Democratizing Finance: The Radical Promise of Fintech • Marion Laboure and Nicolas Deffrennes • Harvard University Press • 2022 • 288 pages • $35
It’s hard to prove this beyond anecdotes, but a sizable portion of the American left seems deeply mistrustful of fintech and especially cryptocurrency. Some of that antipathy may stem from a studied ignorance, coupled with a sense that when elite people and institutions say they are going to use technology to democratize wealth, the usual result is at best laden with hidden costs and at worst a scam.
What’s fascinating about the European authors of this book—who appear to be somewhere on the center-left—is that they never display any need or desire to win over that skeptical group. For Marion Laboure and Nicolas Deffrennes—senior economist at Deutsche Bank and entrepreneur, respectively—fintech is poised to do exactly what its proponents promise: make banking and wealth creation dramatically easier and more accessible to billions of people across the globe.
In one sense, reviewers of this book have the benefit of hindsight. The manuscript was probably written at least 18 months ago, and since then the world has been treated to the Robinhood/GameStop mania, the $40 billion meltdown of the Terra/Luna stablecoin system, and a dramatic drop in the value of bitcoin and other cryptocurrencies. Collectively, these roller-coaster developments picked the pockets of tens of thousands of investors and amplified cries for greater regulation. Still, it’s not as if there haven’t been skeptical and critical voices from the very beginning of what one might call the fintech revolution.
To be charitable, the authors’ sincerity and enthusiasm for fintech innovation can be read as a response to the horrendous state of the financial status quo, especially for the world’s poorest. The authors cite World Bank data showing that approximately 1.7 billion adults worldwide have no account at a financial institution. Furthermore, the authors emphasize that the fintech and crypto movements grew out of the market and government response to the U.S. housing crisis and Great Recession. Inequality in developed economies has been rising for decades, but its surge has been especially sharp in the early parts of the twenty-first century. The authors cite a McKinsey household survey from 25 top economies showing that “between 2005 and 2014, incomes rose for only one-third of households; the remaining two-thirds saw incomes stagnate or decline.”
Enter fintech, it is hoped, as the democratizing hero. The case is not implausible. The application of modern technology to parts of the financial sector has yielded some profound advances that are largely underappreciated. The two Irish brothers who founded Stripe in their 20s created something almost comically simple: seven lines of code that can be inserted into any business website or app and allow the business to accept digital payments. Not only did Stripe’s simplified technology save money for millions of small businesses that previously paid high fees to credit card companies, but it actually enabled tens of millions of microbusinesses worldwide that had never before even been involved with credit cards to accept payments. This “bottom of the pyramid” growth has been explosive. In 2016, Stripe processed about $20 billion in payments; in 2021 it was $640 billion.
Growth, however, doesn’t guarantee democratization. These eminently expert authors seem to believe that allowing fintech to take over the world will automatically achieve their admirable goals. But history is usually more complicated than that.
The book reads like an extended report from the likes of McKinsey: It’s very useful as a taxonomy to “fintech,” which, after all, embraces a huge variety of technologies. Some of the best-known fintech companies are in payments, like PayPal and Venmo. Another category is cryptocurrency, which spawned the more exotic nonfungible token (NFT). Then there are automated versions of businesses that were bogged down in the analog world for too long: insurtech, proptech, etc.
One promising area is “robo-advisers,” the main focus of the book’s third chapter. It’s been axiomatic for decades among sophisticated financial observers that most financial advisers are not worth the fees they charge customers. It’s better in the long term, these observers argue, to put your money into low-fee funds that are indexed to, say, the S&P 500, than to pay even the smartest people to pick and choose investments. This critique informed the rise of the exchange-traded fund (ETF), a multi-stock or bond fund that behaves as if it were a stock that can be bought or sold at any time. The ETF has evolved into an “algorithmic asset manager”—basically a robot that decides how to invest your money based not only on current market conditions, but also on historic patterns. By having machines do much of the heavy lifting, roboadvisors can keep their costs—and therefore their fees—lower than those of traditional financial advisers. “Robo-advice is generally cheaper and more accessible than human advice,” the authors write. In the United States, Betterment and Wealthfront have been leading roboadvisors; both companies currently have tens of billions of dollars under their management.
So the case for fintech optimism is strong, and certainly the authors’ desire to democratize the financial world is admirable, indeed urgent. But—which is often the case with a McKinsey report—there are two large, related ways in which their vision fails to persuade. Let’s call the first one the Transparency Gap. One of the fundamental arguments made by fintech advocates is that technology brings needed transparency to the murky world of finance. Blockchain devotees in particular lean on this argument: In the existing financial structure, data is opaque in large part because it is hoarded inside moated castles like banks and governments. Blockchain, by contrast, is decentralized and accessible. As the authors put it: “Blockchain houses data within one or multiple global asset databases. This approach has the potential to be cheaper, safer, and easier for all transacting participants.”
On some theoretical plane, this is true. But anyone who has watched blockchain-based cryptocurrencies unfold in the actually existing world will be forgiven for suppressing guffaws. A multimillion-dollar crypto rip-off is reported practically every day, whether it’s a crypto exchange being hacked, a “rug pull”—in which the majority owners sell everything and the coin becomes worthless—a crypto-based ransomware threat, or some equally noxious “democratic” act.
The elite colleagues of these well-credentialed authors are all too aware of these shortcomings. Earlier this year, European Central Bank President Christine Lagarde said bluntly, “My very humble assessment is that [cryptocurrency] is worth nothing, it is based on nothing.”
Mistrust of cryptocurrency is not limited to financial or regulatory incumbents (who after all have turf to defend). While tens of millions of people across the globe may be crypto-curious, it’s a lot harder to pitch when the crypto market heads dizzyingly south, as it has for the better part of a year. Some have argued that those outside the monied walls of Europe and the United States hold a particular appetite for cryptocurrency as a method of defying imperialism past or present. Perhaps, but the population Laboure and Deffrennes want fintech to reach is not obviously in a rush to give up cash just yet.
Take El Salvador: The tiny Central American nation grabbed headlines in 2021 when it became the world’s first country to accord legal tender status to bitcoin. The rhetoric used by colorful president Nayib Bukele was very similar to the rhetoric of this book: Bitcoin is a means of empowerment, a tool to reach El Salvador’s substantial unbanked population. And yet, despite some initial excitement, bitcoin is rarely used in El Salvador, whether for everyday purchases, paying taxes, or remittances. A working paper published in April included extensive survey data that showed the Salvadorans’ collective shrug. While most knew about it, few were motivated to use it, and the few who do are better educated, wealthier, and male. Most Salvadorans would not have bothered to download the “Chivo Wallet” app had the government not loaded it with a $30 starter bonus. About three-quarters of Salvadorans downloaded Chivo, but after spending the $30, most never used it again.
At least in some countries, the idea of government-backed digital money—usually called a central bank digital currency (CBDC)—might be less intimidating than the abstraction of bitcoin, a currency backed, after all, by nothing. Nearly every advanced economy is exploring some version of a CBDC. China seems to have had more success than most, but official Chinese state programs are always at least slightly coercive, and the digital yuan carries with it the very real threat that the government will use it to track how citizens spend their money. This is the flip side of the fintech transparency argument, and yet the authors not only overlook this concern, they practically apologize for it. “The Chinese typically view privacy suspiciously, as a form of secrecy,” they write. “It is assumed that an honest person should have nothing to hide from the public domain, so Chinese consumers are often happy to give up their data.”
And this points to the authors’ second failure to persuade: the Friction Gap. Nearly 30 years ago, Bill Gates predicted in The Road Ahead that the Internet would usher in “friction-free capitalism,” a hyperefficient landscape where buyers and sellers match seamlessly at perfect price points. It’s an instructive time capsule. While the Internet certainly changed the way that billions of people conduct their lives, few would describe the current state of capitalism or civilization as “friction-free.”
Moreover, since Gates’s book was published in 1995, it has become clear, at least to me, that there are friction writers and non-friction writers. Like Gates before them, Laboure and Deffrennes want to focus on the transcendence of change, on the marvel of digitization, on the delightful dream that billions of lives can be improved. That is the essence of non-friction writing, and it has its place, because for anything to happen at all people need to be motivated and capital raised and products built and distributed. Moreover, there are benign fintech channels—particularly with payments and the streamlining of lower-risk financial transactions—where their vision is being enacted with minimal harm.
But we’ve seen the Internet, we’ve seen social media—it’s obvious that change on the scale that Laboure and Deffrennes envision does not happen without friction, and lots of it. Products don’t work. Money gets siphoned off by greedy “entrepreneurs” or corrupt governments. There are vast unintended consequences, such as the nation-sized electricity use required to mine bitcoin, which these authors introduce briefly only to wave it away with the promise of a “positive externality.”
Although the fintech/crypto sector will exit 2022 in a significantly weaker financial position than it entered, there has nonetheless been meaningful development in how governments think about the sector. Both the United Kingdom and the European Union have made powerful strides this year in regulating stablecoins and other digital assets.
The United States has been slower to react. A political dynamic developed through last year in which Republicans positioned themselves in favor of innovation in fintech and cryptocurrency while Democrats were either outright hostile or else insistent upon strict regulation. In 2022, that has evolved, notably with the bipartisan crypto regulation bill introduced by two senators, Republican Cynthia Lummis of Wyoming and Democrat Kirsten Gillibrand of New York. The bill would create for the first time clear regulatory guidelines and requirements by placing crypto largely under the scrutiny of the Commodity Futures Exchange Commission; that may not be the best approach, but it beats the nothing we have now. Whether this or any related regulatory attempt will become law anytime soon is an important question, and elections in 2022 and 2024 make the American situation even less clear.
But the policy field is screaming out for intelligent leadership. Innovation happens every day that may fundamentally change how people relate to money and wealth. Fortunes are being made and lost through fintech companies and products. It’s unfortunate that this book, chock-full of data from smart people, will have so little impact on that outcome.