What the Rise of the Finternet Means for Markets, Financial Institutions and Individuals

Due to their legacy infrastructures, most financial systems around the world are either partially or fully closed, even while digital interconnectivity is becoming ubiquitous. This prevents them from attracting external innovation and keeps them disconnected from other markets. While it’s possible to create workarounds that would increase access to financial services, doing so is neither easy nor cost efficient. Because of this, even the most ambitious financial institutions and technology companies often dismiss opportunities to expand into markets where siloed, legacy systems act as gatekeepers between banks and their ability to digitally connect financial capabilities.

Governments must step in to remove these types of barriers, both technical and regulatory, to invite interoperability and innovation that would expand their populations’ access to financial services and fuel cross-border trade. Some are already doing this through the adoption of Digital Public Infrastructures (DPIs). The Bill & Melinda Gates Foundation describes DPIs as similar to roads, which form a physical network that is essential for people to connect with each other and access a huge range of goods and services. These goods and services are vital in creating economic opportunity across many sectors.

These types of open, accessible digital infrastructures enable the exchange of payments, data and other services between otherwise disconnected people and systems. Because they are not created around any one institution or system, DPI systems make it possible for even individuals without traditional financial accounts to send and receive money.  

Digital Public Infrastructures are the first step to scaling the Finternet.

A recent paper from the Bank of International Settlements (BIS) paints a picture of what a world would look like where DPI systems are the rule, rather than the exception. Titled, “Finternet: the financial system for the future,” the paper describes this interconnected world, known as the Finternet, as "multiple financial ecosystems interconnected with each other, much like the Internet, designed to empower individuals and businesses by placing them at the center of their financial lives."

We’re already beginning to see the Finternet blueprint gain traction in some regions through DPI systems such as Pix in Brazil and UPI in India. With these systems, all individuals need is a mobile app and a phone number and they can transact with anyone, anywhere in their country—regardless of whether or not they have a bank account.

Just as the rise of the internet allowed us to democratize everything from knowledge to commerce, the Finternet will break down barriers to innovation that currently limit individuals around the world from accessing the digital economy. Before that happens though, other countries will need to commit to digital public infrastructures (DPIs) and emerging solutions will need to be built with interoperability in mind.

Below is a closer look at a few additional characteristics of the Finternet and how building it will play out to the benefit of markets, financial institutions, businesses and individuals. 

Financial interoperability will pave the way for further expansion and innovation.

According to BIS, “access to financial services is needlessly limited by a financial system dominated by legacy systems.” DPIs and other digital financial systems are interoperable by nature—a core protocol that, according to BIS, means these systems can seamlessly connect transactions between disparate networks.

But connecting multiple markets worldwide through digital financial infrastructures takes tremendous time and resources. It’s not an overnight process. This doesn’t mean that new solutions shouldn’t be built with an inclusive future in mind. In fact, the very opposite is true.

Organizations can take the lead on building the Finternet by following DPI standards as they build new systems. By adopting technology that interacts with any existing and future interoperable systems, financial institutions will gain a head start on integrating with other DPI-compliant markets and new capabilities as they emerge. 

The onus will be on financial institutions and fintechs to build the infrastructure that connects them with the Finternet. Although this will require initial investment, there is a significant market opportunity on the other side of interoperability. 

Take cross border payments, for example. While powering global cross-border payments can create a viable stream of revenue for fintechs and other financial services companies, they’ve traditionally been a costly and complex offering due to high processing costs, currency translation fees, siloed payment networks and more. The Finternet will provide the infrastructure that allows companies to power payments to and from any market seamlessly and cost effectively. 

Individuals will gain access to the digital economy—which will ultimately strengthen their local economies. 

When deployed at scale, the Finternet isn’t just about mechanics of money. It’s about democratizing access to the global economy.

Currently, there are more than 1.4 billion unbanked individuals around the world who lack access to traditional financial services. According to BIS, this lack of access not only prevents these individuals from increasing their incomes, but also keeps them from “improving their skills, expanding their opportunities and making full use of the digital economy.” 

In rural Mexico, for example, local community banks do not have the infrastructure to integrate with today’s private cross-border payments systems. As a result, these organizations are often cut out of the billions of dollars in remittances that flow between the U.S. and Mexico each year—and therefore do not benefit financially from these transactions. 

With interoperability, small community banks can not only accept payments from a bank account or digital wallet anywhere in the world, but they can also charge small fees on each transaction. The income from these fees enables the banks to re-invest in their community through small business loans and other local financing opportunities. 

Ultimately, a cash injection in these rural communities will improve quality of life for everyone—not just the individuals that receive remittances.

As it stands now, the lack of interconnectivity in today’s financial infrastructure is hurting those most in need. The Finternet idea and application has the potential to fundamentally change this by changing the way that global financial services operate.