Digitalization is disrupting financial systems, especially by transforming the relationship between finance and real economy, between financial institutions and fintech companies, as well as the general financial intermediary system and regulatory systems.
On May 25, 2021, the Luohan Academy hosted leading thinkers from around the world for an exploration of digital disruption in financial systems. The by-invitation event covered an ambitious range of topics: blockchain and payments, digital footprints and access to credit, banks versus fintech versus big tech, the power of platforms, financial inclusion, technological leapfrogging in emerging markets, data protection, and the role of regulation, among other topics.
Manju Puri, Professor of Finance at Duke University, and Sumit Agarwal Professor of Finance at the National University of Singapore, demonstrated how big data about people's online presence can be turned into shallow and deep digital footprints indicators as a complement to credit bureau information and helps to alleviate credit constraints for the unbanked, thus creating implication for consumers, firms, and regulators in the digital sphere, especially across the developing world.
Douglas Arner, Professor in Law at the University of Hong Kong, showed how digital technologies, from the regulatory perspective, lead to challenges such as lack of common views or common language, high speed of development, and how COVID-19 had been accelerating both of public adoption of technology and the use of technology for regulatory and supervisory purposes by governments.
Darrell Duffie, Professor of Finance at the Stanford Graduate School of Business, called on central banks to recognize the need to disrupt traditional banking in the build-out of new payments infrastructure. Banks, according to Duffie, have a vested interest in preserving the status quo and their sizable revenues from merchants, thus preventing them from taking the lead and innovating.
One option for central banks would be to partner with private initiatives like Diem, a stablecoin backed by Facebook and formerly known as Libra. In the Dialogue, Diem co-creator Christian Catalini pitched the initiative as a complementary partner in the journey toward a central bank digital currency (CBDC). In this kind of public-private partnership, Catalini said, the private sector could drive use-cases, product development, and getting the coin out to the market faster, while the government would set the rules and preserve value and stability.
When it comes to disruption in the provision of financial services to consumers, IESE Professor of Economics and Finance Xavier Vives laid out the comparative advantages and disadvantages between incumbent financial institutions, big tech companies, and fintech companies. According to Vives, the future may hinge on who can monopolize their interface with customers and win their trust.
A successful example of such an interface could be found in China's Alipay. Luohan Academy Director Long Chen discussed how such an open finance platform – which connects people with as little as $10 with financial advice and education – could have great impact on financial inclusion. Traditional financial institutions in China have also been aggressively producing content and creating discussion forums for consumers. This type of cooperation between finance and technology companies, Chen said, have become inevitable.
The LHA's Frontier Dialogue, the fifth in a series, was moderated by Columbia Business School Professor of Finance and Economics Shang-Jin Wei. Participants included academics, private-sector thought leaders, and supranational representatives
During the open-floor discussion, attendees also explored the implications of using digital footprints to assess creditworthiness, including what it means for vulnerable parts of society as well as those who might seek to "game" the system. Nobel Prize recipient and University of Chicago Professor Lars Peter Hansen, in closing remarks, suggested a future area of focus could be how the nature of credit contracts would evolve, as society moves from old-style relationship banking to arrangements made on platforms.