Without an eye on social value, Europe risks losing the global fintech race
Europe has been left behind in Big Tech.
The scene is overwhelmingly dominated by US companies, with China potentially coming up from the rear.
The question is whether Europe has the potential to avoid the same fate in digital finance — a sector that is likely to play a big role in future economic development.
What has become clear is that digital finance is not simply about shiny new tech. Deep know-how in finance is at least as important as the software itself. Also crucial to success is a renewed focus of what digital finance is supposed to achieve: disruptive technology that can democratise finance, increase competition, and better align the financial system with broader societal goals.
While there is much excitement about technological advances and the promises they might offer, it is the direction of public policy and the regulatory framework that will be the primary driver of the future shape of digital finance. This is what will determine whether it will deliver meaningful social benefit, or merely reproduce in digital form the strengths and weaknesses of the current financial system.
In a report published today, we examine how digital finance lies at the intersection of industrial policy, competition policy, financial regulation — and how it must be seen within the context of social policy if it is to deliver the promised widespread social benefits.
Achieving coordination across all these policy areas will be challenging.
Europe, once again, starts from a position of being far behind the US and China. Yet we believe that the continent has the opportunity not only to catch up but also to deliver a system that maximises widespread societal benefit.
Given that the UK and Switzerland are among the most advanced European countries in this field, this is unlikely to be achieved if policy in this area remains enclosed within the confines of the European Union.
We therefore suggest the following. First, a coalition of the “willing and able” among EU member states and other European countries such as the UK and Switzerland to harness the best of what is available across the continent.
Second, a multilateral investment fund focused on investing in European digital finance initiatives that can deliver social value.
Third, proactive competition policy that prevents the same concentration of power in fintech as has occurred with the social media and search engine giants.
And finally, financial regulation that creates the conditions for market disruption without sacrificing financial stability.
The Covid-19 pandemic has highlighted the folly of grouping what used to be called the “fintech industry” together. It has become clear that such a collective moniker has outlived its usefulness.
The pandemic has had asymmetric effects on those playing in the digital finance space. For many, valuations have plummeted and access to capital has become constrained. Others have shot up in value as more of the world has moved online.
There has already been much work looking at individual industry players in a much more granular way, from the investment perspective and the financial regulation viewpoint. This is refreshing, but it is not enough. We have therefore developed a first pass at a framework for how how one might evaluate companies from the perspective of whether or not they add social value.
Unless we also include this point of view into our evaluations, digital finance will not only fail to deliver on its promise — it might make things worse by denying access to the digitally disenfranchised.
Europe is at the forefront of green finance and, in London, has one of the only two top tier financial centres in the world. It can build on these strengths to develop a socially valuable digital finance ecosystem, if it is able to do what it is asking the fintech industry to do: think outside the box, don’t be constrained by existing structures, and focus on delivering value to citizens as the primary aim.
Do this, and it will be the US and China struggling to catch up.
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