Identification, the fourth function of money

This was an original contribution to The Conversation (France). Posted as per original and creative commons licence.

Translated from the French by the author with Deep L

Patrice Baubeau

Senior Lecturer HDR, History, Economic History, Université Paris Nanterre – Université Paris Lumières

Declaration of interest

Patrice Baubeau has received funding from the Comue UPL for a research project on the social uses of money and the “money of the poor” for the period 2019-2021.

Université Paris Nanterre provides funding as a founding member of The Conversation FR.

A short detour through history allows us to place the question of the three functions of money traditionally identified: standard of value, intermediary of exchanges and reserve of value, in a broader framework. This perspective reveals a fourth fundamental function, identification, which denotes the common, political and social origin of the monetary fact.

Emerging monetary tools, such as bitcoin, state cryptocurrencies, or virtual currencies used in video games, give particular weight to this function of identification and to the political and social consequences that are attached to it.

The question of identification appears alongside Aristotle’s analyses of money, in The Politics and The Nicomachean Ethics, works that focus mainly on the Polis, its limits, its organization, its justice. He thus develops, following Plato, a political and civic reflection that associates the limits of the Polis with the birth of money, whose misuse can conflict with the rules of the ideal State: 1) by making the gain of foreign trade take precedence over the solidarity of internal exchanges; 2) by pricing the exchange value over the use value; 3) by opening the infinite space of desires and speculations over the limited domain of needs.

In short, such a currency, freed from its civic dimensions, tends to become its own end, feeding inequalities and discord within the Polis. This is why money, a political artefact, is also a marker of citizenship: its use inserts the user into a political, social and ethical community and identifies him/her with it.

This function of identification through currency possession or use has not remained the prerogative of the Greek city-states: a constant feature of currencies is the concern of issuers – unless they are counterfeiters – to identify the origin of their currencies, usually territorial or political, by marks indicating the place of production, the issuer or the date.

The multiplication of social and complementary currencies since the 1970s corresponds moreover most often to a “territorial” project consisting in constituting a limited-size monetary space of solidarity. In this way, the use of money can become not only a militant act (sustainable, alternative, ecological economy…) but also support or manifest an identity – this is notably the case with the Basque currency eusko.

Cash is not synonymous with anonymity

This fourth function, this function of identification, is largely neglected in economics – historians and especially numismatists are, on the contrary, very attentive to it. However, taking it into account leads to two important contributions.

First, it reverses the usual perspective on anonymity. Anonymity no longer appears as a property of cash, but becomes one of the modalities of identification by money, which allows a much more graduated approach.

Indeed, as we wrote in a research article in 2016, there is no “one” anonymity: anonymity is always, in fact, an anonymity with respect to a person or an institution. Consequently, it is susceptible to various configurations, which are therefore part of a general function of identification.

Thus, the usual payment in cash to a merchant that one knows does not, of course, entail any anonymity of the payer with respect to the merchant. On the other hand, it does guarantee the anonymity of the merchant’s customers with respect to their banker or tax collector.

Similarly, the use of a contactless payment card results in almost complete anonymity of the customer towards the merchant, as the payment receipt does not include any exploitable element of identity, but precisely identifies the customer to the bank issuing the payment card or to the bank holding the merchant’s accounts.

In general, a process of “nationalization” of money has progressively made the limits of the modern state coincide with those of the monetary spaces of which these states have become the masters.

At the same time, the state assumes another function that is crucial for the proper functioning of civic and social life, beyond payment systems alone: the identification of individuals. This function has grown considerably since the 19th century with the development of various forms of civil status and social security, as well as the rise of enfranchisement and personal ballot.

Consequently, in a State governed by the rule of law, not only do individuals have a right to an identity that the State cannot deny them, but the methods of identification fall within the domain of the law, with the legal guarantees that surround it.

Monetary innovations change the game

Today, new monetary innovations remind us of the importance of this fourth identification function. A first model, already old, consisted in delimiting virtual spaces within which specific monetary forms are employed: massively multiplayer “game” platforms generally provide techniques for accumulating symbols of wealth in order to attach objects, services or skills to avatars.

Already in this case, the watertightness between virtual and real is imperfect, since player “farms” have developed with a view to acquiring objects or abilities in the virtual universe that are then resold in real currency to players who wish to perform. In a way, this amounts to exchanging virtual currency for real currency via virtual goods and services.

In this context, identification takes place within the closed universe of the platform in question, since the “identities” of the avatars are entirely controlled by the provider. The latter also determines the conditions of issue and use of “its” currency. We find again, but limited to a closed and virtual universe, the model of control of money and identities that territorial States carry out.

The second model, which is much more recent, stems from the innovation represented by the blockchain. The blockchain includes an identification device that validates the transaction between a seller and a buyer and makes the record of this validation available to other participants in the payment system.

On the one hand, the identification of transactions makes it essential to identify the users who carry out exchanges. But on the other hand, this identity corresponds to the one declared within the virtual monetary space, and not to an identity as recognized by a State. Moreover, nothing prevents an economic agent from creating a different avatar for each of the existing cryptocurrencies, or even from associating different IP addresses (those that characterize the machines that access the Internet). It is no coincidence that Bitcoin has quickly become the preferred currency of cybercriminals.

This is where Facebook’s diem (ex-libra) virtual currency project makes sense. Users have an identity, guaranteed by the platform and to which, more and more, rights and duties are attached, concerning freedom of expression, the integrity of the “profile”, and even the post-mortem destiny of accounts.

The risk of a lucrative and selective form of identity

Facebook is therefore able to identify its users very precisely. This is the core of its business model: selling the individual characteristics of these profiles. If a currency of its own, or almost, such as the diem, is associated with the Facebook ecosystem, the company or, more likely, the constellation of lucrative interests of which Facebook is the heart, will be able to simultaneously manage its own monetary assets and the proofs of identity related to their use.

However, leaving money in entirely private hands is not always a good idea, even if the management of money by States has also led to disasters, such as the hyperinflationary episodes in Germany in 1923, in Hungary in 1946 or in Zimbabwe since 2000. Leaving the identification of human beings in private hands is even worse: what would happen to a human being whose only proof of existence is a private act, possibly transferable and of which third parties cannot become aware?

Thus, abandoning to the highest bidder these two key elements of the construction of the ancient Polis or of the modern State, which are money and identity, announces the worst of all worlds.

Solutions exist, old and new. Central bank digital currencies (CBDCs), being tested in Asia and Europe, bear witness to this. They limit the risk of substituting a lucrative form of identity for the civic form on which our rights depend, by subjecting payment to identification rather than the reverse.

In a world where the issuance of monetary assets, the creation of identities and the management of the corresponding profiles are no longer the sole responsibility of States, it is indeed becoming urgent to reflect on the articulation of these different dimensions. Only then may we preserve the benefits of the innovations brought about by the rise of the Internet without losing our rights, our goods and our beings. And therefore we must take into account the fourth function of money: identification.

Is there a “concrete wall” for women in Latin American Fintech?

This was an original contriobution to Open Banking Excellence blog. Verbatim copy under creative commons licence.

Bernardo Bátiz-Lazo (Newcastle Business School, Northumbria University, UK), and
Ignacio González-Correa (Department of Economics, Universidad de Santiago, Chile)

We initiated a project to explore the barriers women face to become fintech entrepreneurs in Latin America. Microfinance and then fintech start-ups have focused and helped women “at the base of the pyramid” (by reducing frictions and increasing financial inclusion), but what is the situation of others and particularly towards the “top of the pyramid”? 

We believe this is an important research question because, as a growing sector within the region and other parts of the world, the fintech industry should offer gender-neutral opportunities for development and self-fulfilment. Cristina Junqueira, Co-Founder of Nubank in Brazil in 2013, the most successful fintech start-up in the region to date, suggests these opportunities are real and can be handsomely rewarded. At the same time, however, anecdotal evidence suggests there are important gender disparities in finance and engineering. Does this mean that the case of Junqueira is a fluke?  We therefore asked a group of men and women who were either employed in or had established a fintech start-up across the region to help us identify the barriers women have to wrestle.

An initial challenge was to establish industry boundaries. There is no consistent use of the term fintech. Some root the process to the 19th century while the adoption of electromechanical devices and computer technology came about throughout the 20th century. By the mid-80s, we see the appearance of its acronym (FinTech, Fintech or fintech) encompassing the business and financial impact of technological change internationally. Yet, it was not until 2012 when the concept takes off and is associated with newcomers using applications of information and communication technologies to contest retail financial services.

Since then, the creation of fintech start-ups has been particularly active in Brazil, Mexico, Colombia, Argentina, and Chile. By 2018, there were more than 1,000 fintech companies in Latin America and the Caribbean where Nubank, Mercado Pago (the payments subsidiary of Mercado Libre), Ualá, C6 Bank, and Prisma stand out as the largest and most successful by any measure. Meanwhile, according to Statista.com, in 2020, $1,977 million dollars of venture capital were invested in Brazil, $567 in Mexico, $210 in Uruguay, and $187 in Colombia.

There is evidence by IDB et al. (2018) and FinteChile& EY (2021) to suggest that in Latin America women represent 30% of the workforce in fintech companies while only 1 in 10 fintech companies have achieved gender parity. Further, 80% of all fintechs have at least one woman on their payroll while in Colombia and Argentina, 16% and 12% of the fintech start-ups, respectively, have at least 50% of women on their payroll. Likewise, 20% of start-ups included women in their founder team in Chile (35% for all the region). Colombia, Mexico, Peru, and Uruguay were the countries with the highest proportion of fintech enterprises with at least one woman on the founding team. Moreover, women founders tend to have more inclusive and diverse teams and seek financial inclusion.

The gender gap, however, widened when considering teams that included women establishing a start-up as these received 15% less funding than men-only teams, while 45% of women-only start-ups did not receive external financing at all. These figures stand out when compared with the performance of fintech start-ups in the rest of the world, where enterprises with at least one woman as founder obtained results that were 63% more positive than those established by male-only teams.

With the previous evidence in mind, we asked a group of men and women who were either employed or had established a fintech start-up across the region to help us identify the barriers women have to contend to become founders. Our initial query evolved around the importance of communities and external networks for the success of start-up founders. On the one hand, male interviewees articulated the importance of having both formal and informal communities prior to and during the early stages of the start-up. They argued that making use of their community was key to sharing resources, information and gaining critical support. On the other hand, female interviewees often saw no value in forming a community prior to start-up. They would engage with other women only after having been active in fintech events. Reasons for this were not altogether clear and something we plan to investigate further. However, some did mention giving priority to family commitments for their use of spare time.

A notable result was that most male respondents in our sample saw no significant barriers or hurdles in the way for women to enter fintech either as founders or employees. To the contrary, female interviewees were quite articulate in their description of a “glass wall”, “maze” or “labyrinth” in the way for them to access and fill spaces which have been typically dominated by men. For instance, even though there are no formal barriers for women to pursue a career in economics, finance, technology or engineering, few actually choose this path. Then recruitment advisors often find it difficult to appoint women to senior positions as they are seldom given opportunities to develop and demonstrate abilities to overcome challenges early on.

It is also the case that throughout the 20th century in Latin America, self-employment has been move comment amongst women in lower income strata than the educated (see the work of Escobar Andrae). This trend seems to remain the case as a 2016 survey in OECD economies, reported that one in ten employed women was self- employed, almost half the rate of self-employed men (18%). In other words, there are simply too few women owned businesses or public companies where women have reach the top positions.

There is thus a vicious cycle. Few women pursue a career in economics, finance, technology or engineering. Few educated women become self-employed. And for those handful that do follow this path,  a lack of opportunities prevents them developing a track record showing an ability to sort out challenges and expertise, thus closing many doors to senior positions or having the skills and track record to become fintech founders. In turn, this results in a very small pool of female directors that can signal positive opportunities for development to or actually mentor young people.

These results led us to believe that our future research should explore in greater depth the importance of “soft skills” such as networking and community building for the establishment of fintech start-ups. This will also entail looking at how training opportunities and women-focused support networks can help towards making fintech entrepreneurship more accessible and equitable. We also are to query the socio-economic norms and barriers which disincentivise middle class educated women to become self-employed.