There is no doubt that financial innovation plays a vital role in transforming and advancing the way we do business and live our lives. The inventions of ATM and online banking make money conveniently available 24-7; Payment networks such as Visa and MasterCard have become part of our daily life; a wide range of financial products were created to facilitate transactions and improve the liquidity of market.

Recently a new wave of financial innovation is spreading all over the world. With the ambition to crack the traditional banking, the “fintech” start-ups provide more convenient financial services with lower transaction costs. It’s time to use the power of financial innovation to promote financial inclusion and improve egalitarian social benefits.

The widening wealth gap

While financial services have benefited millions, the benefits are not equally received. The economic inequality is not a new concept. The Marxist view that rising income inequality is an inherent feature of capitalism has gradually become a prevailing wisdom. Credit Suisse Global Wealth 2014 Report shows that nowadays the richest 0.7% of the world’s population owns 44% of the global wealth, while the bottom 70% just get 2.9% of the share. These figures raised red flags that inequality is extreme and widening.

History shows repeatedly that the highly wealthy individuals would compound their wealth by getting access to more economic opportunities, and redistribution system cannot offset this effect. In the meantime, the traditional financial systems do not provide enough credit to fuel the economy. Especially in developing countries where individuals and organizations still have limited access to basic financial services, transactions are difficult to take place, credits are scarce and expensive, and economy is inevitably moving slowly. This exacerbates the wealth gap between different regions.

The collaborative credit system

Is it possible to narrow the wealth gap while the current monetary and financial systems dominate the economy? The answer could be including different forms of currency and credit that nourish life and community. In the book Debt – the first 5000 years, David Graeberg states that human beings already used collaborative credit systems in the early history, until virtual credit money was gradually replaced by gold and silver.

Collaborative finance prevails again after it was first invented thousands years ago, and has become a buzzword as the recent financial innovation trend. A lot of financial transactions bypass the traditional financial institutions and occur directly between individuals and organizations, providing illustrative examples of collaborative credits in the modern society.

Credit is abundant in the collaborative finance system. Peers extend credit to each other. Issuance and redemption of the currency relies on freely collaborating individuals or organizations. While conventional currencies controlled by governments are too scarce to unlock the full potential of the economy, collaborative credit is in circulation to complete the transactions. It empowers people to carry out normal business  even during financial crisis. The pooling and trading of excess capacity directly, rather than through financial institutions using money, could contribute to the narrowing of the wealth gap. While the poor had little access to credit through traditional institution, it is easier for them to use collaborative credits to trade surplus capacity.

Scale the financial innovation

Doing good relies on a scalable and sustainable model, as the social problems we need to tackle are always big and complex. While many financial inclusion programmes are making positive impacts on the lives of individuals that they aim to reach, they are facing challenges to make a bigger impact. To scale up the financial inclusion, the private sector must get involved. A profitable business model could ensure the sustainability and a reasonable incentive system can attract the talents.

Nowadays the microfinance business model is well established and financially self-sustainable. And it’s time to take a step forward and use financial innovations to make real influence. The financial innovation is taking over the territory of traditional banking, and has the potential to scale up and help a wider range of people to thrive. More businesses and individuals who are not served by the traditional banking industry in developing countries will benefit from these kinds of financial innovations in the future.  

Outlook

It is predictable that financial innovations will not only change the landscape of the financial industry, but also transform the philanthropy and social enterprises. Mainstream financial institutions are also showing interests and seeing profitable opportunities by doing goods. However, innovation is not always a good thing, if it is not properly regulated. To ensure the sustainability of financial innovation, governments should establish corresponding regulations as soon as possible.