Joining up the financial world for people

Deutsche Bank’s Dixit Joshi says technology is transforming the way we see financial connectivity


After the collapse of the Soviet Union and the reunification of Germany, the world experienced an exceptional period of globalisation and liberalisation. Barriers to international trade were reduced and regional alliances such as the creation of the Eurozone and NAFTA brought neighbouring nations closer together. The result was positive for the global economy and helped to lift about a billion people out of poverty as international trade flourished.

However, since the financial crisis of 2008-09, globalisation has faced headwinds. Nationalism and populism have increased. Challenges to the established political order have strengthened, from Brexit, to Italy’s Five Star movement, to France’s Gilets Jaunes. The reasons are complex, but one factor is undeniable: globalisation is perceived to have benefited some, but not all, in our society.

Financial markets have become significantly more interconnected, especially in the years before the financial crisis – a period sometimes known as the ‘Greenspan era’. Capital moved around the world with ever-increasing speed as investors moved into new and growing markets. Risk was distributed around the world, and across the balance sheets of ever-more globalised financial institutions, in an increasingly wide array of financial instruments.

Sub-prime mortgage debt from the US rust belt – packaged into complex instruments which were often AAA-rated – might end up in a pension fund thousands of miles away. Risk in the system became less visible. As the price of risk came down, debt levels – of households, businesses, banks and nations – went up.

We know what happened next. In an increasingly interconnected global financial system, ripples from the failure of a single bank, Lehman Brothers, spread across the world with remarkable speed. A highly unusual global recession ensued. It took unprecedented and concerted action by G20 governments to avert an even greater shock to the world economy. As policymakers, regulators, central bankers and business leaders worked to stabilise the global financial system, interconnectedness became synonymous with contagion.

The post-crisis decade: interconnectedness in a digital era

The past decade has seen an unprecedented wave of financial regulation. The aim has been to prevent a repeat of the events of 2008-09 by tackling their perceived root causes. Capital bases have been restored, balance sheets and leverage have been cut, minimum standards have been laid down for liquidity and stable sources of funding, and constraints have been placed on proprietary trading.

In addition, regulators and financial leaders have worked to build firebreaks against contagion risk arising from interconnectedness. Policymakers have sought to minimise the impact of a single bank failure on the wider system. A clearly defined list of the world’s most interconnected banks – so-called Global, Systemically Important Banks or ‘G-SIBs’ – added capital buffers and other requirements. Derivative instruments are now cleared by central counterparties. Total Loss Absorption Capacity, or ‘TLAC,’ is prescribed in order to protect depositors and taxpayers in the scenario of a bank needing to be wound up.

“Illiteracy is no longer a barrier: if the system can recognise your iris or your thumbprint, you’re connected”

In parallel, digital technology is transforming the way banks connect with clients, with each other, and with supervisory authorities. Newer technologies, for example, offer the possibility of a secure ecosystem in which financial transactions may take place and be observed, in real time, between businesses trading with each other, intermediary banks, and supervisory bodies.

This offers scope for financial transactions which are faster, cheaper, safer, and more transparent for all parties involved in them. According to some estimates, 40% of global gross domestic product could flow across such networks within 10 years. In this context, interconnectedness becomes not a source of systemic risk, but a force for good.

Interconnectedness and financial inclusion

In a digital age, technological interconnectedness can also have wider positive impact as a route to financial inclusion.

Globalisation, and the liberalisation of world trade, brought undoubted benefits to emerging nations and their communities. However, in some countries financial exclusion remains a major challenge. As recently as a decade ago, about two billion people worldwide were unbanked – that is to say, outside the financial system. For many of the world’s poorest people, conventional banking services were not economically viable. For people who could not read or write, the simple process of opening a bank account was impossible.

Thanks to technology, that is now changing. Digitisation has transformed the economics of banking for the poorest in our society. Millions of people in India and Africa, for example, do not have bank accounts, but they do carry out financial transactions via their mobile phones. The economics of financial inclusion is being transformed.

“Financial inclusion can become a path to greater wellbeing, security and human dignity”

With the advent of biometric identification and cheap and reliable online payment platforms around the world, tens of millions of people are being lifted out of poverty through financial inclusion. Illiteracy is no longer a barrier: if the system can recognise your iris or your thumbprint, you’re connected. Cheap and reliable payment platforms enable micro-credits, small remittances and micro-financing. At this elementary level, financial interconnectedness can transform lives. We can harness financial technology in the fight against relentless poverty and social exclusion which still blights the lives of millions.

A paradigm shift: interconnectedness as a force for good

In a single decade, the technological advances of the ‘fourth industrial revolution’ have transformed the post-crisis paradigm. Interconnectedness, as a vehicle of contagion, was a risk to be mitigated. Some say this ‘fourth industrial revolution’ primarily benefits developed economies, but I see it differently. Artificial intelligence, analytics and big data have the power to transform lives in developed, but also in less advantaged societies – for example, by revolutionising the provision of essential healthcare, education, agriculture and other fundamental needs.

With the technology of today, interconnectedness becomes a force for good. Digital connectivity can help make the world economy safer, more transparent and more efficient. Additionally, and perhaps most importantly of all: financial inclusion can become a path to greater wellbeing, security and human dignity for some of the most vulnerable members of our global community.

For this reason, I feel privileged to be part of the financial industry at this transformative and exciting time.

Financial inclusion in India

  • 90% of the 1.3 billion population have a unique biometric identity
  • 80% of adults have bank accounts
  • 330 million new ‘no-frills’ bank accounts opened in four years
  • 90% mobile penetration expected by 2020

A series of government initiatives is responsible for the dramatic rise in financial inclusion in India. ‘Aadhaar’, a biometric database gives every citizen a unique identity, a basic savings bank account (‘Jan Dhan’) and a digital payment infrastructure. The unique identity is vital for meeting anti-money laundering ‘know-your-customer’ requirements, while the Jan Dhan bank accounts enable direct transfer of social benefit payments to recipients. Along with mobile penetration rates that rival those of China and the US, internet penetration has soared and the use of digital payments is rising significantly.

 Source: World Economic Forum/World Bank Global Findex Database

Dixit Joshi is Group Treasurer, Deutsche Bank and a Member of the Board of Directors of the International Swaps and Derivatives Association (ISDA).