Article

The Future of Fintech in the Caribbean


By By Ryan R. Peterson, General Manager of Economic Policy, Central Bank of Aruba (01/06/2018)

The need for (re-)framing and fostering the resilience of Small Island Caribbean Economies (SICEs) is imperative in an inclusive digital economy. Despite the stylized divergence and diversity in terms of population and production, the Caribbean shares several (geo-) economic invariants, including economic space, openness, concentration, and exposure to economic disruptions, ecological risks, social inequity and environmental destruction. These vulnerabilities are well recognized, and have been discussed for over half a century. Furthermore, the Caribbean is concurrently being disrupted by a host of new digital and financial technologies (FinTech), in addition to societal and other market trends that challenge the status quo. Thus, a confluence of social, political, economic, environmental, digital forces is shaping SICEs.

The resilience of SICEs is, however, not dictated by inherent endowments or contextual impulses, but more importantly, fostered by creating and cultivating the systemic ability to foresee (the effects of) economic disruptions and develop the innovation capability to pro-act and adapt (dynamic resilience). Hereto, the stock and flow of digital capabilities are an integral, yet oftentimes overlooked, part of (dynamic) resilience.  In more classical terms, resilience also describes the (static) capacity to withstand, absorb and recover from economic disruptions and shocks. 

While the Caribbean continues to convalesce from concomitant disruptions, and is ‘bouncing back’, it is dubious whether it is ‘bouncing forward’. In fostering resilience in an increasingly digital economy, the question is not merely about absorbing shocks and maintaining a steady state, but more importantly, transitioning and transforming towards steady change.

Contemporary Traditions

Strapped for financial and human capital, SICEs are notorious for being tough on business. With the majority of local businesses being (relatively) small and (predominantly) focused on domestic markets, the lack of access to financial and available human capital remains a severe constraint to development (Figure 1). On average, more than one-third of businesses across the Caribbean report that they experience significant challenges with access to finance and credit, with the small(er) tourism-based economies facing substantial constraints. Likewise, the availability of human capital and a skilled workforce seems to be one of the major barriers to business in the Caribbean.

Figure 1. Capital constraints across select Small Island Caribbean States .

This situation endures due to classical market failures and a core set of ‘sticky’ conditions involving shallow markets and information asymmetries. In general, the contemporary financial ecosystem is relatively unsophisticated, standardized, and is concentrated around traditional financial institutions with limited alternatives and capacities. The recent elevation in de-risking policies in international and correspondent banking relationships promulgates the status.

Moreover, (financial) capital constraints reach beyond markets with repercussions for society. Globally, available data suggests that the Caribbean lags in terms of financial inclusion and trails behind other regions (Figure 2). In general, the unbundling of financial services and the specialization of financial instruments are comparatively limited. On average, less than 50 percent of households have a bank account at a financial institution, and more than 40 percent of the general population remains un(der)-banked.8

Figure 2. Stylized financial inclusion across economic regions.

While physical financial infrastructures have been conducive to increasing electronic payments by means of (debit) cards, the nascent digital financial architecture restrains the wide-spread adoption and use of (mobile) digital payments. Nevertheless, digital technologies are increasingly shaping new markets and opportunities for the future.

Emerging Transformations

Today, the Caribbean is progressively being disrupted by a host of new digital and financial technologies. Over the past decade, SICEs have experienced significant growth in digital connectivity by means of web-based networks and smart phone (mobile) technologies. On average, well over 50 per cent of societies are digitally connected, with over 120 mobile subscriptions per 100 inhabitants8 (Figure 3).

Figure 3. Digital connectivity and smart phone penetration rates across SICEs.

This emerging transformation holds new opportunities for start-ups and business innovation, especially within the realm of financial technologies. More than simply a mobile application, cryptocurrency or distributed ledger technology, FinTech is an evolving digital ecosystem delivering a wide range and reach of financial products and services, including payments, credit, investments, and insurance. It represents a marked evolution in the specialization of financial services and instruments.

The rise in FinTech is largely explained – not so much by technology – but by its social prowess and pull from underserved and next-generation markets. FinTech holds the potential to enable financial inclusion and stability, and is pivotal to realizing the Sustainable Development Goals (SDGs). With less than 50 per cent of the Caribbean being served by financial institutions, and more than 50 per cent being digitally connected, the prospects for (digital) financial technologies and (specialised) intermediaries are a clear and present indication that the Caribbean is nearing a transformational tipping point (Figure 4).

Figure 4. Transformational tipping point as financial inclusion and digital connectivity gain momentum.

Exploratory analysis across SICEs indicates that FinTech, by means of increased connectivity, explains at least 40 per cent of the (cross-regional) development in financial inclusion and credit provisioning (Figure 5). While the direction of causation remains undetermined, the adoption and usage of FinTech indeed show a noteworthy association with access to capital and ease of payments.

Figure 5. Association between digital connectivity and financial inclusion.

There are limits, however, to the contribution of digital connectivity (technology) to financial inclusion (society). Digital connectivity merely provides the basic infrastructure for enabling other digital capabilities, which encompass a suite of processes, skills and technologies. In effect, without business innovation and transformation, the Caribbean will not be able to realize and appropriate the promise and potential value of FinTech. Further analysis reveals that whereas Caribbean enterprises generally use (basic) communication technologies, investments in and adoption of quality process innovations, (digital) professional skills, and advanced (digital) technologies are relatively scarce across SICEs (Figure 6).

The future of FinTech in the Caribbean will thus require the integrated improvement and innovation of processes, skills and technologies. More importantly, leading the future of FinTech begets an ecosystemic approach towards developing (national and regional) digital capabilities across public sector institutions and private sector enterprises.  Improving the quality, efficiency and agility of government and governance is sine qua none for fostering resilience in an inclusive digital economy.

 

Figure 6. The state of enterprise innovation capabilities across SICEs.

Future Trails

While government and regulatory reactions towards FinTech have been ambivalent, ambiguous and oftentimes antagonistic, it would be challenging to think of 21st-century governance and regulation without prudent innovation. Whereas monetary and macro-prudential policies have traditionally been the main occupancy of financial regulators and monetary authorities, the recent surge in FinTech and digital transformation is gradually shaping new thinking and tinkering on the future of regulation.

Associated with the rise, digital transformation is not only a set of new digital technologies and institutional mechanisms, but more importantly, the transformation and evolution of certain values, norms, beliefs and cognitions about the nature of money and trust. Beyond money and markets, the codification of trust is a critical inflection point in the evolution of financial services.

What may seem revolutionary, if not paradoxical at first hand, increasingly regulators are becoming innovators as they entertain, explore, and experiment with the adoption of distributed ledger technologies, digital currencies, application programming interfaces, artificial intelligence, augmented reality and a host of other digital technologies.

From an evolutionary economic perspective, what we are witnessing is a form of speciation: a process whereby small nascent variations (e.g. digital currencies) could accumulate over time into systemic changes (e.g. distributed technology ecosystems), which could hypothetically result in the emergence of novel hybrid species (e.g. central bank digital currency).

While it may be true that innovation usually precedes regulation, in more evolutionary terms, the regulatory landscape is undergoing a systemic transformation in nurturing trust and fostering resilience. The confluence of both (societal) ‘pull’ forces and (digital) ‘push’ forces are propelling digital innovation and the transformation of Caribbean regulators as they seek inclusive sustainable growth (Figure 7). Clear of an industrial revolution of the fourth kind, what we are experiencing is a societal evolution of the fifth degree.

Figure 7. Convergence of societal ‘pull’ forces and digital ‘push’ forces in shaping an inclusive digital economy.

As architects of the future, nimble regulators are likely to take the lead, as witnessed by numerous recent accounts of monetary innovation and experimentation by central banks. Yet, rather than maintain stability and a steady state, digitization will demand resiliency and steady change on the part of regulators. Moreover, trust rather than technology will be essential in this transformation. Regulatory resilience in dynamic environments requires regulatory variety, and the capacity for regulatory differentiation and integration. The growth in, for instance, (the variety of) cryptocurrencies, financial technology charters, regulatory sandboxes, blockchain collaborations, and experimentation with (central bank) digital currencies are early, yet present signs of evolution in motion.

Conclusion

The need for fostering resilience of Small Island Caribbean Economies (SICEs) is quintessential in the quest towards an inclusive digital economy. Whereas traditionally the economic resilience of the Caribbean has been framed in terms of (macro-economic) stability and efficiency, the rise of financial inclusion and technologies call for a reframing of traditional concepts, measurements and policies. Due to the limited availability of data on financial innovation, technologies and digital capabilities in the Caribbean, future research is necessary for developing evidence-based policies for fostering resilience in an inclusive digital economy.

Digital capabilities are an integral part of developing (dynamic) resilience, and thereto the systemic ability to foresee economic disruptions and develop the innovation capability to adapt pro-actively. A requisite for leveraging the future of FinTech in the Caribbean is an ecosystemic approach towards developing digital capabilities across public sector institutions and private sector enterprises, in which processes, skills and technologies are innovated in an integrated manner. Building sound institutional and human capacities are pivotal to prospering in an inclusive digital economy.

Ryan R. Peterson, PhD is General Manager of Economic Policy at the Central Bank of Aruba. As an Aruban native, his international career spans over two decades of research and development on innovation economics, with a keen passion for island economies, entrepreneurship, and dynamic resilience. This article represents the views of the author, and does not necessarily reflect the policies and perspectives of the Central Bank of Aruba.

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