In its recent report, ‘Policy responses to fintech,’ the Bank of International Settlements (BIS) celebrates the global progress of regulators to further financial goals of safety, soundness, and consumer protection in light of the challenges brought by fintech.
Overall, the global fintech and regulatory communities should celebrate the expansion of financial inclusion and fintech adoption over the last decade. However, the challenge will be how regulators rise to occasion as new risks rise around data, new entrants in the form of big tech, and embarking on a transition to becoming a data- and tech-driven regulator.
Here are some key takeaways from the report:
1. The Fintech Tree is a powerful metaphor - showing the symbiosis between both policy (roots) and financial services (leaves) to develop a strong overall financial ecosystem (tree).
The Fintech Tree differentiates between three, highly-connected themes - fintech activities (leaves), enabling tech (trunk), and policy enablers (roots).
Fintech activities refer to the diverse array of products and business models within fintech. Enabling tech refers to the underlying technology that has heralded the fintech revolution, principally digital technologies like APIs, cloud computing, mobile UIs and applications, and advanced analytics like machine learning (ML) and AI. Lastly, policy enablers are the actions taken by regulators to nourish (or hinder in some instances) the development of fintech.
Taken together, the Fintech Tree shows how these three themes work in tandem to nourish a stronger, overall financial ecosystem, represented by the tree.
Though not addressed in the paper, the tree metaphor is apt in another respect: there is a symbiosis between regulators and fintech actors.
Regulators can enable fintech to flourish, just as fintechs enable regulators to carry out their missions with new, or stronger tools, capabilities, and talents. In the Fintech Tree, just as roots (policy) provides raw ingredients for leaves (fintech) to thrive, the leaves (fintech) also provide the outputs (technology, talent, tools) for roots (policy) to use to build a stronger foundation for the entire tree.
2. Regulators have presided over a decade of substantial advances in financial inclusion and fintech adoption; however, regulators have more work to - especially related to data.
Since the financial crisis, both financial inclusion and fintech adoption have expanded on a global scale. According to the World Bank’s Findex database, the proportion of banked adults has increased to 69% (2017) - an increase from 51% at the beginning of the decade.
This has occurred in part due to the expansion of fintech. In the latest EY Fintech Adoption Index, fintech adoption has continued to expand across the 29 markets it tracks.
As the BIS report details, regulators have been busy evolving their regulatory frameworks. Financial activities like digital banking, credit products, and robo-advising score highly on regulator’s adapting their existing framework to cover new actors.
For financial activities that are relatively newer in nature - like crowdfunding - many regulators have developed new regulatory approaches to accommodate these innovations.
While global progress has been made on clarifying expectations related to certain enabling technologies like APIs, cloud computing, biometrics, and cybersecurity, regulators lag behind on the area of data and analytics.
This is especially true in the realm of ML/AI, data protection frameworks, and supporting Open Banking environments with rules governing data portability and access. Data and its regulation represent a new frontier and competency for regulators.
3. In the new decade, regulators face challenges that will demand a data-driven and tech-driven approach to oversight.
Over the last decade, regulators have navigated the rise of fintech, the expansion of financial services to more, previously unbanked peoples, and the commercial adoption of new technologies.
The 2020s will bring new challenges and risks. Key among them:
Entrance of big tech to financial services
New digital currencies (Libra and China’s digital yuan are just the beginning)
Interoperability of tech & data standards (e.g., open, common standards that encourage consumer-friendly innovation and competition)
Coordination with other regulatory bodies related to tech, data, & oversight of new actors
Despite the limited capacity of many regulators, they are rising to the challenge. Many have embarked on their own digital journey and are adopting regtech and supervisory technology tools to increase their regulatory efficiency and effectiveness. Just as financial services has been revolutionized by digital technologies, so too will the regulator of the future.
Where to next?
The BIS report provides a useful framework and progress report on regulator’s responses to fintech. Not all regulatory actions, however, may qualify as a ‘policy enabler.’ Some, surely, must act as a blocker or decelerator. As a next step, the authors could highlight ‘policy blockers’ and trade-offs more deeply to give regulators a clearer roadmap of where to go next and for fintechs to understand where they may need to raise their voice and advocate for change.