The first one analyzed one of the most impressive, fast growing and innovative Chinese payment companies: Ant Financial (more specifically, the Alipay case). The second case study focused on a similar payment company that is growing expressively and offering new technological solutions to financial obstacles faced by millions of Brazilian individual entrepreneurs, micro merchants and SMEs.
Although these companies were born in different regulatory and economic ecosystems, it was observed in this research that there were similar economic outputs coming from the consolidation and expansion of the FinTech sectors there. Indeed, by comparing the economic externalities generated by Ant Financial/Alipay and by PagSeguro, this research found similar results:
i. There was an expansion in the number of merchants included in the formal economy or accessing financial services for the first time;
ii. A reduction of transaction costs and payment fees was observed after these companies integrated new digital tools and other technologies to their financial services and products;
iii. The dominance and influence of big traditional banks and/or financial institutions have diminished due to the emergence of FinTechs and their new customer-merchant-tailored solutions; and
iv. There was a democratization of the access to means of payment such as Peer-to-Peer transactions, card-based transactions and online payment platforms.
Even though the access to financial services was improved quantitatively and qualitatively by the usage of new digital technologies in the financial sector in the countries analyzed, how did these technologies affected the economic growth? Did the governmental regulations play an important role in the emergence of FinTechs and in the application of new digital tools in the financial sector?
According with neoclassical economic assumptions1, the implementation of new digital technologies to the financial sector leads to an improvement in the country’s production process (more outputs produced with the same amount of inputs for example). This improvement, then, contributes to a growth in the total economic output produced (Economic Growth). If these new digital solutions impact positively not only the total economic output, but also the number of people accessing formal financial services and the quality of this access, the Economic Growth can be theoretically considered inclusive.
In addition to that, this approach also argues that governments rule in a selfless and impartial way in order to contain market distortions that could potentially arise. Therefore, the governments are expected to interfere only minimally, by creating and implementing norms and regulations that protect the market from distortions at the same time that stimulate market efficiency’s improvements due to the application of new technologies and the establishment of new companies and innovative business models.
However, some of these predictions related to the emergence and impact of the FinTech sector were not totally confirmed by data collected from the cases here analyzed. Indeed, the reality has presented deviations from these expectations. The influence of state regulations was, for example, significantly different from the ones recommended by neoclassical economic theory. Moreover, these regulations were shaped substantially this sector’s growth and externalities.
With the emergence and usage of these new financial technologies by FinTech companies, it was expected that the economic efficiency and production would be impacted positively. By using new tools, spending less time managing bank-related tasks, paying lower transaction fees and democratizing the access to formal payment methods, the whole productive process could be optimized for instance. As consequence, firms would produce more with the same – or even less – inputs and would be able to sell better products with lower prices. These results would naturally spread throughout the country’s economy and, indirectly, would stimulate economic growth and economic inclusiveness.
According with this predictions, it would be accurate to assume that both the GDP and GDP per capita annual growth rates would increase in Brazil and China as an indirect consequence of the more democratic usage of new financial technologies. A positive evolution of these countries Gini Index would also be expected once these technologies were democratizing the access to formal bank-related services.
Nevertheless, the Brazilian and Chinese GDP, GDP per capita growth rates did not behave as it was expected they should have behaved according with these neoclassical predictions2
Figure 9.1 Brazilian and Chinese Gross Domestic Product (GDP) annual growth3 rate between 2006 and 2016. Source: author based on World Development Indicators provided by the World Bank (2018).
As it can be observed in Figures 9.1 and 9.2, the GDP and the GDP per capita annual growth rates in Brazil have decreased significantly since 2010. In fact, these rates even reached negative levels after 2014/2015.
Figure 9.2 Brazilian and Chinese GDP per capita annual growth4 rate between 2006 and 2016. Source: author based on World Development Indicators provided by the World Bank (2018).
Despite China’s GDP and GDP per capita annual growth rates kept positive, the country’s economic growth path slowed down during the past years. Since 2011, the GDP annual growth rate has not exceeded 10% a year and, by 2016, this indicator reached its lowest point in the decade (6.69%). The GDP per capita also followed this trend: after 2010, the official GDP per capita annual growth started to diminish and it reached its lowest point in 2016 (6.11%).
Similarly, the Gini Index5 did not present the variations that could be expected as a result of new technologies being applied to financial transactions and as a consequence of the growth in the number of people accessing financial and banking services in these countries for the first time. As it was mentioned during the case studies, the number of people using formal payment channels and other financial services 6 offered by FinTechs such as Alipay and PagSeguro has grown significantly. Millions of merchants are now able to receive payment through formal payment channels and platforms even though some of these merchants still do not have bank accounts. Additionally, the transaction fees and Merchant Discount fees paid by them were reduced significantly when they started to use these new services offered by Ant Financial, WeChat Pay, PagSeguro, NuBank, among others. As consequence of the access to formal economic channels, it was expected that income would be more equally distributed in China and Brazil, because more people had been added to the formal economic process for instance.
Figure 9.3 Gini Index in Brazil and China between 2006 and 2016. Source: author based on World Bank estimate Gini Index7 (2017).
Nevertheless, the Gini Index for Brazil and China between 2013 and 2016 did not improve as much as expected. Indeed, the income distribution inequality decreased just slightly between 2013 and 2015 in both cases (reduction of 0.016 and 0.011 in the Brazilian and in the Chinese cases respectively), and even grew between 2015 and 2016 as it can be observed in figure 9.3.8
If the application of new financial technologies theoretically should lead to improvements of the productive process9, reduction of transaction costs10 and growth of economic efficiency11, why did the GDP, GDP per capita and Gini Index did not behave in the cases analyzed as predicted by neoclassical economic theory?12
According with data collected during this research, it is accurate to affirm that the governmental regulations ruling how new technologies could be applied to financial activities, for example, played a decisive role on how the implementation of these new technologies could lead to improvements in the productive process and economic efficiency and could impact Economic Growth. Moreover, it was also observed that these regulations also influence indirectly a country’s economic inclusiveness, once they shape the way the new technologies could be legally used and applied.
In fact, the role played by state regulations is much deeper than it is usually assumed by the neoclassical approach. Additionally, the way these regulations are created (the policy making process) is not as impartial as this theory usually considers it. In reality, there are different groups pressing policy makers to rule in favor to their own goals and objectives. Depending on what group influences the country’s policymakers the most, the rules gshaping how technology can be applied to the financial sector can be more restrictive (pro-status quo/ pro-traditional banking system) or more supportive (pro-FinTechs/innovation).
Although the neoclassical approach recommends that States should not intervene in the economic activity except in order to correct market failures, the big majority of countries do intervene in their economy and financial activities. Actually, many governments establish several rules, laws and norms in order to guarantee that no market distortion will arise and that, therefore, all economic actors will allocate efficiently their scarce resources. In many cases, the amount of regulations and governmental interventions surpasses profoundly the minimal intervention standard prescribed by neoclassical and neoliberal economists and scholars.
Brazil is an example of a country where the government has been intervening in the economy regularly and deeply. Brazilian governors often assumed that the market could not allocate properly and equally the scarce resources and that inequality, poverty, unfair trade and other distortions would arise if they did not regulate the whole economic and financial activities. Because of these premises, the Brazilian Constitution promulgated in 1988 empowered both the federal government and the Central Bank to regulate and intervene in the economy in order to prevent market failures and to assure fair practices. In other words, the Brazilian Constitution entitled the government and the Central Bank as the main responsible authorities to protect Brazilian economy and conduct it.
As it was the State’s prerogative to protect its citizens and its economy, many financial regulations were developed. In fact, these rules, laws and norms were established having this duty in mind and considering the country’s economic history. In order to prevent economic and hyperinflation crisis, the government and the Central Bank worked together to create a solid and reliable financial system, ruled by norms that would protect the Brazilian citizens and ensure a sustainable economic growth.
As a result, Brazil has developed a financial system highly regulated and protected by many specific laws and regulations. These regulations, in many cases, work in a preventive way, blocking the application of new technologies and the development of new business models until the economic and monetary authorities are convinced that the benefits brought by them are bigger than the risks they offer. On one hand, these regulations ensured a reliable and trustworthy financial system in the country. On the other hand, they also created barriers and obstacles to the development and implementation of new financial technologies and innovative business models. These technologies and business models could only be legally implemented, for instance, after the Central Bank and federal government have established the norms regulating them and this would be done only a couple of months or even years after the emergence of these innovations.13
Actually, the desire to protect its economy, prevent crisis and reduce negative externalities associated with the application of new technologies and business models were not the only factors influencing policy-making process related to the financial regulations. Indeed, traditional banks and financial institutions have also played a decisive role in the process of creation and implementation of these rules and laws. This interest group has historically pressured both the Central Bank and the central government (legislative and executive powers) to regulate the financial sector in a way that the norms would not only protect the whole system, but would also protect banks’ privileges, prerogatives and interests.
Instead of ruling impartially and selflessly, the federal government and the Central Bank were deeply influenced by the pressures received from traditional financial institutions. This interest group constantly pressured policy-makers evoking the urgency and moral duty of protecting the economy against the unknown risks that could arise due to the implementation of new technologies and the establishment of new business models. In fact, it mostly argued that FinTech companies could misuse their clients’ personal information to generate big data and credit scores, that P2P lending platforms could lead to development of loan sharks, that online payment platforms should increase the population’s indebtedness level and allow room for more frauds.
Consequently, many regulations were created and imposed to “protect” both the Brazil’s financial system and its population. However, entrepreneurs and some experts (including policy-makers) interviewed argued that many of these regulations shaping the emergence and usage of new technologies and business models applied to financial activities are, indeed, a mechanism used by traditional banks and financial institutions to protect their activities, to keep their market share shielded from new incomers, to maintain their high profit margin and to avoid the growth of competition among financial services’ providers.
Similarly to the Brazilian case, the Chinese financial system and economy have also been deeply governed by many norms, laws and other monetary, fiscal and financial regulations implemented by the central government. Differently from many other countries, however, China did not assume that the market was capable of regulate itself and promote inclusive economic growth. Indeed, it assumed that the interests and goals of those possessing the means of production and capital ruled the market. As consequence of class struggle and unequal distribution of income, for instance, the market is considered an economic institution that will inevitably lead to the perpetuation of the elite that has always concentrated the economic and political power.
In order to avoid these distortions, the Chinese Communist Government considers its duty to conduct and plan the economy, assuring both economic growth and a fair distribution of economic outputs generated. Therefore, the government has intervened in the country’s economy to assure that it will keep growing and that this growth will be equally distributed among its citizens.
Nevertheless, it is inaccurate to say that the policy-making and regulations creation processes were impartially conducted. Indeed, the government has received many inputs from different entrepreneurs, bureaucrats, scholars and experts in order to better address the norms-creation process.
Among all the groups proving these inputs, the traditional banking system tried to pressure the government to rule in favor of this group’s interests. In fact, it fought for the maintenance of the financial status quo in which the big commercial banks and financial institutions already established would keep their dominance even though millions of people were either underserved by or excluded from this formal banking system.
Despite all the efforts made by traditional banks and financial institutions, the government decided to pursue an innovation-oriented approach while establishing and implementing financial regulations. This decision is, actually, a result of two main factors: pro-innovation interest groups influencing the decision-making process more efficiently than the traditional institutions’ interest group did; and the government desire of stimulating technological research and innovation throughout the country as one of the main engines for Chinese sustainable economic growth during the next decades.
The group here called pro-innovation interest group is mainly composed by Tech or Internet-related companies such as Tencent, Alibaba, Ant Financial and Baidu. In fact, these companies and their high profile businessmen have been in touch with many local and central government officials in order to convince them that innovation and the implementation of new technologies would be the key for Chinese Sustainable Economic Growth during the next decades.
The new services, products and platforms developed and implemented by these companies should not only be legally allowed, but also supported and protected by the government. Containing these innovations would not extinguish the risks associated with their application. Instead, it would refrain the benefits associated with their application and reduce the comparative advantages that could arise from their implementation. Additionally, it would also lead to a technological exodus and to a brain drain from China towards other pro-innovation countries such as Israel, Singapore, Korea, United Kingdom, and United States. In other words, this group managed to convince policy-makers and government officials that supporting innovation and allowing companies to apply them in the financial and economic fields would contribute significantly with Chinese Economic Growth during the next years.
Furthermore, adopting a new approach towards innovation, research & development, and education had become necessary to China to improve its economic advantages in comparison to other developing and developed countries. The Chinese government, therefore, should not only support, but also incentivize innovation and technological developments. Supporting and encouraging its citizens to innovate, create new business models, invest in R&D and apply new technologies to their products, for instance, became a national policy. 14
Indeed, “In the recent years, the Chinese leadership has been keen to implement a portfolio of comprehensive structural reforms to encourage innovation and the growth of private sectors.”15 Because of these state interventions and regulations in both cases, the way new technologies were developed by companies and assimilated by the financial sector were not the same as it could be predicted by neoclassical theorists. Actually, these regulations and the interests behind them shaped significantly the usage of these new technologies, the implementation of new business models and, indirectly, the impact of new financial technologies on Inclusive Economic Growth.
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