[T]he history of financial innovation is littered with examples that led to early booms, growing unintended consequences, and eventual busts.

Mark Carney, former Governor of the Bank of England and Chair of the Financial Stability Board

1. Introduction

The emergence of fintech (financial technology), defined as “[c]omputer programs and other technology used to support or enable banking and financial services”, is an innovation that constitutes a historic discontinuity in the structure, operations, and conduct of financial systems everywhere. In its simplest form, which this essay restricts its attention to, fintech enhances the ability to transact financial services via a mobile phone or smart device, thus making it easier, cheaper, and quicker for a large section of the population to access a loan, make a savings deposit, transfer and receive money, and pay for and be paid for goods and services. Since its origin in the mid-2000s, the expansion of this basic fintech model around the world has been nothing short of astonishing. Massive investments have launched new fintech operations, and helped convert existing brick-and-mortar financial institutions into fintech-based operations. Early investors have already realized huge profits, as evidenced by the growing number of fintech “unicorns”1 A “unicorn” is a privately-held fintech startup company valued at over US$1 billion. . As a result, many observers are convinced that the investor-driven spread of fintech to every corner of the globe will usher in a new “golden age” of global free market capitalism.

Considerably adding to the excitement is the widespread claim that the poor will be the principal beneficiaries of fintech in this new epoch as access to financial services is “democratized” and made available to all. It is quite clear that, as with many innovations, ordinary citizens have enjoyed important gains as fintech applications spread throughout the world. However, I will argue in this essay that these gains are increasingly being offset by a number of mid-to-longer term downsides which may even wipe them out entirely. To be clear, this does not mean that fintech has failed to work in a technical sense. Rather, these downsides are emerging because the fintech model has been purposely structured to operate under a neoliberal governance framework that effectively bypasses the state (democratic or otherwise) and hands over the responsibility for addressing poverty, inequality, and (the lack of) development to markets and private investors. The inevitable result is that the fintech model increasingly serves the commercial and ideological agendas of key powerful stakeholders. Simply put, the ‘suppliers’ of basic fintech services are now their primary beneficiaries, while the poor are relegated to being instructed, encouraged, and “nudged” into using these services in ways that maximize profits. If governments in low- and middle-income countries (hereafter L&MICs) want to reverse the increasingly destructive outcomes arising from the ‘investor-driven’ fintech model, there is an urgent need to locate and pro-actively deploy basic fintech applications in ways that help develop sustainable local economies while prioritizing human development and social justice.


2. Fintech’s Rise to Prominence

The fintech movement effectively began in 2007 with the launch of Kenya’s now iconic money transfer platform M-Pesa, an outcome of a U.K. government-funded project that provided a grant to the giant U.K. multinational company Vodafone to develop a way of electronically providing more microcredit to Africa’s poor. The unexpectedly high demand for simple money transfer services meant that the project was reoriented to focus on providing this service. The ownership of M-Pesa was lodged within the Safaricom corporation that in turn was 40% owned by Vodafone, 35% by the Kenyan government, and 25% by various external investors and shareholders. Crucially, 5% of Safaricom’s shares were allocated to a shell company, Mobitelea Ventures, registered in Guernsey and ultimately owned by leading members of the Kenyan business and political elite hiding behind a few nominee directors based in the Caribbean islands of Anguilla and Antigua.2Vodafone, for a long time, pointedly refused to identify the real owners of Mobitelea Ventures, claiming “commercial confidentiality”. However, the names of those involved in the ownership of Mobitelea Ventures were eventually revealed in the late 2010s. This secretive new entity lobbied successfully for a near-monopoly for M-Pesa’s money transfer services. Among other things, this meant that M-Pesa could quickly reach an efficient scale of operations and charge extremely high prices for its services.

Thanks mainly to M-Pesa’s rapid expansion, Safaricom began to earn high profits. In 2012, it added a new unit, M-Shwari, which operated off the M-Pesa platform and provided digital microcredit to Kenya’s poor, further adding to Safaricom’s profits. The corporation’s revenue grew exponentially and it soon became Kenya’s largest company, representing 40% of the value of the Nairobi stock exchange. Thereafter, it rose to become one of the world’s most profitable ventures.3 Safaricom’s profit in 2019-20, for example, was nearly US$750 million Safaricom’s shareholders, especially Vodafone, were soon being rewarded with large annual dividends. Safaricom’s CEOs were also richly rewarded. The excitement created by M-Pesa’s commercial success coupled with equally profitable fintech developments in China in the form of WePay and AliPay,4Turrin, R (2021) Cashless: China’s Digital Currency Revolution, Gold River, CA: Authority Publishing. prompted a torrent of private capital investment into fintech projects around the globe.

Not least because M-Pesa was a product of the U.K.’s development aid program, the international development community soon became aware of its operations and the many benefits that fintech-based financial services offered (at least initially) to the poor. Almost immediately, the fintech model was anointed as the successor to the global brick-and-mortar microfinance industry. Having had no real impact on addressing global poverty in L&MICs, if not seriously undermining their chances of sustainable economic and social development,5See further analysis, see Bateman, M. (2010) Why Doesn’t Microfinance Work? The Destructive Rise of Local Neoliberalism, London: Zed Books. Bateman, M., and Chang, H-J. (2012) ‘Microfinance and the Illusion of Development: From Hubris to Nemesis in Thirty Years’, World Economic Review, 1, 13–36. Bateman, M., and MacLean, K. (2017) Seduced and Betrayed: Exposing the Contemporary Microfinance Phenomenon, (Eds), Santa Fe, NM and Albuquerque, NM: School for Advanced Research Press and University of New Mexico Press.‬‬‬‬‬‬‬‬‬‬ the microfinance industry, by the early 2010s, was on the verge of being declared a failure. Such an outcome would have thoroughly discredited the concepts of private market-driven financial services provision to the poor and “bottom of the pyramid” capitalism. Neither the main international development organizations nor the western neoliberal-oriented governments (especially the U.S. and the U.K.) wanted to see that happen.

A new goal was thus urgently needed to justify the brick-and-mortar microfinance industry’s continued existence. The solution was to repurpose its role in terms of its ability to advance ‘financial inclusion’, defined by the World Bank as ensuring that “individuals and businesses have access to useful and affordable financial products and services that meet their needs — transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way”. Importantly, the original ostensible goal of the brick-and-mortar microfinance model — to help the poor escape poverty by establishing their own microenterprise with the help of microcredit — was supplemented by a new and far more realistic goal to pursue “full” financial inclusion that only sought to enable the poor to better ‘manage’ their poverty. After some initial experiments, 6A pioneering effort to promote the financial inclusion agenda was made in South Africa, for instance, though it ultimately proved a disaster for the poor.the “full” financial inclusion objective was officially declared to the world in 2011.7This took place in Mexico with the Maya Declaration that committed L&MICs to a set of financial inclusion targets to be achieved with the help of leading institutions in the international development architecture, especially the World Bank. The brick-and-mortar microfinance industry thus became the ‘financial inclusion industry’.

It was extremely fortuitous, however, that the announcement of the “full” financial inclusion objective, quite by accident, coincided with the introduction of basic fintech applications that would ensure its rapid attainment. The financial inclusion-based anti-poverty programs and policies of many international development institutions, notably the World Bank, were soon reorganized to incorporate the investor-driven fintech model as the key driver. In order to raise the profile of this model and “sell” it to governments in the L&MICs, commercial and ideological stakeholders with an interest in its success began a coordinated lobbying effort. Gabor and Brooks usefully termed this lobbying network the Fintech-Philanthropy-Development (FPD) complex.8The FPD complex included, amongst others, the World Bank, the IMF, the US government’s aid assistance arm (USAID), the UK government’s then aid assistance arm (DFID), the Bill and Melinda Gates Foundation (hereafter the Gates Foundation), The World Economic Forum (WEF), and the major financial, telecom and digital payment corporations. It was also notably aided by two high-profile “astro-turf” lobbying units, the Alliance for Financial Inclusion (AFI) and the Better than Cash Alliance (BTCA), which were financed and directed by key members of the FPD complex. See Gabor, D., and Brooks, S. (2017) ‘The digital revolution in financial inclusion: international development in the fintech era’, New Political Economy, Vol 22(4): 423-436. Key financial analysts and development economists were soon brought on board by the FPD complex to provide the empirical evidence that supposedly demonstrated the effectiveness of fintech as a poverty reduction and local development intervention. Initially, this involved outputs by those either directly working for, or wholly funded by, the FPD complex. 9Notable outputs funded by the Bill and Melinda Gates Foundation include Cambridge, MA: National Bureau of Economic Research. Mas, I. (2009) ‘The Economics of Branchless Banking’, Innovations, 4, no. 2 (Spring): 57-75. Suri, T. and Jack, W. (2016) ‘The Long-Run Poverty and Gender Impacts of Mobile Money’, Science, 354(6317): 1288–1292.Sensing a new bandwagon in the making,10With financial sponsorship needed to underpin both individual and institutional academic activity in many countries, notably in the US and UK, research outputs deliberately biased in order to be sympathetic to particular corporate goals are increasingly becoming the norm everywhere in the financial sector. See Ferguson, C. (2012) Inside Job: The Financiers Who Pulled off the Heist of the Century, Oxford: Oneworld Publications Ltd. It is also a pressing problem in the academic study of microfinance. however, a great many other development economists, financial analysts, paid-for “influencers”, boutique consultancy firms, and newly-established fintech “think tanks” in search of funding also began to churn out supportive outputs. Embedding the investor-driven fintech model in the L&MICs was now unstoppable.

The financial inclusion-based anti-poverty programs and policies of many international development institutions, notably the World Bank, were reorganized to incorporate the investor-driven fintech model as the key driver. The model was sold to governments in the L&MICs through a coordinated lobbying effort by commercial and ideological stakeholders.


3. The Investor-Driven Fintech Model: Whose Gain Is it Anyway?

To date, the poor in L&MICs have enjoyed many important benefits as a result of fintech-based financial services in terms of quicker, easier, and more affordable access to a range of basic financial services. Such benefits include:

  • Digital microcredit can be instantly provided to anyone who requires funds to start or expand a microenterprise or wants to better manage their daily cash flow.
  • Remittances from friends and relatives can now be easily and quickly sent and received through mobile money channels.
  • Savings can be more easily accumulated through the use of a secure internet-based account, which gradually reduces household vulnerability, promotes resilience, and makes funds available for business purposes or emergency needs.
  • Payments for goods and services (especially wages) and other non-business financial transactions, such as social grants and pensions, are made easier and cheaper to send and receive, which reduces the overall costs of such services and helps to avoid problems of safe storage and delivery of cash.

These are not insignificant benefits and they have, in many cases and through various mechanisms, improved the lives of poor communities.

However, as the epigraph at the start of this essay suggests, the early widely distributed gains of many financial innovations are not always sustainable. Indeed, a financial innovation may end up negatively affecting certain groups, such as the poor, as well as seriously damaging the overall economy and society. Sub-prime mortgages would be one obvious example of an initially celebrated but ultimately destructive financial innovation.11Initially positioned as an instrument to “help poor minorities get on the American housing ladder”, they were eventually shown to be principally all about enriching the Wall Street financial institutions that invented and circulated them, with the entire episode ending with the global financial crisis in 2008. See Mirowski, P. 2013. Never let a serious crisis go to waste: How neoliberalism survived the financial meltdown. London: Verso. However, the most relevant example here is the above-mentioned global brick-and-mortar microfinance industry that, after beginning as a non-profit sector, was transitioned into a for-profit business model. This shift was the outcome of determined pressure from key stakeholders, notably the World Bank through its Consultative Group to Assist the Poor (CGAP) lobbying arm and the Boston-based ACCION advocacy and investment body.12 ACCION actually claims to have invented the for-profit microfinance model. s The inevitable result of this conversion into a for-profit business model was that CEOs, senior managers, owners, shareholders, investors, partners, and advisors attached to the brick-and-mortar microfinance industry soon replaced the global poor as the intended primary beneficiaries of its operations.13Even a cursory glance at the often spectacular salaries, bonuses, pension payments, profits, management fees, dividends, and capital gains enjoyed by these new stakeholders quite clearly reveals this to be the case

In many respects, the investor-driven fintech model already appears to be locked into a similar destructive path. Independent researchers have more recently argued that the pro-poor case for the model was constructed on flimsy foundations, including the mistaken belief that the early “one-off” positive impacts persist in the long term, the strained logics that link cause to effect, biased evaluation methodologies, and manifestly false initial assumptions. Other independent researchers have suggested that the investor-driven fintech model has already demonstrated the potential to ‘amplify’ many of the main economic and social development problems that currently exist in L&MICs. In what follows, I briefly outline seven key areas where the initial gains generated by investor-driven fintech applications are at serious risk of being counteracted in the medium to long term, if not swamped entirely.


3.1. Fintech and Destructive Local Labor Market Dynamics

In the 1980s and 1990s many economists, development specialists, and international development organizations argued that an expansion in the number of informal microenterprises and self-employment ventures in L&MICs would bring about sustainable local economic development and ensure widespread poverty reduction. 14 See Levitsky J. (1989) Microenterprises in Developing Countries (Eds), London: Intermediate Technology Publications. Stewart, F., Thomas, H., and de Wilde, T. (1990) The Other Policy, (Eds), Intermediate Technology Publications, London. Wright, G. (2000) Microfinance Systems: Designing Quality Financial Services for the Poor, London: Zed Books. According to some leading advocates of the informal sector, 15See, for example: Yunus, M. (1989) ‘Grameen Bank: Organization and Operation’ in J. Levitsky (Ed.) Microenterprises in Developing Countries, London: Intermediate Technology Publications. Otero, M. and E. Rhyne (1994) The New World of Microenterprise Finance: Building Healthy Institutions for the Poor, London: IT Publications. Robinson, M. (2001) The Microfinance Revolution: Sustainable Finance for the Poor, World Bank, Washington DC. Sachs, J. (2005) The End of Poverty: Economic Possibilities for Our Time, London: Penguin.all that was needed to eradicate global poverty was to provide the right “enabling environment”, narrowly defined as less regulation and more microcredit. In many ways, their wish was granted. The result was a proliferation of ultra-low productivity activities, typically street retail, cross-border trading, backyard chicken rearing, fast food supply, and personal transport. However, success in expanding the number of such “survivalist” enterprises proved to be counter-productive. First, it only served to accelerate the level of “churn” — the simultaneous and large-scale entry and exit of unproductive “no-growth” microenterprises, usually accompanied by wasted financial resources, rising poverty, and over-indebtedness and distress among those forced to close down their microenterprise. Second, in the longer run, it helped to embed a number of seriously damaging primitivization, informalization, and deindustrialization trends in the local economies of L&MICs which, far from “lifting up” these economies, effectively ensured that they were “dumbed down”.16Bateman, M. (2010) Why Doesn’t Microfinance Work? The destructive rise of local neoliberalism. London: Zed Books. Pagés, C. (2010) The Age of Productivity: Transforming Economies from the Bottom Up, (Ed), Washington D.C: Inter-American Development Bank. Chang, H-J. (2010, pp 157-167) 23 Things They Don’t Tell You About Capitalism. New York: Bloomsbury Press. Pritchett, L. (2020) ‘Randomizing Development: Method or Madness?’, in: Bédécarrats, F., Guérin, I., and Roubaud, F. (Eds). Randomised Control Trials in the Field of Development: A Critical Perspective, London: Oxford University Press. Needless to say, the programmed increase in desperation-driven microcredit-supported petty entrepreneurial activities did not turn out to be the solution to global poverty. On the contrary, as Davis argues, it helped create “[a] living museum of human exploitation”. Many early proponents of the microfinance-assisted expansion of the informal microenterprise sector finally began to accept the sour reality that the project had failed, after all, to meaningfully address global poverty. Notable among them are the 2019 Nobel Economics Prize co-recipients Abhijit Banerjee and Esther Duflo. Using the supposedly ‘gold standard’ Randomised Control Trial (RCTs) methodology, Banerjee and Duflo began the 2010s convinced that their own evidence showed that “(M)icrocredit ha(d) earned its rightful place as one of the key instruments in the fight against poverty” . 17Banerjee, A and Duflo, E. (2011, p. 171) Poor Economics: A Radical Rethinking of the way to fight Global Poverty, New Yorks: Public Affairs.However, when their own six-country study later had to conclude that microcredit had had very little success, if any, in addressing global poverty, 18See Banerjee, A., Karlan, D. and Zinman, J. (2015) ‘Six randomized evaluations of microcredit: Introduction and further steps’. American Economic Journal: Applied Economics, 7(1): 1–21.they were forced to row back quite considerably on their earlier positive assessments of microcredit.19Moreover, as Bédécarrats, et al (2020: pp. 186-226) pointed out, this conclusion still quite seriously over-stated the positive impact of microcredit because almost all of the authors were found to have deliberately distorted and misrepresented the evidence, often using quite unethical research methodologies to do so, seemingly in order to be able to come to as positive an assessment of the impact of microcredit as was humanly possible (see also Bateman, 2013, ‘The Art of Pointless and Misleading Microcredit Impact Evaluations’, Governance across Borders, May 29.

Despite such high-profile re-assessments of a once-universally celebrated intervention, and clearly driven by financial self-interest, fintech lenders are nonetheless still aiming to supply unlimited digital microcredit to the global poor in order to further expand the informal microenterprise sector. Without providing any additional context (such as an assessment of the negative knock-on effects that occur when local markets are saturated, as is the norm in most L&MICs, including Kenya), fintech advocates boldly proclaim that expanding the number of informal microenterprises will, by definition, always generate a positive impact. There is, however, little reason to doubt that the problems that have undermined previous policy-driven efforts to promote informal microenterprises will surface once again. In fact, given the extreme levels of local market saturation and churn that exist in almost all L&MICs today, and which have led to high exit rates, it is inevitable that these problems will be exacerbated even further. Competition from new digital microcredit-funded microenterprises will force many more existing microenterprises out of business. Moreover, even leading fintech advocates now quite openly admit that many new microenterprises funded by digital microcredit are already failing in large numbers due to limited local demand. The end result will be an even higher level of unproductive churn. Increased competition will also likely put downward pressure on local prices and dampen the average incomes earned by surviving microenterprises.

Furthermore, by diverting scarce financial resources away from enterprises which ‘do’ possess the capacity to sustainably grow, diversify, innovate, export, and adopt new technologies, such as formal small and medium-sized enterprises (SMEs) (see sections 3.2 and 3.3), the investor-driven fintech model effectively undermines the wider effort to structurally upgrade local economies. Even in the best-case scenario, a rising supply of digital microcredit will redistribute the few economic opportunities available to the poor even more thinly in the short term, and facilitate a further “dumbing down” of the local economy in the long term. Already such destructive outcomes are seriously undermining local economies in Kenya and Uganda, and it may not be long before they begin to inflict equally damaging impacts elsewhere.


3.2. Fintech SME Lending Models Are “Anti-Development”

Not least because of the lack of success of poverty-reduction programs promoting informal microenterprises in L&MICs (see section 3.1), in recent years, many international development bodies are reorienting their efforts towards promoting the more ‘growth-oriented’ SME sector. Crowdfunding and peer-to-peer (P2P) lending institutions are being touted as the ideal financial vehicles to mobilize capital from a variety of sources and direct it towards financing SMEs almost anywhere in the world. Indeed, the World Bank is of the opinion that these fintech innovations represent “the future of SME financing” in L&MICs. Based on algorithmic credit scoring, metadata collection, machine learning, social media use, and other non-human credit screening devices, these fintech lenders are better at identifying which SMEs are most likely to generate solid profits in the short term. In practice, this means that funding will flow to SME clients that are well established, already profitable, present in “quick return” business areas, and have a simple business model, all of which puts them in a good position to be able to repay a loan within a relatively short period. Besides, a fintech lender does not generally use its own funds to lend, but rather the funds of other parties such as investors, bankers, and members of the public who are more keen on registering a quick profit than anything else. This further incentivizes lending only to businesses with high projected profits so as to ensure hassle-free repayment of loans.

However, this also means that fintech lenders are, by definition, programmatically biased to avoid SME clients that do not have the potential for easy profitability in the short term, given the uncertainties attached to servicing such loans. Accordingly, the SMEs that are screened out in the process are those that need time and additional resources to enter a growing market, deploy complicated new technologies, undertake radical innovations, and require expensive and time-consuming employee training programs. These SMEs may have solid future growth potential but are sidelined because they are likely to lag in terms of achieving a break-even point. Paradoxically, economic history shows that it is precisely such slower-growing SMEs that are most likely to facilitate sustainable development in any local economy. A local financial sector’s ability to identify and be willing to financially support such SMEs into the longer run is therefore a crucial determinant of sustainable local economic development and poverty reduction success. But this is not how investor-driven fintechs operate and this already deeply damaging aspect of for-profit private sector SME lending is therefore likely to be intensified by fintech lenders.20With profit-maximizing private SME lenders unwilling to provide such support, many struggling sub-national regions are often forced to establish public, cooperative, and other types of SME banks dedicated to identifying, financing, and supporting precisely such growth-oriented SMEs. In post-war Western Europe, for example, many countries (notably Italy) were forced to set up special SME banks and funds in order to support more growth-oriented SMEs, at least partly because private sector lenders were able to make high risk-free profits lending to SMEs engaged in the lucrative business of luxury imports serving elite customers.


3.3. Fintech Lenders Cannot Create the Right Ecosystem of Support for SME Development

Exacerbating the likely adverse selection problem noted in section 3.2 is the fact that the process of SME development is best supported by a ‘local’ ecosystem of business advisory and financial support bodies. Such an ecosystem involves a raft of interlinked institutions that are embedded within the local economy and society, and can efficiently facilitate a range of productivity-raising activities, including tacit knowledge transfer, knowledge spillovers, and technology acquisition; clusters, networks, and other linkages; and so on. History shows that by far the most effective ‘financial’ bodies supporting SMEs are those that are deeply embedded within the community in which they operate, are often owned by the local community (such as financial cooperatives and community development banks), and have the capacity and willingness to identify and provide “patient” finance (and other forms of technical support) to the best local growth-oriented SME candidates. 21 In the famous example of northern Italy, for example, a great part of its economic and human development success is attributable to the fact that most of its cities possessed a well-connected raft of locally-owned financial institutions (especially state banks and funds, and financial cooperatives) which were able to work closely with other local stakeholders to provide financial support specifically attuned to the needs of local growth-oriented SMEs. This local institutional advantage was a key aspect of what Becattini termed his “theory of the local bank”.Today’s fintech-based SME lenders possess no such characteristics. As such, they contribute very little towards building, operating, and adjusting a crucial local ecosystem of enterprise support because of the costs involved, as well as the physical distance from and the lack of long-term commitment to a particular local community.

History shows that by far the most effective financial bodies supporting SMEs are those that are deeply embedded within the community in which they operate, are often owned by the local community and have the capacity and willingness to identify and provide “patient” finance to the best local growth-oriented SME candidates. Today’s fintech-based SME lenders possess no such characteristics.


3.4. Fintech Can Undermine Social Solidarity Networks

Fintech and mobile money channels have helped expand, formalize, and monetize existing social solidarity networks, including across international borders. In turn, this advance has assisted household survival through quicker, easier, and cheaper access to a larger volume of remittances provided by family and friends living and working abroad. However, pushing impoverished communities en masse to depend systematically on remittance flows as a household survival strategy will inevitably lead to its over-use as a survival mechanism, which will, in time, lead to its eventual degradation. This will amount to killing the goose that lays the golden eggs. In addition, fintech platforms are increasingly using remittance flows as collateral to support a growing number of highly exploitative pressure-selling business strategies involving their most vulnerable clients, especially the over-selling of expensive microcredit.22 In Cambodia, for instance, remittance income flows used as collateral for microloans are linked to rising debt levels that are otherwise undermining the lives and communities of the country’s poor. In some places, the harm caused by these tactics is beginning to outweigh the upfront benefits to recipients of remittances. One of the most common tactics here involves deceptively expensive microcredit, aggressively sold over a mobile phone to clients in receipt of a remittance flow or social grant and which the fintech can divert into regular repayment of any new microloan, but which ultimately plunges many clients into serious debt.


3.5. Fintech Exacerbates Existing Over-Indebtedness Patterns

It is well-known that easier access to microcredit since the 1990s began to create a wave of household over-indebtedness in those L&MICs that most aggressively supported the microcredit concept. A major driving factor was the shift in the 2000s from microcredit being used for microenterprise development to underpinning simple consumption spending. In addition, the quest for high profits, which facilitate high CEO and senior management salaries and bonuses as well as generous returns to shareholders and investors, gave rise to the sort of reckless lending that is all too typical of financialized capitalism. It produced an over-indebtedness among clients of brick-and-mortar microfinance institutions that has been quite damaging. Furthermore, the wider local economy (clients and non-clients) also runs the risk of crashing as a community’s consumption spending rises with the reckless lending-driven increase in the supply of microcredit, but comes to an abrupt end when the increase in credit inevitably goes into reverse, leading to a slump in local demand.

With fintech lending applications making it considerably easier for the poor to access vast quantities of digital microcredit, and with many venture capitalist-backed fintech lenders desperately seeking rapid growth and scale before cashing out via a direct sale or an initial public offering (IPO), typically within a five-year period or less, a major over-indebtedness problem has inevitably begun to surface in the L&MICs. This negative trend began, perhaps predictably, in Kenya, thanks not just to M-Pesa and its stablemate M-Shwari, but also because of a raft of new profit-driven foreign investor-funded fintech lenders such as Tala and Branch. Most recently, the new overdraft facility introduced by Safaricom in 2019, Fuliza, has begun to considerably add to the problem of over-indebtedness by allowing individuals instant digital loans if they happen to have no cash in their M-Pesa account.23Even the former CEO of Safaricom, Michael Joseph, felt it necessary to express his serious reservations about encouraging such easy access to a new loan. In a recent interview, he described Fuliza as nothing more than a way of pushing Kenyans into even deeper debt for no other reason than to “(M)ake more money when you lend people more money”. Essentially, these Kenyan investor-driven fintech organizations have all succeeded by adopting a business model based on the “profitability of perpetual debt”. For the same reasons, similar fintech-driven over-indebtedness problems have emerged in Tanzania and, as even World Bank economists now recognize, across “digitalized Africa”. ‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬A notable case is South Africa, probably the most unequal and over-indebted country in the world, where the new digital Tyme Bank is pushing even more unsecured microcredit on to already over-indebted individuals. Many observers are now beginning to sense the obvious dangers that lie ahead for L&MICs. A number of leading fintech advocacy bodies and key individual advocates are calling for more robust measures to halt the rising damage to economies and society. As the pioneer, Kenya is seen as most at risk, but other countries are being advised to take urgent action as well. In short, the already successful effort by brick-and-mortar microcredit institutions to load the poor up with “perpetual debt” in order to extract value from them is being rapidly extended by the investor-driven fintech model. It is, therefore, likely that even more damaging levels of over-indebtedness lie just around the corner in L&MICs that are at the forefront of the ‘fintech revolution’.

Kenyan investor-driven fintech organizations have all succeeded by adopting a business model based on the “profitability of perpetual debt”. For the same reasons, similar fintech-driven over-indebtedness problems have emerged in Tanzania and across “digitalized Africa”.


3.6. Fintech Helps Create a “Criminogenic” Environment

As the ‘fintech revolution’ was underway in the early 2010s, many mainstream economists claimed that the investor-driven fintech model would significantly reduce the extent of theft, fraud, and other financial crimes compared to the use of cash money. Not least because their claims were largely based on deeply flawed mainstream neoclassical financial models premised on extensive privatization, deregulation, and de-supervision, these assumptions now appear to be well off the mark. The investor-driven fintech sector has actually become the subject of a major wave of unethical behavior, greed, fraud and outright financial crimes that began in Kenya and China, before emerging all across Africa, especially in South Africa. Indeed, individual instances of bad behaviour have gradually metastasized into waves of anonymous internet-based theft, fraud, and illegality, suggesting that the investor-driven fintech model has actually created a criminogenic environment. Even the World Bank now admits that an increasingly comprehensive global effort is needed to effectively police and re-regulate the global fintech sector before it is overwhelmed.


3.7. Fintech Is a Form of “Digital Extractivism”

Many, if not most, of the economic and social problems experienced today in L&MICs stem from the colonial and imperialist extractivist models of exploitation that began in the sixteenth century24 Frank, A. G. (1970) Capitalismo y subdesarrollo en América Latina, Buenos Aires: Siglo XXI and continue to the present day in the form of corporation-led natural resource-based extractivist models. These projects have contributed materially towards developing the northern economies at the expense of the so-called under-developed countries in the Global South. In many fundamental respects, the investor-driven fintech model is nothing more than a turbo-charged extension of these earlier extractivist models. Fintech platforms facilitate the ‘mining’ of digitalized financial transactions of the poor in order to accumulate often staggering financial returns, a large part of which is then transferred northwards into the hands of a wealthy investor elite. This forecloses the possibility of retaining and reinvesting these financial resources locally in order to accelerate the process of sustainable economic development and structural transformation. As some L&MICs have shown, it is perfectly possible to do this if there is political will.25The obvious example is Chile where the huge revenues the state received from its ownership of Codelco, the world’s largest copper producer and one of the most profitable facilities in the world, were used to finance numerous state-coordinated enterprise development, cluster and export programs that helped create Latin America’s most successful economy.
Instead, the profits and dividends earned by global investors and their local representatives in the fintech sector on the one hand, and the ever increasing prices that ordinary individuals have to fork out for basic fintech services on the other, will add to growing global and local inequality over time.

For evidence of these ‘digital extraction’ trends, we need look no further than Kenya’s Safaricom. Its almost total monopoly of the mobile money sector (nearly 99% of the market) has enabled it to charge a variety of high fees on its mobile money service and on other revenue-raising services, in the process, creating the mother lode upon which astounding financial gains have been ‘digitally mined’. In 2018–2019, for example, its net profit came in at USD620 million. Even after a significant loss of revenues due to a sports betting craze that was routed through the M-Pesa platform, profits expanded further to a record US$747 million in 2019–2020. During the Covid-19 crisis, Safaricom was impressed upon to reduce its charges for certain money transfer services in order to allow families and friends to assist each other with cash help during an extremely difficult period. But after much fierce lobbying by Safaricom, the charges were eventually reintroduced in early 2021 and this contributed to a significant increase in its profits.

Pointedly, the bulk of Safaricom’s profits have always been paid out to shareholders, which are mainly wealthy individuals and foreign institutions. Since 2016, Safaricom has chosen to go even further, rewarding its shareholders by introducing a program of ‘special dividend’ payouts. In 2019, for instance, Safaricom’s shareholders received an extra one-off dividend of USD$200 million. Even during the Covid-19 crisis when poverty rose to new heights and all members of Kenyan society were being implored to help each other out as almost never before in its history, Safaricom remained adamant that it simply must continue to pay out the bulk of its profits to its wealthy shareholders, with dividend payouts in 2020-2021 coming in at just over USD500 million.

Further underlining the colonial-style extractivist fintech model perfected in Kenya is the fact that Safaricom’s majority shareholder, U.K.’s Vodafone corporation, is notoriously reluctant to pay taxes to its own government. It points instead to the development benefits the U.K. economy derives from the dividends Vodafone earns from its ownership of major foreign companies, including from the 40% majority stake it owns in Safaricom, which have allowed it to finance a number of major infrastructure projects in the UK. This important benefit to the U.K. economy helps explain why recent U.K. governments have pushed hard for other U.K.-based investors and fintechs to establish themselves in Kenya and elsewhere in the Global South. While adopting a nationalistic “America first” position, the U.S. government has similarly helped U.S. corporations in their attempts to enter and then dominate foreign fintech sectors, most notably in India.

Finally, given its function of creating and circulating non-state (digital) money, fintech was quickly recognized by wealthy individuals and digital corporations everywhere as a way to amass unimagined private wealth and power without government oversight and democratic control. The launch of private digital currencies ensued, the more well-known of which are probably Bitcoin and Facebook’s failed Libra venture. And even though many governments are in the process of introducing a Central Bank Digital Currency (CBDC), it is widely expected that private for-profit institutions will continue to be the primary intermediation channel for a CBDC and will continue to profit from their effective control over the financial system. However, the urgent need to address the downsides as well as the lost potential that is emerging as digital finance is further globalized and concentrated into the hands of a tiny elite has been widely recognized. For example, leading development economist Mariana Mazzucato has argued that:

By exploiting technologies that were originally developed by the public sector, digital platform companies have acquired a market position that allows them to extract massive rents from consumers and workers alike. Reforming the digital economy so that it serves collective ends is thus the defining economic challenge of our time.


4. An Alternative to the Investor-Driven Fintech Model

With the investor-driven fintech model likely to undermine local communities into the longer term, and especially in the aftermath of the Covid-19 crisis, there is an urgent need to explore the contribution that a fundamentally repurposed fintech model can play in “building back better”. One of the alternatives to the dominant investor-driven fintech model has emerged in the city of Maricá in Brazil and, even though it is still at an early stage, it already very usefully illustrates how a form of ‘people-centred’ fintech has the potential to achieve a major sustainable and equitable economic and social development impact. Briefly, 26For a longer examination of the Maricá Model and why it outperforms the investor-driven fintech model in terms of its potential to promote sustainable economic, social and political development, see Bateman, M. and Teixeira, F.A. (2022) The Promises and Perils of Investor-Driven Fintech: Forging People-Centered alternatives’. Amsterdam: Transnational Institute (TNI).the Maricá Model is based on two core interventions: first, a Community Digital Currency (CDC), termed the ‘Mumbuca’, and, second, a local government-owned Community Development Bank (the Banco Comunitário de Maricá), termed the ‘Mumbuca Bank’, that, among other things, issues, manages, and regulates the ‘Mumbuca’.

An alternative to the dominant investor-driven fintech model has emerged in the city of Maricá in Brazil. Even though it is still at an early stage, it very usefully illustrates how a form of ‘people-centred’ fintech has the potential to achieve a major sustainable and equitable development impact.

Several key advantages to the Maricá Model have emerged. Maricá’s innovative Basic Income Scheme (‘Renda Básica de Cidadania’, RBC) ‘allows quick and easy disbursement of’ Mumbuca via a mobile phone, thus not only helping local people avoid deep poverty but also strengthening demand for local businesses as recipients tend to use it to buy many goods and services locally. Moreover, the RBC scheme disburses Mumbuca to recipients at no cost, whereas recipients elsewhere lose a percentage in fees (a similar Basic Income scheme in Kenya that is disbursed through M-Pesa, for example, deducts as much as 10-20% of the recipients cash in fees).27This is just one of the reasons why Maricá’s CT scheme is seen by many as one of the best local government responses to the Covid-19 pandemic in all of Brazil. See Katz, P.R., and Ferreira, L. (2020) ‘What a Solidarity economy looks like’, Boston Review, April 9. It is also important to note that the cost savings resulting from Maricá’s use of digital payments and the Mumbuca local currency are used to directly benefit local citizens, including through lower local taxes and better services, rather than being transferred to investors and corporations in the form of high profits and dividends.

The Mumbuca Bank is operated as a public service and eschews the usual business tactics favored by many investor-driven fintechs (such as the sale of private data, deceptively high fees, pushing clients on to a “debt treadmill”, aggressive cross-selling, etc), and so citizens are much better served. Moreover, any profits generated by the Mumbuca Bank are returned to the community to fund economic and social development, not sent abroad to foreign shareholders and investors. The bank also offers a microloan program paid out in Mumbuca at very low interest rates, which helps local microbusinesses to expand or diversify if they can, and, in times of great difficulty (such as during the Covid-19 crisis), avoid going to high-cost private digital microcredit suppliers. The Mumbuca Bank also supports SME development by promoting business links within the community (clusters, networks, sub-contracting, etc), and by providing longer-term support to those SMEs with long-term potential (such as those with a possibility to link with the oil and gas industry located just off the coast).

While still a novel experiment, the Maricá Model has already begun to demonstrate that a “people-centered” fintech model need not be built on an extractivist logic that aims to tap into and appropriate the transactional wealth created by the population, but can instead be creatively used to serve the economic and social needs of the community.

5. Conclusion

The ‘fintech revolution’ is clearly changing the world. But is this revolution going to be good for everyone, including the global poor? Or will fintech increasingly evolve to serve the interests of a narrow elite? Based on existing data and trends, I have argued that the latter scenario is becoming the reality. Like the brick-and-mortar microfinance industry that came before it, the investor-driven fintech model has followed an adverse path-dependency trajectory. A major technological innovation with the potential to improve the lives of the vast majority of the world’s population is instead morphing into yet another way to facilitate the enrichment of the global elite. The global poor are now increasingly trapped in a largely privately-operated digital financial system over which they have progressively little control and no real possibility of escape going forward (especially if cash is abandoned, as is the long-term goal of many fintech advocacy bodies28The abolition of cash is, for example, the goal of the Better than Cash Alliance.). However, a growing number of alternative fintech models that have emerged in recent years, notably the Maricá Model introduced above, have demonstrated that it is possible to promote sustainable local economic development and poverty reduction while also adhering to principles of social justice, equality, and dignity at work. Given what is at stake for the global elite that is benefitting from the investor-driven fintech model, however, it remains to be seen if such exciting local ‘people-centered’ fintech experiments as the Maricá Model can be extended further in L&MICs. It will require widespread political support aided by popular mobilizations to replicate this exciting model of fintech-driven local development in other parts of the world.