Can technology help provide easier access to finance?

True democracy means the greatest good for the greatest number with fair access to all. No one would claim that global finance today is democratic. In reality, markets are networks that tend towards concentration, to an extent never seen before. Google has 4.3 billion users, accounting for over 90 per cent of internet users, with a market value of $1.7 trillion. Facebook (now Meta) has 2.9 billion users and a market value of $590 billion. The top 30 banks accounted for 62 per cent of the total assets of the top 100 banks of $110.3 trillion at end of 2021. 

The top two exchanges (NYSE and Nasdaq) account for 43 per cent of the total market cap of the top 30 global exchanges ($121.4 trillion). In half of the world’s listed companies, the top three shareholders hold more than 50 per cent of the capital. The impacts on people are clear. Credit Suisse reports that 2.9 billion people have less than USD 10,000 in household wealth while the top 1.1 per cent of the world’s population holds 45.8 per cent of global household wealth. 

The reality is that financial inclusion is an outcome that financial markets, as they are currently structured, can only dream about. Whether you are one of roughly 2 billion people who are unbanked or one of the 131 million small enterprises on the wrong side of the world’s $5 trillion MSME finance gap, you are likely to pay more for financial services or simply do without, affecting your ability to grow or take on new opportunities. And since SMEs drive job creation and emissions reduction in many economies, that affects growth, wealth, and our ability to achieve net-zero, on a massive scale. 

Even the World Federation of Exchanges recognises that SMEs’ access to public markets is key to future inclusivity. There are only 59,400 companies listed on the world’s exchanges, but over 400 million SMEs worldwide (according to the World Bank) have a variety of financing needs that aren’t currently met by the financial markets or big banks. 

Could crowdfunding help?

Crowdfunding is not new. Kickstarter has funded over 218,000 projects for startups totalling US$6.5 billion from 21 million funders since 2009. GofundMe is one year younger, having raised US$13 billion in charitable donations for impact investing. They are largely open access—anyone can list a project and anyone can fund it. In theory, the platforms could scale up rapidly if market demand is there, but there are still barriers to scale. 

But this is only one type of crowdfunding. Crowdfunding could also be used by businesses looking for equity from investors in exchange for future profits or in peer-to-peer (P2P) lending schemes, whereby lenders are willing to get higher interest in taking stakes in unsecured loans for borrowers. 

In each of these instances, investors bear risks that are largely similar to public fund-raising – fraud, compliance, delivery and operations. Public equity exchanges manage these risks through a rigorous IPO (initial public offering) process with additional support from regulations, costs, and disclosure. In other words, the exchange or regulator picks who 

is eligible for listing and under what conditions, and then the candidate must be filtered by a gamut of reputable intermediaries (such as sponsors, accountants, and lawyers). With these limits in place to control access, plus technology to drive efficiency, the process is highly profitable for all concerned, even if it shuts out all but the largest and best-connected companies. 

This exclusivity has consequences not only for companies seeking funding but for investors as well, particularly as interest in investing in companies with good ESG (Environmental, Social and Governance) credentials rise to unprecedented levels. 

A Gallup poll in November 2021 of several thousand American investors found that over 48 per cent of them are very interested or somewhat interested in investing in sustainable companies, although only 10 per cent do so. And 63 per cent would invest in stocks of funds that reflect their values, indicating the rise of purpose-based investing. 

Can this interest be met by public markets? As long as public markets are biased towards the large and well-funded, it is difficult to believe the answer is yes. Green bonds can be an answer, but currently, these are the only real options for larger institutional buyers. It is even more difficult to understand whether one’s investment – via stocks or bonds— will lead to more pro-ESG behaviour by the company concerned. 

With large public equity markets and the asset management industry on the one hand, and tiny crowdfunding and P2P funding networks on the other, the choices for investors looking to make a visible impact appear slim. This has given birth to the field of impact investing, where networks have sprung up to share knowledge of projects and deals, tactics for due diligence, and ways to gauge impact. They attempt to build trust and transparency through the age-old methods of conversation, networking and reputation. It works and is rewarding for all concerned, but it remains slow, localised and time-consuming. 

We believe that digital platforms backed by blockchain can vastly improve the choices available to retail and small institutional investors when it comes to investing in ESG. The idea is to enable projects and companies to self-signal using blockchain verified data, disclosures, and credentials, with open data so that the public can actually “police”, together with new types of performance auditors, such as verification of carbon credits and delivery performance, to ensure that scam and fraud risks are minimised. Payouts and dividends could easily be routed through the many two-way payment exchanges. 

An open platform that grants access to projects and companies for the ESG economy, using standardised and verified credentialing and disclosures, would provide transparency in the market for ESG causes. In essence, this broadens the access base to a wider net of ESG projects to a wider net of investors, functioning the same way as existing stock exchanges, but with much lower entry barriers and more transparency. 

The technology for democratising access to finance is already here. What is lacking is the political will to cut through the vested interests to really democratize investing and funding for causes that really matter. Watch this space for more concrete ideas on how this can be done. 

(The writers are, respectively, Distinguished Fellow, Asia Global Institute, University of Hong Kong and Executive Vice President, Knowledge and Applications, Fung Group. The views are personal.)

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