The world has changed in incalculable ways in the past two years. Two phenomena have been especially notable to us at Franklin Templeton: Technological innovation has accelerated exponentially, and there has been an increased awareness of and concern about economic inequality.
Some believe that technological change is driving economic inequality. We believe that innovation can, in fact, create a more inclusive and equitable global economy with changes that will far outlast the pandemic and our recovery from it.
Historically, bursts of innovation have often led to an initial increase in inequality as some skills become more valuable and better compensated while others become obsolete. But over time, innovation has frequently led to productivity and wage growth resulting in broad-based higher living standards.
Today, innovation is changing financial services and has the power to increase access to investment opportunities and make financial expertise more equitable and broadly available.
As the trends show, more people will have access to investments previously available only to institutions and high-net-worth individuals. More people will have access to credit. More people will have increased financial literacy leading to greater savings and improved credit standing. And, perhaps best of all, the 2 billion people around the world who are underbanked will gain access to the global financial system.
Consider investments. Fractional shares have opened up higher yielding traditional investments to a broader population. Tokenization will likely enable individual investors to access the kinds of alternative asset classes previously available only to institutions and the wealthy. Digital innovation is enabling increased access to capital aimed at channeling investments from individuals and institutions into loans for small businesses run by underrepresented groups like women and people of color.
Consider credit. Data science is enabling new and better ways to assess the credit worthiness of potential borrowers, providing easier access to credit to a broader range of individuals and small businesses. Technology can help remove bias from lending, and with ongoing efforts to prevent embedded bias in algorithms, these innovations can be especially powerful in helping disadvantaged communities.
Innovation has frequently led to productivity and wage growth.
Consider the underbanked. In the United States, some companies are experimenting with digital technologies that offer low-wage workers flexibility in accessing their wages, essentially drawing portions of their paycheck as they earn it and when they need it, rather than waiting for fixed paydays—sidelining the predatory “payday loan” industry. Around the world, people in developing markets are gaining access to the financial system thanks to innovative startups, like a mobile phone-based money transfer service for payments and microfinancing in Africa. Crowdfunding platforms are providing people in emerging markets life-changing access to credit. New services are leveraging blockchain technology to help low-income people send and receive money across borders, improving speed and reducing fees for the millions of immigrants and their families who rely on remittances.
Consider, even, everyday financial responsibility. Digital innovations are helping nudge people to save for education or retirement with apps that enable them to save small amounts by rounding up purchases.
There are risks to digital innovation in financial services, of course. As access to complicated financial instruments like options is democratized, inexperienced investors can get caught up with risky investments like “meme stocks” and face dangerous exposure to high volatility. Crypto investing similarly exposes inexperienced investors to losses they might not be able to afford.
Another threat from digital innovation involves cybersecurity. As financial services firms provide greater online capabilities to clients, the risk of exposure to institutions and individuals from various kinds of cyberattacks grows. Users’ and policymakers’ strong expectations for the privacy and security of clients' data make this an important priority of digital innovation.
I am confident digital innovation in financial services, if guided correctly, will help to significantly boost the growth of new business and employment, expand access to economic opportunities to disadvantaged communities, and improve financial literacy and basic financial health.
Today’s innovation has real potential to yield tomorrow’s broadly shared prosperity.
Please note: The comments, opinions, and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. The opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region, or market.