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PayPal is one example of financial technology that betters lives around the globe, but the Federal Reserve recognizes it must be monitored.

Financial technology, or fintech, promises lightning-fast, convenient, frictionless transactions and has been a lifesaver for many individuals and businesses amid the pandemic. 

It’s transforming consumers' lives in wealthy, moderate and poor nations alike while paving the way for a new type of financial industry. Some believe it’s key for developing countries to escape poverty. But is the world ready to fully pivot away from traditional banks?

Forging a finer financial future

Fintech is the adaptation and adoption of technology by financial services companies, which are pushing financial technology innovation through insurance, lending, payment and investing services for the first time. 

Economists like Lael Brainard on the Federal Reserve’s Board of Governors believe “it seems inevitable” that financial services will become on-demand, convenient and customizable, following in the footsteps of online shopping, streaming entertainment or ordering meals. 

After all, innovations usually come about due to a dire need to adapt to consumer demands of convenience and affordability.

Half of U.S. consumers now use fintech firms to transfer money, according to consulting firm Ernst & Young, and Fed officials have taken note. Over 3,330 new fintech firms were created from 2010-17, according to the Treasury, and financing for those firms increased thirteenfold to $22 billion. 

PayPal, one of the world’s largest online payment systems, made a pivotal move by letting consumers easily link their checking accounts to credit and debit cards. The Palo Alto, California-based company clearly uses Venmo, its mobile payment service, as a youth-oriented brand so it can keep growing to meet the wants of the next generation. Making Venmo a household name for years to come is a great example of smart financial innovation by PayPal.

But many fintech firms are hesitant to invest in national expansion without certain licenses and privileges given from the Fed such as payment systems and settlement services.

Reuters’ Pete Schroeder said Fed officials believe that these up-and-comers “favor growth over risk-management” after fintech disruptor Robinhood falsely claimed its checking and savings accounts were federally insured.

“I am concerned that fintech will be the source of the next crisis,” St. Louis Fed President James Bullard told Reuters in late 2018.

Fed officials fear fintech firms “lack robust risk-management controls and consumer protections” like banks, which means they probably want access to the payments system without the regulation that’d come with that access.

This is vital for the whole industry because if they won’t be willing to become regulated like other banks for the consumers’ own good, then the Fed won’t grant them what they want and will hinder the potential to rise in value.

The Fed and fintech firms should work as a team to compromise their differences so that citizens across the globe coming from any socioeconomic status, demographic or background can have access to an abundance of safe financial options.

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Serving the underprivileged, unbanked

Although there are noticeable flaws in financial technology, it can also be a way to serve the “unbanked” or “underbanked” and be able to attain higher rates of “financial inclusion,” according to CNBC. 

While many wealthy countries see fintech as a normal industry growth trajectory, developing countries believe it can play a pivotal role in navigating their citizens out of poverty. Traditional commercial banks in developing countries are usually afraid to lend to poor citizens because they don’t know how long it’ll take to get the principal, or money, borrowed back with interest. 

Fintech can offer solutions to disadvantaged and low-income people who may have little to no access to mainstream financial services, which is one of the most important missions for fintech companies who operate in developing countries.

On the consumer side, lower prices are driving consumers toward fintech and away from traditional banks. On the business side, fintech companies are able to offer such low premiums because they don’t have classic brick-and-mortar costs, such as rent and advertising, and can instead invest into improving their technology for their clients. Fintech companies also have a significantly less amount of employees than traditional banks and therefore much less salary payroll as well.

Fintech is also reshaping the lending industry because now poorer citizens can be lent money from fintech companies with much lower interest rates than a traditional bank would charge. 

In the past, there’s been a lot of scrutiny over how safe and secure consumer data is within fintech companies. There have been calls for heavier government regulation over consumer data.

However, fintech companies are investing heavily in security systems to protect all of their individual customers' data. A couple security tools companies are using to prevent consumer data theft or hacking of any sort are biometric data privacy and encryption. 

Many countries were advised that the rise of gross domestic product, decrease in unemployment and lowering of interest rates was the best way to get citizens out of poverty, according to Patrice Flynn. Countries started to realize that this made sense, and by the year 2000, there were trillions of dollars moving in the world in electronic currency markets. 

Countries wanted to find a way to make financial services accessible to everyone, Flynn said, not just the wealthy citizens who could afford more things. In Latin America, there were around 360 million people who didn’t have access to financial services in 2007, and most people were living on less than $2 a day. 

Flynn quotes prominent people, such as the president of the Inter-American Development Bank, Luis Moreno, and Kofi Annan, who was the United Nations Secretary-General, who both preached for better financial systems so that underprivileged people could be a part of the global marketplace and have access to consumer goods. 

This so-called “21st century model” of savings accounts, consumer credit and insurance policies were a part of the first wave of banking breakthroughs in this century. It shows just how pivotal financial innovation is in getting countries out of economic turmoil and into financial freedom. 

Jeremy Abrams is a junior economics major. Contact Jeremy at abramsja@dukes.jmu.edu.

Disclaimer: I’m a long-term investor in PayPal. I wrote this article myself, and it expresses my own opinions. I’m not receiving compensation for it, and I have no business relationship with any company whose stock is mentioned in this article.