by Guerino Tondreau
June 28, 2021
- Abstract
Digital Finance is a multifaceted subject. It provides inclusion to groups around the world who previously struggled to attain financial accessibility. With constant advancements to financial technology digital finance has been able to aid small businesses in move from solely cash based and brick and mortar establishments to having an e-commerce presence. It has also created to the ability to share money amongst peers from around the world. Lastly, although the technology is not perfectly safe, financial and informational security have both been positively affected by technology like Blockchain.
- Introduction – What is Digital Finance?
Digital finance is the general term used to describe new innovations in technology within the financial sector. It is an overarching term and covers various types of applications and products. These new forms of technology have disrupted the traditional processes of the financial industry. Digital finance has made banking and private loan resources more accessible to historically marginalized groups of people and developing countries around the world. In addition, it has given rise to the growth of alternative forms of monetary denominations known as cryptocurrency. This in turn has led to the development of blockchain which has been used as a protective and defensive mechanism against potential fraud and abuse within this new cryptocurrency environment. Digital finance has also helped with the continued growth of e-commerce.
As stated above, there is a bevy of different forms of digital finance which include peer-to-peer lending services. Peer-to-peer lending is the action of borrowing or lending money to friends via such common applications as PayPal, Venmo, Cashapp, and Zelle. For larger loans involving possible business ventures services like Lending Club provide investors and businesses a platform to find and provide private loans to each other.
Well known digital trading applications like TD Ameritrade, Webull, Robinhood and Coinbase provide a platform for average people to buy and sell stocks and some cryptocurrencies from their mobile devices. This allows more people to have access to the stock market and invest their own money, with reduced fees and commissions. Financial Technology also known as “FinTech” has enabled users and consumers of big data to gain greater understanding of these data sets. This technology has created powerful data analytic tools capable of converting and simplifying big data in such a manner that we the consumers can understand and expose their hidden information. The inclusion of FinTech services has enabled investors in the stock market to utilize artificial intelligence in identifying trends, thus allowing them to make better informed trades. These technologies do not eliminate the risk of trading on the stock market; however, they do provide a better understanding for the person deciding to take these risks.
- How has Digital Finance improved banking?
It is well known that black and brown communities were historically devoid of banking institutions. Most of these communities were financially illiterate. Check depositories were readily available, but actual banks where they could create checking and savings accounts were completely missing. Thus, people were neither able to practice saving nor real money management. This in turn didn’t allow them to invest their money in the stock market. They were effectively sanctioned to remain economically and financially deprived. This also prevents them from creating generational wealth. This has caused many people to continue to live from paycheck to paycheck. It has handicapped their ability to plan financially for the future and disallowed the ability to implement an effective and successful saving plan.
Digital Finance has improved banking by providing historically underrepresented groups greater access to better banking than ever before. The introduction of novel forms of financial technology like mobile banking apps, has enabled the average person to view his or her accounts, make transfers from one account to another, make transfers from person to person, make payments, and even deposit checks without having to visit the brick-and-mortar locations of a particular bank. This has eliminated the need for an individual to go to a physical location to conduct their business. They can perform these tasks in the comfort of their homes or on the in general. Therefore, while banks may still choose not to have locations in black or brown neighborhoods, this no longer disallows people in these neighborhoods from having money in these banks.
In addition to banking applications, there are financial technology companies that acts as a fully operational bank online. Chime is an example of an online bank. Another form of digital finance is mobile banking. Chime provides mobile banking services without the need to have a physical location. In other words, it does not have the traditional brick-and-mortar locations. However, traditional banks around the country like Citi Bank, TD Bank, Bank of America, and even regional credit unions provide this service as well. They can do so through their mobile banking applications. These allow their patrons to make deposits, transfer funds, and make payments among other things. It is necessary to note that while it is a financial technology company, Chime provides its customers with a checking account known as a “spending account”, a savings account, and a secured credit card. It provides these banking services through Bancorp or Stride Bank which are insured by the FDIC.
Banking services like Chime provide people with even more options in banking. They have a higher-than-average interest rate on their savings accounts, no overdraft fees, and a lack of monthly fees provide a welcome environment to people new to banking. Financial technology like this helps to promote growth in these underprivileged communities or even in developing economic region through their services.
Small businesses that have historically been cash based have also been aided by digital finance. Financial Technology has availed them the ability to move on from solely relying on cash and now be able to accept other forms of payment. Considering small businesses make up such a large part of the American economy, the growth of this sector is pertinent to the continued development and stability of the economy as well. With new ways of accepting payment being made readily available to small businesses, it is fair to assume that this will help in continuing economic expansion.
Developing countries also benefit from the use of digital finance. It is approximated that nearly two thirds now have access to financial services through financial technology. Digital financing services have removed traditional barriers to people who typically did not have means to use financial services. This includes geographic location and consistent locations are no longer important. For example, Sub-Saharan Africa has become a leader in using mobile banking. Approximately twenty percent of the region’s populace over the age of eighteen has a mobile banking account. This also shows that these mobile accounts can perform more complex digital finance services.
- Can Digital Finance provide more security?
Blockchain is currently used often in conjunction with cryptocurrency, most notably Bitcoin. It provides users with trust in the fact that their data will not be lost or stolen. Blockchain accomplishes this by developing records of transactions that cannot be altered. These transactions have end to end encryption. This reduces or prevents the occurrence of fraudulent activities. It does not allow unauthorized users access to sensitive data and information of consumers. Another benefit of blockchain is that its data is stored across multiple networks of computers. This makes it even more difficult to hack into than other more traditional systems. Additionally, blocking makes data anonymous, so it is more difficult for someone’s information to be targeted. It is expected that blockchain information security will greatly improve over time as the technology evolves. New development in this area will strengthen our ability to protect the information and investment of investors and others.
Another way digital finance can provide more security is by allowing more cooperation among businesses that utilize or specialize in digital finance services and governing bodies. Regulation at this time may not be helpful, it could have adverse effects and instead of promoting the continued growth of the digital finance industry may instead cause it to become stunted. An increase in governmental support of digital finance services and related companies may further reduce be the risk of cyberattacks.
- Is Digital Finance more than just a fad?
Digital financial services are here to stay. The automation and digitization have been helpful to both large and small businesses. More advancements in the financial technology sector that deal with big data, scaling businesses, mobile businesses, and others will continue to have an overall positive effect. Digital financial services have also improved the way small business work as well. They have helped to facilitate new avenues of revenue, provided platforms to secure loans, and helped many cash-based businesses gain access to electronic payment methods. Additionally, e-commerce has also aided the community of small businesses. Forms of digital finance like this have aided retail businesses to branch out and reach a wider customer base. This has helped these retailers to increases their sales significantly from year to year, as well as provide their consumers with an easier way of shopping around the clock regardless of their physical location. An example of this would be a service like Shopify, BigCommerce, and Oracle NetSuite It will continue to improve access to investment opportunities to historically marginalized and excluded communities. It is fair to predict that digital finance is here to stay because of its inherent ability to increase the value of businesses and access to various financial services for everyone.
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