Regulating FinTech Matthew Saal, Lead Financial Sector Specialist Dorothee Delort, Senior Financial Sector Specialist Helen Gradstein, Financial Sector Specialist World Bank Group Agenda • FinTech and Financial Inclusion • The Bali FinTech Agenda • Policy Actions around Regulating FinTech • Resources • Annex: Country Case Studies What is FinTech Advances in technology that can transform the provision of financial services by spurring the development of new business models, applications, processes, products, and services Source: Bali Fintech Agenda paper 4 Source: World Economic Forum New technologies and Fintech impact a wide range of financial services 5 FinTech has enormous potential to expand financial access and inclusion Potential for Fintech to: • Reimagine financial processes and business models • Enable new entrants and competition within the financial service value chain (disaggregation, specialization, open APIs) New and Enhanced Improved more tailored • Enable services to be more efficiencies coverage of/ types of accessible (incl. through mobile and reduced access to products, networks), often at lower cost costs, and financial services, and also risk • Leverage electronic data to tailor services delivery management product design, reach new channels consumers, accurately price risks [and to enable AI] Potential Fintech-enabled Outcomes 6 6 FinTech has enormous potential to expand financial access and inclusion • New, affordable products or services that address the needs of the excluded and underserved customer segments (M-Pesa, BitPesa). • Distribution channels that reach out to dispersed Potential FinTech-Enabled populations in remote and rural areas (AliPay). • Operational efficiencies that allow financial services Outcomes providers to serve low-margin clients profitably (Yu’e Bao). • Business models that allow financial services providers to serve marginalized clients to achieve scale (PayGo). • Ways to address compliance (e.g., customer due diligence) and riskmanagement (e.g., credit scoring) barriers to financial inclusion (iProov). • Increased competition that may prompt incumbents to focus more attention on unserved and underserved segments. Leveraging the digital opportunity does not come without risks challenges 8 Risks and Benefits Although FinTech has it also poses the potential to rapidly expand financial risks access and inclusion Regulatory & Supervisory Fraud or other Depositor & investor risk: Perimeter, Capacity: market abuses, inc. AML/CFT: New providers may be Fintech players may not fit with Access to customer information can lead to insufficiently regulated / abuse without adequate consumer regulatory/ supervisory remits. monitored, and may Developing country supervisors protection mechanisms. not fully comply with disclosure or have systems & capacity constraints Cryptocurrencies can be used for illicit transparency requirements activities Over-indebtedness: Risks of cyber attack: Financial Stability: New/easier access to digital Cyber attacks can be at the Unsupervised linkages; credit may cause borrowers to regulator, financial market Exacerbate credit cycles; be more susceptible, infrastructure, financial Untested credit models; Affect particularly without adequate institution or consumer level banking system profitability financial capability. 9 9 Background to Bali FinTech Agenda Rapid transformation of financial sector via advances in technology Given fintech’s global nature, country authorities’ requests to facilitate information sharing and cooperation Outline high-level considerations for policy makers and the international community – still at early stages of information gathering Engagement with Standard Setters IMF-World Bank interest reflects our universal membership, focused on respective areas of expertise and mandate 12 Elements, grouped into 4 Objectives Foster enabling environment to harness opportunities Promote Strengthen financial international sector policy collaboration framework Address potential risks and improve resilience (V) Monitor (VI) Adapt Developments Financial system Regulatory Closely to Framework and Deepen Supervisory Understanding of Practices for Stability Trust Development Evolving Financial Orderly (XI) Encourage Systems Development and International Stability of the Cooperation and Financial System Coordination, and (VIII) Modernize Legal Information Sharing (IV) Foster Fintech to Promote Frameworks to Financial Inclusion Provide an and Develop Enabling Legal Strengthen Data Financial Markets Privacy Data Insolvency Landscape Resolution Security financial sector Smart Payments Contracts policy framework (IX) Ensure the Stability of Foster enabling AML/CFT RegTech Monetary and environment to Financial systems harness opportunities (VII) Safeguard (XII) Enhance Collective (III) Reinforce Financial Integrity Promote Surveillance and Assessment of Competition and international Financial Sector Commitment to Open, Free, and collaboration Risks Contestable Markets Address potential risks and improve Business continuity Operational risk management Data ownership Consumer protection resilience Privacy Data security and integrity Cyber security Concentration risk management (II) Enable New (X) Develop Robust Technologies to Financial and Data Enhance Financial Infrastructure to Service Provision Sustain Fintech (I) Embrace the Benefits Fintech revolution (II) Enable New Technologies to (I) Embrace the Fintech revolution Enhance Financial Service Provision Key issues: strengthen institutional capacity; Key issues: facilitate development of and fair improve communication with stakeholders and access to telecom and internet infra; financial across agencies; and expand consumer infrastructure, digital IDs; digitize Government education data repositories; and leverage technology to make cross-border payments efficient. 1 4 Fostering enabling environment to harness opportunities (IV) Foster Fintech to Promote Financial Inclusion and Develop (III) Reinforce Competition and Commitment to Open, Free, and Financial Markets Contestable Markets Key issues: treat similar risks equally, apply laws Key issues: embed fintech in national financial and regulations proportionately; avoid market inclusion and literacy strategies; foster concentration and abuse; foster standardization knowledge exchange; digitize government and interoperability payments; leverage fintech to advance financial sector development 1 5 (VI) Adapt Regulatory Framework (VIII) Modernize Legal and Supervisory Practices for Frameworks to Provide an Orderly Development and Stability Enabling Legal Landscape (V) Monitor Developments of the Financial System Closely to Deepen Understanding of Evolving Financial system Financial Systems Data Insolvency Privacy Data Resolution Security Stability Trust Development Smart Payments Contracts Key issues: enable flexible data Key issues: ensure regulation Key issues: legal predictability to spur gathering frameworks to identify remains adaptable and conducive investment; legal basis for smart obstacles to innovation and new to development, inclusion, and contracts and electronic signatures; risks competition; consider new address legal gaps approaches like regulatory sandbox; address new risks and (cross-border) arbitrage 1 6 (IX) Ensure the Stability of (VII) Safeguard Financial Monetary and Financial (X) Develop Robust Financial and Integrity systems Data Infrastructure to Sustain Fintech Benefits AML/CFT RegTech Business continuity Data ownership Operational risk management Consumer protection Privacy Data security and integrity Cyber security Concentration risk management Key issues: mitigate AML/CFT Key issues: Digital currencies, Key issues: Cyber security and risks that crypto-assets and distributed ledger applications to operational risk management, risk of other Fintech developments payments, lender of Last Resort and concentration in third-party service may pose, potential of Regtech other safety net arrangements providers, data governance to strengthen AML/CFT frameworks compliance 1 7 (XI) Encourage International Cooperation and (XII) Enhance Collective Surveillance and Coordination, and Information Sharing Assessment of Financial Sector Risks Key issues: to avoid regulatory arbitrage and a “race IMF and World Bank can provide capacity to the bottom”, to monitor global risks, to facilitate a development in the areas of financial global enabling regulatory and legal environment for inclusion, consumer protection, statistics fintech, and to stimulate sharing of opportunities gaps, financial integrity, regulatory and legal frameworks, and cyber security 1 8 Such approaches, like a Sandbox, can be developed specifically for innovations that enhance financial inclusion Priority can be given to innovations relevant for financial inclusion 2 0 Regulatory Tools DIFFERENTIA REGULATO TED RY REGULATION REFORM/LA W New innovations Virtual legal certificate Enactment of tested in a live Environment issued by the regulations that environment with where authority to support FinTech involvement from innovators can indicate that it startups and the regulators test their does not object consumer •Case-by-case products/service the product or protection, basis s in a time services provided competition, • by the fintech No special •Requires active bound manner. resources for financial stability involvement by •Greater entity. and financial maintenance are regulator transparency Relevant for inclusion required •Difficult to and replicability smaller markets, •Modifications to Example: India: scale up; hard to • Relevant for when the risk existing profile of the Payments Bank & ensure equal markets with regulations • No special innovations are Trade Receivables treatment good Platform license. •Examples: EU resources for generally well- •Examples: supervisory (PSD2, GDPR), . maintenance are understood. Philippines, capacity and Mexico (FinTech required Tanzania high level of Example: Kenya Law) active, potentially non- licensed players Sample Actions for Regulating FinTech within an NFIS Establish policy windows to Assessments / Digital Strategies prioritize the adjustment of to encourage innovations or legal / regulatory framework enable innovations for Financial specifically for FinTech Inclusion or to adjust the current innovations that enhance legal framework (key examples Financial Inclusion include enabling eKYC, digital ID, alternative credit scoring, cross- border remittances, blockchain) Explore establishing a structured experimental approach (like a Sandbox) or even accelerators / hubs Establish Committees / Working specifically to encourage Groups to monitor FinTech for development of innovations financial inclusion for Financial Inclusion 2 2 • Regulators and supervisors need to conduct a deep, three-parts assessment pertaining to, at minimum, their institutional mandate and regulatory framework, supervision capacity and FinTech market Asking yourself about (i) your institutional and The legal and legal mandate to implement frameworks like a regulatory sandbox; (ii) how much flexibility already framework and exists; (iii) what changes to the current mandate frameworks might be required; and (iv) what implications on compliance. Undertaking an honest review of your supervision capabilities. Are you in a position to carefully monitor and manage risks, for the financial sector and for consumers? Do your have enough technical knowledge? Taking a good look at Current supervision your current FinTech The current FinTech and oversight market, which helps to market capacities clarify the need for a new approach to FinTech. 2 3 • A few, minimum actions have been identified as becoming common practice • These actions should implemented in general, and with regards to a window for Financial Inclusion (i) Regulator centric, internal market watch task force. Regulators should institute an internal, regulator centric market watch with representatives from different departments (legal, IT, payment systems, financial stability) to assess and watch the emergence of FinTech innovations both domestically and internationally. Prior to selecting an approach to regulating FinTech, regulators and supervisors should increase their resources and build capacity to understand FinTech, new technologies, business models and their implications on the market and on regulation. (ii) Inter-regulatory agencies Committee. A cross-institutional committee can be established and include relevant financial sector regulators and institutions for FinTech including (but not limited to) the central bank, the ministry of finance and other related ministries, the regulators for securities and insurance / pension (if other than the central bank), consumer protection agencies, the telecommunications regulator, etc. The committee can help foster and build capacity towards FinTech, understand the FinTech market from the perspective of other regulators and institutions, as well as enable a platform to help identify and understand an appropriate approach to FinTech. (iii) Sectoral-Stakeholder forum. A sectoral stakeholder forum should include the majority of representatives from the cross- institutional committee, and also include financial sector providers (banks, non-bank financial institutions), FinTech companies, local and and other related market players and relevant stakeholders. The sectoral-stakeholder forum should aim to result in a knowledge exchange that increases the regulator’s sophistication in their understanding of FinTech innovations and business models and the provider’s appreciation of the policy objectives and expectations of the regulators. 2 4 Resources • Regulatory Sandboxes and Financial Inclusion. CGAP. (https://www.cgap.org/sites/default/files/researches/documents/Working-Paper-Regulatory-Sandboxes-Oct-2017.pdf) • G20 High-level Principles for Digital Financial Inclusion. GPFI. (http://www.gpfi.org/sites/default/files/documents/G20%20High%20Level%20Principles%20for%20Digital%20Financial% 20Inclusion%20-%20Full%20version-.pdf) • The Bali FinTech Agenda. IMF. (https://www.imf.org/en/Publications/Policy- Papers/Issues/2018/10/11/pp101118-bali-fintech-agenda) • Distributed Ledger Technology and Blockchain. WBG. (http://documents.worldbank.org/curated/en/177911513714062215/Distributed-Ledger-Technology-DLT-and-blockchain) 2 6 Thank you! Questions? Example: Cross-border payments and eKYC Today: SWIFT + Correspondent = Relay Tomorrow 1.0: Bank-to-Bank in a peer-to-peer manner Tomorrow 2.0: Party-to-Party = No banks involved at all? 29 2 9 Example: Cross-border payments an eKYC 30 3 0 Example: Digital ID - the case of Aadhaar • eKYC: Aadhaar authentication sufficient for opening basic bank accounts and was central to the mass account opening campaign - PMJDY (Pradhan Mantri Jan Dhan Yojana). Over 250 million accounts opened in 2 years. • G2P: De-duplication and targeting of Government subsidies and making Aadhar the “payment address” – enabling paying subsidies by mapping Aadhar number to bank account – Public Distribution System (ration), LPG Cylinders, Social Safety Net programs etc. • Aadhar based authentication of payment transactions and Digitally signing legal documents: replacement of PIN for ATM transactions; Signing Tax Returns, Registering Title documents, registering lease-rentals etc. • Digital locker service: Mobile based, intended to provide secure access to Government-issued documents and released based on approval of individual: 4.2 M users; 6 M uploads; 1.6 B issued documents 31 3 1