The rise of the Finternet

Financial services must catch up with technological advances. This will require taking bold action to build a seamless, interconnected network that would put all individuals and businesses in full control of their financial lives.

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Photo: Shutterstock
Disclaimer: The translations are mostly done through AI translator and might not be 100% accurate.

Our financial system is ready for a giant leap forward. It's time to explore new frontiers. We expect that applying for a mortgage or small business loan will soon be as easy as texting friends or booking a hotel room online.

Certain advances in technology have already brought this new reality closer, as evidenced by the widespread adoption of mobile payment applications. However, a major transformation of financial services will require the creation of an entirely new system to match the advances in communications achieved since the advent of the Internet and smartphones. Since mobile phones have evolved into powerful computers, it would be foolish not to make the most of their capabilities.

To this end, by combining our knowledge of economics and technology, we have developed a version of the future financial architecture. What we call the "Finternet" (financial internet) is a vision of multiple financial ecosystems that connect to each other (similar to the Internet) to give customers – individuals and businesses – total control over their financial lives. We envision a world where people and businesses can use any device to transfer any financial asset – of any size – to anyone. These transactions will be cheap, secure, near-instant and available to everyone.

The new system would be particularly important for developing countries that lag far behind in access to financial services, despite efforts to boost inclusion. Many services today are simply not available or not widely available, especially for residents of remote areas and low-income households. And even when people have access to financial services, they are often too expensive and slow.

The path to the Finternet has been paved by more important technical discoveries in recent years. For example, tokenization: tokens, which represent digital assets, can uniquely identify the owner and applicable rules. Another example is programmable books. These are digital platforms that combine the traditional function of keeping books with mechanisms for managing their updating.

To unlock the potential of financial innovation and create a seamless, interconnected network, we need to bring all these elements together, breaking down barriers and isolation in the current financial system. In particular, merging different tokenized assets into single programmable ledgers would drastically reduce the need for lengthy messaging, clearing and settlement systems that create additional costs, take more time and limit access to credit and other financial services.

Unified ledgers would also enable "smart contracts" that can trigger certain actions (for example, transferring ownership of a house) when predetermined conditions are met. They can even consolidate multiple automated transactions. For example: in the case of a property transfer, the payment of the purchase price and the anti-money laundering check can be completed simultaneously and take seconds, not weeks. Overall, these ledgers would meet (and perhaps even exceed) today's regulatory and oversight standards, while also being faster, cheaper, and more reliable than existing systems.

But technology is not enough. Central banks, as custodians of public money, will play a key role in this new financial architecture. The money they emit is the means through which all economic transactions are ultimately carried out. And therefore, the digital form of this money will become the necessary basis of Finternet. Commercial banks will also play an important role in interacting with consumers, not least by providing tokenized bank deposits, which will be the lifeblood of the Finternet system.

In addition, a strong regulatory and supervisory framework must be the basis for the Finternet. Safeguards, such as deposit insurance and public oversight of financial service providers, should be maintained to protect clients and ensure that money has the same value regardless of whether it is issued by a central or commercial bank.

Radical use of new technologies would simplify the multi-layered manual checks now required to comply with rules and regulations. This would make it possible to create products and services that would otherwise not be available due to compliance issues, but also to ensure that the Finternet is not exploited by malicious actors looking to exploit loopholes.

Although it will take years for the Finternet to become a reality, we need to start working now. The technologies are mature enough and, most importantly, we are not yet limited by rigid institutional frameworks and have not yet fallen into the trap of "walled gardens" created by monopolists of certain services. This is an absolutely unique opportunity to redesign the architecture of the financial system, and we should think broadly and creatively, rather than focusing narrowly on individual technologies.

We know where we need to go. It is equally important that we have all the tools to reach that goal. The global financial system now needs its "Neil Armstrong moment" - it needs to take a small step that will become a giant leap for humanity.

A. Carstens is a former governor of the Bank of Mexico; is the general director of the Bank for International Settlements

N. Nilekani is the co-founder and chairman of Infosys; founder of UIDAI (Aadhaar)

Copyright: Project Syndicate, 2024. (translation: NR)

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