EMMANUEL DANIEL, author of The Great Transition, a forward-looking evaluation of the state of financial technology, agreed to answer regionally relevant questions about fintech following my review of his book (https://cstu.io/71e06d).
His 2,000 word response has been excerpted for length but the full interview is available on technewstt.com. Emmanuel Daniel is a 2021 and 2022 global top ten influencer on the Fintech Power50 list and a researcher and consultant in the field.
Q: The Eastern Caribbean digital currency is an example of a central bank pursuing fintech to solve a problem, an island group that needed a more agile currency. Are there other models that might encourage central banks to engage with fintech?
ED: After publishing my book, I visited with the governors of several Latin American central banks, including the eastern Caribbean.
I was told in confidential conversations that the digital currency of the Caribbean countries had a take-up rate of less than two per cent (I suspect it's less than one per cent) because these countries are wholly dependent on American tourists who swipe their credit cards, which are picked up mostly by the foreign banks that do business in their jurisdictions.
There are no "what's in it for me" benefits with the banks that operate in these countries. In fact, the central banks expect these banks to invest in the processing capability for CBDCs (central bank digital currencies).
At the time of writing, I was hoping that the cost-benefit of a central bank digital currency would work in places where getting to remote places was a factor and the Caribbean areas were prime examples.
But what I think I saw was that because the CBDCs are designed for the poor islanders who lived away from the more developed parts of the countries, the infrastructure further alienated the islanders from the mainstream economy, thus keeping them poor.
My clear opinion now is that "CBDCs are designed to fail" for several reasons.
The Chinese CBDC has suspiciously been in pilot mode since 2018. All the "use cases" being touted today belie the fact that the original directors have been removed, the pilots are all running only because of discounts and incentives at the expense of taxpayers, and the government is terrified of making the project go live because of possible unintended consequences to the traditional banking system.
The CBDC technology being introduced by central banks cannot keep up with the innovations taking place in cryptocurrencies and stable coins. Here, I notice that the BIS (Bank for International Settlements) has been, in parallel, introducing new rules for banks and central banks to carry cryptocurrencies on their balance sheets from 2025 while simultaneously promoting CBDCs.
Q: What fintech model would serve the "underbanked" in an environment in which cash is the dominant form of value exchange in the middle and lower class of a country's society?
ED: Let me tackle the question of the "underbanked" and "financial inclusion" here. I question the motive of trying to get the poor into the same archaic, expensive and over-regulated banking system that the developed world subscribes to today.
So many fintech initiatives carry the moniker "financial inclusion" as if it was shorthand for helping the poor and an excuse to attract investors.
In my book, I say that "financial inclusion is a lie" generally, because these fintech models operate with the same motivation as all other platform models (think Facebook and Google) where the goal is to "on-board millions of users and then to monetise them."
As long as there is a venture capitalist behind the initiative, the goal is exactly that and none other, because the VC has to be rewarded at some stage.
The best working model of serving the underbanked – “and here I compare the original model pioneered by Muhammad Yunus of Grameen Bank against the VC-backed Indian versions" – suggests that it only works if the focus is on the community.
I also question what exactly about the current banking system, with its layers of financial institutions generating income from their passive intermediation role, is desirable for on-boarding the unbanked.
The current baking system extracts value and does not generate value to its user.
Financial inclusion is firstly digital inclusion. Giving digital access to the poor to be able to navigate the internet and find their customers and their friends and family is a human right second only to drinking water.
It does not then follow that plugging them into the traditional banking system is a desirable goal.
Mark Lyndersay is the editor of technewstt.com. An expanded version of this column can be found there