This paper presents research conducted on the fintech industry in United Kingdom (UK) that analyses recent technological changes to identify new risks in finance and discusses its potential benefits to the economy with appropriate policymaking and regulations. Fintech is defined as the technological innovations in finance that generate new financial service businesses, models and processes.

The report addresses three topics to provide an overview of the current state of fintech and its associated risks and opportunities:

Fintech today

The opportunities from fintech innovation emerge from incorporating alternative data into financing services. Alternative data is data sourced from digital activities such as social media, browsing history and mobile data. New forms of data gathering have allowed organisations to enter the finance sector, specialising in fintech to supplement institutions that use traditional data. A new business model called ‘the platform’ is an intermediary that monetises the value of user-generated data, for example selling advertisements. Big tech, a collective of the leading platforms, continue to integrate financial services and traditional financial institutions and companies develop their own platforms. The financial system utilises Big Tech infrastructure to operate digitally.

Risks

The four main risks of fintech developments is that fintech is undemocratic, unsustainable, unjust and not resilient.

• Undemocratic: alternative data increases industry information asymmetry and users are not well informed when they consent to data sharing. Additionally, the unprecedented power of Big Techs and their control on communication and information leave users and businesses at a disadvantage and the operations of the digital economy at risk.
• Unsustainable: fintech requires large amounts of raw materials and energy to operate despite the opportunity to reduce the environmental impact. Further, artificial intelligence (AI) is not designed to prioritise social and environmental goals and can inefficiently allocate capital.
• Unjust: fintech operates to benefit businesses and the wealthy, leaving those without access to devices or education at a disadvantage. Digitalising financial services increases poverty as low income earners rely on the provision of cash from banking institutions. Discrimination is evident in automated decision-making due to biases in historical data and marginalisation resulting from new data as measures in credit scores increase.
• Not resilient: reliance on Big Tech and the platform model produces systemic risks and using similar models on similar data can simultaneously become unstable to the same threat. Digital services are at risk of cyber threats and there is no sound evidence that fintech is able to deliver better performance.

Transforming fintech

The following framework can effectively utilise fintech for environmental and social outcomes when government policymaking and regulations are developed:

• Put social and environmental purpose at the heart of policymaking
• Develop fintech in a way that is transparent and accountable to citizens
• Create non-market alternatives to big tech, run in the public interest
• Rebalance the playing field in favour of purpose-driven fintech
• Moderate data’s potential to undermine finance service provision and create vulnerability
• Protect and empower consumers and citizens, especially those facing the greatest risk of discrimination and vulnerability
• Build and draw upon an independent evidence base

1. The role of fintech in the financial system should work towards promoting social justice and protecting human rights. Currently, fintech serves to benefit the wealthy and business as many individuals are excluded due to lack of digital access. In 2019, 13.6% of adults in UK have never used the internet or last used it three months ago.
2. The digitisation of society has made new kinds of data available. Financial services firms increasingly combine traditional financial data with 'alternative data' including social media activity, browsing history, and data captured on mobile phones (such as photos and calendar entries). All of this and more can be used to determine what services you can access, and for how much.
3. The digitalisation of workflows and processes should be an opportunity to reduce environmental waste produced from paper waste. However, as fintech currently requires large amounts of raw material and energy to operate, it does not align with sustainability goals.
4. Data and algorithms are not neutral they are designed with a specific purpose and encode a set of values and preferences. If human financiers prioritise profit over social and environmental outcomes then the AI that aims to replace their decisions could exaggerate these values.
5. Fintech is not designed with the focus of meeting social and environmental outcomes. Currently, it accelerates poverty, inequality, discrimination and marginalisation.
6. Fintech has the capabilities to promote social and environmental goals but the current financial system cannot be improved without the intervention of governments through policymaking and regulations. In legislative reviews such as the Fintech Strategic Review in UK, objectives should be set in social and environmental cases to improve conditions in households and businesses.
7. The template of surveillance-based platforms in big tech is now being adapted in the finance industry. This can be dangerous as access to personal alternative data places big tech companies in the favourable position of information asymmetry and thus sustains greater corporate power.
8. A seven principle framework is developed to be utilised by governments and regulators to incorporate systemic changes to promote human rights. It realises the social and environmental benefits of fintech when correctly employed and shifts the monopolised power away from big tech corporations.
9. A decade ago the USA's Citigroup was the largest financial services firm in the world, with 200 million customers. In 2020 it is China's ANT Group, with over one billion clients and no bank branches.