironi’s mention of strict scanning – or, in other words, sufficient regulation – is a hot topic in the fintech sphere. Customer privacy and security is an element of fintech development that necessitates constant and close attention. Within the traditional banking industry, new customers hand over detailed information to the banks, which make an assessment of risk a potential customer may bring to the bank. This makes for a secure system, yet also for slow processes and high entry barriers to financial access. Many fintech companies, such as ARYZE, are approaching this differently, innovating their know-your-customer (KYC) procedures while maintaining and sometimes even improving risk management practices from the traditional model.
Especially in emerging markets, where traditional banking KYC procedures cause many people to be excluded from financial services such as payments, savings, loans and investment, fintech can change the status quo. Sironi states:
Fintech grants the opportunity to lower entry barriers into banking services by making payments secured among individuals, fostering the possibility for small shop owners to reach out to potential new customers.
It is the adoption of fintech that transformed the Chinese consumer-to-consumer market on Taobao, igniting trading interactions within society. Access to digital payments would typically facilitate the creation of more inclusive business ecosystems that allow for micro-lending, which could not be handled by traditional banking infrastructures. Clearly, this would also open the door for digital solutions to better manage personal saving and investments.
Sironi argues that India provides a great example of including people who usually are not eligible for financial services. The Reserve Bank of India (RBI) allows for fintech solutions to be used to develop digital IDs, making sure that KYC is as strict, yet inclusive as possible. By improving standards, banking services can become more accessible and secure. Both governments and traditional banks have the opportunity to promote the advancement of such standards, and if they don’t, big tech players are likely to step in and take charge of this.
Unfortunately, high entry barriers are not the only reason that an estimated two billion people are still excluded from banking services today. Financial illiteracy also plays a significant role, which is partly due to the lack of transparency in the current global banking industry. Without sufficient transparency and trust, it is challenging for people to understand the financial market and become part of the financial infrastructure. According to Sironi, transparency and financial literacy go hand in hand:
On one side, digital and banking must become more transparent in front of final clients about their incentives, costs and consequences of financial decisions. Transparency is a core element of trust which becomes even more important for new entrants using digital to disintermediate personal relationships. At the same time, it is fundamental to elevate the capability of individuals to understand the financial equation in order to be more aware and become truly capable to self-direct themselves on digital.
Sironi continues by explaining how fintech can improve both sides and improve financial accessibility:
Blockchain is of importance because – if well understood – it can make underlying transactions more transparent, reducing business uncertainty. AI is crucial to enable clients on digital, by giving them more contextualised information about their finances and the available opportunities.
The future of blockchain and AI looks promising to unleash global economic participation and freedom. Any expert in the field will tell you that the payments industry is changing drastically. The question that remains is: what will it look like? How will the payments industry act and how will people use different currencies? We asked Sironi what his expectations are of the future of digital payments:
It is too early to know what the final configuration of digital payments will look like. I believe that, ultimately, Central Bank Digital Currencies will impose themselves and guide the new normal for cross border payments. Moving money securely for lower transaction costs is the first and foremost important element. Security first, clearly.
Paolo Sironi believes that fintech can bring about positive social change and make finance more honest and accessible. Ethics, however, are always the key to ensure digital change is balanced and generates value. Sironi believes that the core ethical principle that can transform financial technological innovation into sustainable and inclusive progress, is transparency.