It’s tempting to think of technology as the great globalizer. After all, people from Beijing to London equally risk walking into a fountain or lamppost, distracted by their Apple, Google, or Huawei phones.
But look a little closer and you’ll see that while in the U.S. we use three different apps to hail a taxi (Uber), buy a book (Amazon), or pay our friends for dinner (Venmo), Chinese users do it all in just one: WeChat.
It isn’t just apps that differ; entire financial services providers are becoming more regionally distinct. Such developments could establish roadblocks to effective global regulatory cooperation, potentially exacerbating future financial crises. What is driving this divergence, and how do we avoid trouble?
Regionalization of finance is certainly a reality. Consider payments. Thanks to deep smartphone penetration among the entire population, and a wait-and-see approach by regulators, China leads the world in mobile payments. While Apple Pay had an estimated 12 million monthly users globally as of 2016, Alibaba’s Alipay had 450 million, or 20 times more, in 2017. The same is happening in retail credit and investments. In China, one’s online “reputation” can serve as a stand-in for more traditional credit metrics. For example, Tencent is quietly testing a “social credit score” based on people’s online behavior and trustworthiness.
The result is that technology giants like WeChat’s parent company Tencent and Alibaba subsidiary Ant Financial are leading providers of consumer credit and investment management, and regulators are adjusting accordingly.
Big changes are also afoot in Europe, as new European Union rules will open up retail banking. Banks will have to allow customers to share their financial data with third parties such as merchants or fintechs, hollowing out the banks’ exclusive relationship with their clients.
Banks are already responding. Dutch bank ING, for example, has invested 800 million euros in a digital transformation, including building a new “aggregation dashboard.” The platform shows users balances held in various accounts—not just ING’s—and analyzes spending patterns. It will also be available to non-ING customers.
Both the tech-led financial system that has emerged in China and the hybrid system that is emerging in Europe stand in stark contrast to that of the U.S. American regulators have shown little appetite for new rules that would upend the retail banking system, and consumers also are not switching en masse to other providers the way that their Chinese counterparts have.
Why should any of this matter? Because in a deglobalized financial world, safeguarding stability and controlling contagion will become increasingly difficult. Banks, payments providers, and technology companies bear different risks in each region, and thus their reactions to any single macroeconomic shock or policy change will differ too.
This could have grave consequences. The worst impacts of 2007–08 financial crisis were avoided because regulators effectively coordinated on a global scale. With different rules and no coordination, it would be much harder to avoid or control a new crisis.
To protect against this, we should make sure that organizations with a global remit, such as the Financial Stability Board and the International Monetary Fund, play a critical role in ensuring two things: First, they will need to establish what Andrew Haldane of the Bank of England calls a “common financial language,” mapping the complex interactions between these systems. And second, regulators will need to embrace the very technology that is making finance more complicated and use it to build a clearer picture of the interactions between these financial systems.
This might not stop consumers from falling into a fountain or walking into a lamppost, but it would ensure that the financial systems underpinning their transactions don’t.
Jesse McWaters is the project lead for disruptive innovation in financial services at the World Economic Forum and the author of a new World Economic Forum report, “Beyond Fintech: A Pragmatic Assessment of Disruptive Potential in Financial Services.”