Democratization of Finance

Buzzword and promise of many fintech-endeavors. The idea of democratizing finance is one of the legacies of the Occupy Wall Street movement and has brought about a myriad of fintech start-ups taking up the cause.

The definition of “Democratization of Finance” refers to the gradual process of removing control of the finance industry away from the select few big banks/financial institutions and distributing the power more evenly among the public.
The internet has given a voice to a public that previously had no way of being heard; nowadays when discrepancies and unjust practices are discovered, financial institutions must answer not only to their critics, but to everyone else with access to a computer. This collective voice is loud enough that it also reaches the ears of the regulators, putting significant public pressure on them to monitor things carefully and intervene where necessary.
The internet also provides a platform that facilitates financial exchange between consumers without the direct input of financial institutions. Peer-to-peer lending via the internet is now a common practice, and donations-based crowdfunding is growing exponentially.
Thus the theory at least, as formulated on the website of Bricksave. Possible conflict of interest, here: Bricksave is itself an endeavor in democratizing finance, as it is a real estate crowdfunding platform.

While it undoubtedly is true that information has become more accessible in the internet age, that does not necessarily mean that financial literacy and the technology needed to meaningfully analyze all that information have seen the same developments. Owning a highly capable Bloomberg Terminal still makes a world of difference when analyzing (financial) data. So does direct versus mediated access to markets and order placement. Professional training helps, too.

Nonetheless, without a certain infrastructure of democratized finance being in place, an event like the GameStop short squeeze in early 2021—a collective effort of conjuring up a decentralized form of investment momentum, exercised by so-called retail investors (the “dumb money”) paired with the enormous leverage of institutional investors (the “smart money”)—arguably would not have been possible.

Behavioral economist Robert Shiller is a great supporter of the endeavor of democratizing finance. However, some of his hopeful writing produced in the wake of the Occupy Wall Street movement and at the cusp of the age of platform capitalism, sounds almost naive compared to the darker turns many allegedly democratizing fintech endeavors have taken. For example, he writes: “financial innovation can (...) channel our gambling impulses into something more constructive. It can make speculative bubbles less of a problem, and help make prices in financial markets better reflect fundamental information.” That projection certainly does not line up with the critique brought forward towards Robinhood and similar fintech start-ups, who are accused of exactly incentivizing these behavioral patterns.


See also