## Fintech Payments in Public Financial Management: Benefits and Risks

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---

### Introduction
- Definition and scope
  - Fintech: “technologically enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services” (Financial Stability Board, 2022).
  - Focus: fintech payments and their applications in public financial management (PFM).
  - PFM: systems that produce information, processes, and rules to support fiscal policymaking and implementation across budget formulation, approval, and execution (Cangiano, Curristine, and Lazare, 2012).
  - Core government functions emphasized: treasury payments and non-tax revenue collection.

### I. Fintech payments developments
- Mobile money
  - Mobile payment accounts enabling deposit, transfer, and withdrawal without bank accounts; e-money defined as an electronic store of monetary value (European Central Bank, 2016).
  - Agent model: customers cash in with MNO agents; agents require liquidity (cash and e-money).
  - Examples: M-Pesa (Kenya), GCash (Philippines), EasyPaisa (Pakistan).
  - Statistic: in Kenya, mobile money represents 85 percent of all non-cash payment transactions, although only 10 percent of total national payments in value in 2019 (Central Bank of Kenya).
- Internet-based fintech payments (e-payments)
  - Online payments, mobile banking, payment gateways, digital platforms and Big Tech entry; can process larger transactions and facilitate international remittances.
  - Example scale: PayPal (August 2021) — presence in more than 200 countries/regions, supported 25 currencies, more than 400 million active users, processed more than 4.7 billion transactions.
  - Operational limits example: verified PayPal account single transaction limit of $10,000 (PayPal website, as of October 2022).
- Digital money
  - CBDC (retail and wholesale), eMoney, stablecoins and crypto assets.
  - CBDC: publicly issued, denominated in national currency; design choices (account-based vs token-based) affect anonymity and operational requirements.
  - Stablecoins: privately issued, backed by safe assets/currencies.
  - Crypto assets (unbacked): high price volatility; minting governed by protocol algorithms and consensus mechanisms.

### Key operational steps and fintech value propositions
- Three operational steps in a payment:
  - (i) verification of payment details
  - (ii) authorization
  - (iii) request for transfer
- Fintech roles:
  - Aggregator: large user-base digital payment platforms producing network effects.
  - Digital money holders: customers can store value digitally, sometimes pegged to strong currencies.
  - Digital wallets: one-stop accounts for multiple payment services.
  - Data services: transaction activity and digital footprints enable customer due diligence and business/market analytics.

### II. Potential fintech applications for PFM
- Areas of PFM where fintech can be utilized:
  - Government-to-persons (G2P)
  - Government-to-business (G2B)
  - Persons-to-government (P2G)
  - Business-to-government (B2G)
- Specific PFM functions with promise:
  - Salaries and pensions (G2P)
  - Payments to vendors (G2B)
  - Cash transfer programs (G2P)
  - E-vouchers for health services
  - Park entrance fees and transit fines (P2G)
  - Passports fees and agricultural services charges (P2G & B2G)
  - All categories of non-tax revenue

### Empirical and illustrative examples
- COVID-19 response and social assistance
  - Developing countries launched more than 155 programs that leveraged digital payments for delivery of new or expanded social assistance programs during 2020 (Gentilini et al. 2021).
  - Togo’s Novissi: built and launched in 10 days (April 2020); beneficiaries enroll and receive mobile money payments within 120 seconds via basic mobile phones; distributed $34 million to a quarter of its adult population.
  - India: transferred funds directly to bank accounts of almost 500 million beneficiaries under 2020 COVID-19 relief packages using existing PFMS and other IT systems (Verma and Raj, 2020).
  - Brazil: beneficiaries of direct cash transfers rose from 14 million to 50 million after leveraging cloud-based online banking applications (Una, van Eden, et al. 2020).
  - Costa Rica: SUPRES platform connected to central bank SINPE; during first quarter of 2022 nearly 300,000 beneficiaries received payments through the platform.
- Efficiency and cost savings
  - Niger: digitizing social transfers estimated to reduce administrative costs of cash transfers by 20 percent vs manual cash transfers; reduced travel and wait time for recipients by 40 minutes (Aker et al. 2013, 2016).
  - Mexico (mid-1990s transition to electronic payments): annual cost savings of $1.27 billion, or 3.3 percent of total expenditure on salaries, pensions, and social transfer programs (Babtaz, 2013).
- Non-tax revenue collection examples
  - India: integrated non-tax revenue portal with banks and aggregators, linked services to accounting codes and government collection accounts; reconciliation via unique transaction ID.
  - Dominican Republic: online and mobile banking collections for different non-tax revenues.
  - Rwanda: IremboGov GovTech solution (introduced 2015) processes public service applications and payments (including mobile money); in early 2020 about 300,000 service requests processed monthly.

### Tables and Figures referenced
- Examples of fintech payment applications in PFM and their benefits are catalogued (Table 1).
- Fintech payments in Treasury’s G2P and G2B: main applications, operational benefits and enablers (Table 2).
- Use of fintech payments in non-tax revenue collection (Table 3).
- Digitalization in Global Banking (Figure 1).
- Social Safety Nets, before and during the COVID-19 Pandemic (Figure 2).

### Boxes referenced
- Box 1: Fintech Applications in Senegal for Tax Collections.
- Box 2: Utilizing e-vouchers in India.

### Box 1 — Senegal: summarized findings
- Digital initiatives from a 2016 IMF-supported hackathon include M-Tax (SMS, USSD, interactive voice) for declarations and payments.
- Adoption/compliance improvements (2016–2019):
  - M-Tax – small businesses declaring and paying taxes increased from 0 to 70 percent.
  - E-Tax – online declarations and payment by large-size taxpayers grew from 1 to 100 percent, and medium-size taxpayers from 0 to 65 percent.
  - Electronic filing of annual financial statements grew from 0 to 91 percent (large-size taxpayers) and to 42 percent (medium-size taxpayers).
  - Electronic monitoring of audit activities increased from 0 to 100 percent.
- Integration considerations: FMIS integration with banks/aggregators, updated business processes, flexible bank reconciliation; partial adoption risks loss of information, fraud, reconciliation challenges.

### III. Benefits of fintech applications in PFM
- Three main informational/operational advantages:
  - Greater fiscal transparency: generation of high frequency and reliable data publishable through fiscal transparency portals; enhanced accountability and traceability.
  - Better budget planning and execution: improved information for resource allocation; improved budget execution especially for cash transfer social programs.
  - Improved cash management: stronger Treasury Single Account (TSA) operations and improved daily cash management based on timelier and more precise data.
- Operational benefits when integrated properly:
  - Automated transfers and fund reconciliation to include public resources in TSA.
  - Timely reconciliation of collections via unique transaction identifiers.
  - Faster, more precise establishment of treasuries’ cash positions.

### IV. Risks and challenges of fintech applications in PFM
- Technology and operations
  - Operational complexity from multiple services, agent networks, fund management, and many counterparties.
  - Need for robustness against cyber-attacks; resilience to peak-time demand; interoperability and integration with other payment services and public systems.
  - Size-of-payments constraint: mobile money agents’ limited capacity to hold cash/e-money limits ability to deliver large payments and absorb cash-out surges.
- Market conduct and governance
  - Fund safekeeping: e-money backing funds held in escrow/trust accounts; risk of bank failure and deposit concentrations above deposit insurance limits; need for segregated funds and conservative treasury investment policies.
- Customer rights and data privacy
  - Concentration of transaction data with fintech firms could weaken banks’ credit assessment role and create information monopolies; need to update regulation and supervision to address data concentration risks.
- Systemic and macro-financial risks
  - Fintech providers can evolve into systemic players; failure could disrupt payment systems and harm retail users with limited alternatives.
  - Disintermediation of banks: large digital-money balances held with fintech providers act like deposits and could reduce bank funding, impacting bank profitability, liquidity management, lending, and financial stability.
- Compliance and regulatory capacity
  - Need for infrastructure and governance to meet AML/CFT, auditing, and reporting requirements as fintechs scale.

### V. Crypto assets and CBDC: PFM-specific risks and trade-offs
- Crypto assets — PFM risks and challenges
  - TSA functioning and cash management:
    - High volatility in crypto asset prices might lead to unpredictable cash requirements.
    - Crypto assets could disrupt a centralized TSA model by introducing crypto e-wallets to subaccounts and bank accounts, weakening active cash management and tangling liquidity management.
  - Fiscal accounting and reporting:
    - Measurement of value and registration issues due to high volatility; value depends on timing of conversion.
  - Internal and external oversight:
    - Auditors need capacities to analyze nodes and transactions to audit crypto asset operations.
  - Storing private crypto assets:
    - Managed via exchanges, mobile wallets, or cold storage (e.g., Trezor); private key management is critical—losing a private key could mean permanent loss.
  - Fiscal risks if crypto is legal tender:
    - Example: El Salvador adopted Bitcoin as legal tender (alongside the U.S. dollar). In June 2021, a law enacted that the U.S. dollar will be used as a reference currency for accounting purposes, mandating acceptance of Bitcoin by economic agents in exchange for goods and services, and guaranteeing automatic conversion from Bitcoin to U.S. dollars through a trust fund.
    - IMF (2021c) quote preserved verbatim: “Initiatives to improve financial inclusion are welcome, but Bitcoin use carries significant risks and Bitcoin should not be used as an official currency with legal tender status. Narrowing the scope of the Bitcoin law will contain some of the macroeconomic risks. Strict regulation and supervisory oversight are needed to mitigate remaining fiscal, financial integrity and financial stability risks.”
  - Policy implication: adoption of crypto assets for public finance should not be considered without an adequate regulatory framework and accompanying processes, systems, and procedures to address related risks.
- CBDC — opportunities and trade-offs
  - Opportunities:
    - Programmability could be used for targeted payments by individual, purpose, or region.
    - Could enhance public spending accountability, address income and regional disparities, and design new fiscal policies.
  - Trade-offs/challenges:
    - Trade-off between expenditure targeting and individual data privacy depending on CBDC design.
    - Impact on government banking arrangements, cash management, and TSA design and operation should be analyzed.
    - Appeal for EMDEs and advanced economies depends on design and anonymity choices.

### VI. Preconditions and integration challenges for public sector adoption
- Preconditions for successful integration:
  - Development and operational quality of government FMIS and other core PFM digital solutions.
  - Digital infrastructure, digital ID solutions, institutional and technological capacity of finance ministries.
  - A wholistic government digitalization strategy.
- Common FMIS shortcomings impeding fintech adoption:
  - Difficulty capturing data to control payments against commitments and appropriations.
  - Challenges ensuring consistent flow of payments information between FMIS accounting databases and government bank accounts.
  - Timeliness issues in registering transactions in FMIS accounting systems.
  - FMIS operational weaknesses: poor internal controls, deficient cash management, connectivity infrastructure limitations, hardware obsolescence, lack of technical support and cybersecurity capacity.
- Implementation guidance notes:
  - Treasuries should maintain TSA coverage when adopting fintech payments—fintech solutions should facilitate inclusion of all public resources in the TSA by automating transfers and fund reconciliation.
  - For non-tax revenue collection, treasuries must build payment gateways or integrate with external gateways, list services with accounting classifications, and ensure backend integration with government bank accounts for timely reconciliation.
  - Close coordination with service-providing agencies is essential to ensure accurate collection, accounting, and reconciliation.
- Key enablers and constraints
  - Authentication challenges if digital ID solutions are not well established.
  - Integration with beneficiary databases required for targeted social transfers; fintech networks alone are insufficient without robust identification systems.
  - Privacy/legal compliance for sensitive PFM data.
  - Need to strengthen ministry of finance institutional and technological capacities.

### VII. Concluding findings and policy recommendations
- Principal benefits where fintech adoption is promising:
  - Increased efficiency and effectiveness of resource allocation and fiscal policy implementation (e.g., cash transfer social programs).
  - Strengthened fiscal transparency via reliable and more granular high-frequency payment data.
  - Faster and more precise establishment of treasuries’ cash positions and upgraded cash management practices when fintech payments are integrated with treasury management and government banking arrangements.
- Main implementation challenges to address:
  - Overcome legacy information systems, inefficient business processes, inconsistent data, and limited institutional capacity.
  - Manage operational risks, notably cyber risks.
  - Address challenges from digital money, crypto asset spread, and data privacy issues.
  - Adopt a robust digital ID as a key enabler.
- Overall recommendation:
  - Authorities and policymakers should handle fintech adoption with attention and care—implementing appropriate regulations, institutional capacity building, and technical measures to manage risks while realizing efficiency gains.

*Source: IMF Working Paper — wpiea2023020-print-pdf (Introduction).*

### Introduction  ________________________________________________________________________ 3

### Fintech Payments in Public Financial Management: Benefits and Risks

### Introduction
- Content starts on page 3.

### I. Fintech payments developments
- A. Mobile money (page 6)
- B. Internet-based fintech payments (e-payments) (page 7)
- C. Digital money (page 9)
- D. Risks and challenges (page 10)
  - Technology and operations (page 10)
  - Market conduct and prudent governance (page 11)
  - Customer rights and data privacy (page 11)
  - Risks to the payment system and regulation compliance (page 11)
  - Risks and challenges of cbdc (page 12)

### II. Potential fintech applications for the public financial management
- Overview (page 12)
- A. Treasury payments and fintech applications (page 14)
- B. Non-tax revenue collection (page 17)

### III. Benefits of fintech applications in pfm
- Overview (page 20)
- A. Strengthening fiscal transparency (page 21)
- B. Improving budget planning and execution (mainly for cash transfer social programs) (page 22)
- C. Upgrading cash management (page 23)

### IV. Risks and challenges of fintech applications in pfm
- Overview (page 24)
- A. Public sector institutional and technological capacities to adopt fintech applications (page 24)
- B. Potential pfm risks and challenges in implementing digital money (page 25)

### V. Concluding remarks
- Concluding section (page 28)

### Supporting materials listed in the content unit
- Boxes
  - 1. Fintech Applications in Senegal for Tax Collections (page 19)
  - 2. Utilizing e-vouchers in India (page 27)
- Figures
  - 1. Digitalization in Global Banking (page 9)
  - 2. Social Safety Nets, before and during the COVID-19 Pandemic (page 15)
- Tables
  - 1. Examples of Fintech Payment Applications in PFM and their Benefits (page 4)
  - 2. Fintech Payments in Treasury’s G2P and G2B: Main Applications, Operational Benefits and Enablers (page 14)
  - 3. Use of Fintech Payments in Non-Tax Revenue Collection (page 18)
  - 4. Main Weaknesses of the Core FMIS (page 24)

*Source: IMF Working Paper — wpiea2023020-print-pdf (Introduction).*

### Introduction

### wpiea2023020-print-pdf - Introduction

### Definition, scope, and purpose
- Fintech defined as “technologically enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services” (Financial Stability Board, 2022).
- Fintech firms can be start-ups, incumbent companies, or platform-based businesses; the paper focuses on fintech payments and their applications in public financial management (PFM).
- PFM defined as an “umbrella” concept covering systems that produce information, processes, and rules to support fiscal policymaking and implementation across budget formulation, approval, and execution (Cangiano, Curristine, and Lazare, 2012).
- Focus areas: treasury payments and non-tax revenue collection—two core government functions related to transferring and receiving resources where the IMF’s Fiscal Affairs Department provides capacity development.

### Fintech payment models covered
- Mobile money: payment accounts on phones enabling deposit, transfer, and withdrawal without bank accounts; e-money defined as an electronic store of monetary value (European Central Bank, 2016).
  - Agent model: customers cash in with MNO agents; agents require liquidity (cash and e-money) to service cash-in/cash-out.
  - Examples: M-Pesa (Kenya), GCash (Philippines), EasyPaisa (Pakistan).
  - Statistic: in Kenya, mobile money represents 85 percent of all non-cash payment transactions, although only 10 percent of total national payments in value in 2019 (Central Bank of Kenya).
- Internet-based fintech payments (e-payments): online payments, mobile banking, payment gateways, digital platforms and Big Tech entry; can process larger transactions and facilitate international remittances.
  - Example platform scale: PayPal (August 2021) — presence in more than 200 countries/regions, supported 25 currencies, more than 400 million active users, processed more than 4.7 billion transactions.
  - Operational limits example: verified PayPal account single transaction limit of $10,000 (PayPal website, as of October 2022).
- Digital money: CBDC (retail and wholesale), eMoney, stablecoins and crypto assets.
  - CBDC: publicly issued, denominated in national currency; design choices (account-based vs token-based) affect anonymity and operational requirements.
  - Stablecoins: privately issued, backed by safe assets/currencies; subset of crypto assets.
  - Crypto assets (unbacked) have high price volatility and minting governed by protocol algorithms and consensus mechanisms.

### Key operational steps and fintech value propositions
- Three operational steps in a payment: (i) verification of payment details, (ii) authorization, (iii) request for transfer.
- Fintech roles:
  - Aggregator: large user-base digital payment platforms producing network effects.
  - Digital money holders: customers can store value digitally, sometimes pegged to strong currencies.
  - Digital wallets: one-stop accounts for multiple payment services.
  - Data services: transaction activity and digital footprints enable customer due diligence and business/market analytics.

### Benefits of fintech in PFM (areas and core gains)
- Areas of PFM where fintech can be utilized: government-to-persons (G2P), government-to-business (G2B), persons-to-government (P2G), business-to-government (B2G) payments.
- Three main informational/operational advantages:
  - Greater fiscal transparency: generation of high frequency and reliable data publishable through fiscal transparency portals; enhanced accountability and traceability.
  - Better budget planning and execution: improved information for resource allocation; improved budget execution especially for cash transfer social programs.
  - Improved cash management: stronger treasury single account (TSA) operations and improved daily cash management based on timelier and more precise data.
- Specific PFM functions with promise: salaries and pensions (G2P), payments to vendors (G2B), cash transfer programs (G2P), e-vouchers for health services, park entrance fees and transit fines (P2G), passports fees and agricultural services charges (P2G & B2G), all categories of non-tax revenue.

### Empirical and illustrative examples of fintech in PFM
- COVID-19 response:
  - Developing countries launched more than 155 programs that leveraged digital payments for delivery of new or expanded social assistance programs during 2020 (Gentilini et al. 2021).
  - Togo’s Novissi: built and launched in 10 days (April 2020); beneficiaries enroll and receive mobile money payments within 120 seconds via basic mobile phones; distributed $34 million to a quarter of its adult population.
  - India: transferred funds directly to bank accounts of almost 500 million beneficiaries under 2020 COVID-19 relief packages using existing PFMS and other IT systems (Verma and Raj, 2020).
  - Brazil: beneficiaries of direct cash transfers rose from 14 million to 50 million after leveraging cloud-based online banking applications (Una, van Eden, et al. 2020).
  - Costa Rica: SUPRES platform connected to central bank SINPE; during first quarter of 2022 nearly 300,000 beneficiaries received payments through the platform.
- Efficiency and cost savings:
  - Niger: digitizing social transfers estimated to reduce administrative costs of cash transfers by 20 percent vs manual cash transfers; reduced travel and wait time for recipients by 40 minutes (Aker et al. 2013, 2016).
  - Mexico (mid-1990s transition to electronic payments): annual cost savings of $1.27 billion, or 3.3 percent of total expenditure on salaries, pensions, and social transfer programs (Babtaz, 2013).
- Non-tax revenue collection examples:
  - India: integrated non-tax revenue portal with banks and aggregators, linked services to accounting codes and government collection accounts; reconciliation via unique transaction ID.
  - Dominican Republic: similar online and mobile banking collections for different non-tax revenues.
  - Rwanda: IremboGov GovTech solution (introduced 2015) processes public service applications and payments (including mobile money); in early 2020 about 300,000 service requests processed monthly.

### Main risks and challenges (general fintech and PFM-specific)
- Technology and operations:
  - Operational complexity from multiple services, agent networks, fund management, and many counterparties.
  - Need for operational robustness against cyber-attacks; resilience to peak-time demand; interoperability and integration with other payment services and public systems.
  - Size-of-payments constraint: mobile money agents’ limited capacity to hold cash/e-money limits ability to deliver large payments and absorb cash-out surges.
- Market conduct and governance:
  - Fund safekeeping: e-money backing funds held in escrow/trust accounts; risk of bank failure and deposit concentrations above deposit insurance limits; need for segregated funds and conservative treasury investment policies.
- Customer rights and data privacy:
  - Concentration of transaction data with fintech firms could weaken banks’ credit assessment role and create information monopolies; need to update regulation and supervision to address emerging data concentration risks.
- Systemic and macro-financial risks:
  - Fintech providers can evolve into systemic players; failure could disrupt payment systems and have severe welfare effects for retail users with limited alternatives.
  - Disintermediation of banks: large digital-money balances held with fintech providers act like deposits and could reduce bank funding, impacting bank profitability, liquidity management, lending, and financial stability.
- Compliance and regulatory capacity:
  - Fintech firms need infrastructure and governance to meet AML/CFT, auditing, and reporting requirements as they scale.
- CBDC-specific risks:
  - Design implications for transaction anonymity (account-based vs token-based).
  - Operational requirements: interface with wallets, AML/CFT controls (CDD and monitoring), cross-platform compatibility; risk of migration of bank deposits to CBDC with pressure on bank funding, especially where banking systems are underdeveloped.

### Preconditions and integration challenges for public sector adoption
- Successful integration depends on:
  - Development and operational quality of government FMIS and other core PFM digital solutions.
  - Digital infrastructure, digital ID solutions, institutional and technological capacity of finance ministries, and a wholistic government digitalization strategy.
- Common FMIS shortcomings that impede fintech adoption:
  - Difficulty capturing data to control payments against commitments and appropriations.
  - Challenges ensuring consistent flow of payments information between FMIS accounting databases and government bank accounts.
  - Timeliness issues in registering transactions in FMIS accounting systems.
  - FMIS operational weaknesses: poor internal controls, deficient cash management, connectivity infrastructure limitations, hardware obsolescence, lack of technical support and cybersecurity capacity.
- Implementation guidance notes:
  - Treasuries should maintain Treasury Single Account (TSA) coverage when adopting fintech payments—fintech solutions should facilitate inclusion of all public resources in the TSA by automating transfers and fund reconciliation.
  - For non-tax revenue collection, treasuries must either build payment gateways or integrate with external gateways, list services with accounting classifications, and ensure backend integration with government bank accounts for timely reconciliation.
  - Close coordination with service-providing agencies is essential to ensure accurate collection, accounting, and reconciliation.

### Framing of the paper and caveats
- The paper is exploratory: fintech PFM applications discussed are options rather than prescriptive recommendations because they have not been fully tested across diverse circumstances.
- Structure summarized:
  - Section 2: core value proposition of mobile money, e-payments, digital money; challenges and risks.
  - Section 3: potential fintech adoption in treasury payments and non-tax revenue collections, advantages for fiscal transparency, budget planning/execution, and cash management.
  - Section 4: main public-sector challenges and risks (institutional capacities, FMIS readiness, cybersecurity).
  - Section 5: concluding remarks.

*Source: IMF Working Paper — Introduction (wpiea2023020-print-pdf).*

### Box 1. Fintech Applications in Senegal for Tax Collections

### Box 1. Fintech Applications in Senegal for Tax Collections

### Fintech initiatives and digital solutions implemented
- A 2016 “hackathon” organized with IMF support led to several digital initiatives in the Senegalese tax administration, including mobile payments.
- One hackathon solution was “M-Tax” (or “Mobile-Tax”), a system for small businesses and individuals to declare and pay tax using SMS (texting), Unstructured Supplementary Service Data (another protocol for sending text messages), and interactive voice server channels.
- The Senegalese tax administration continued to develop and implement digitalization solutions, including:
  - electronic filing solutions designed specifically for small businesses, and other solutions designed for medium and large taxpayers;
  - electronic filing of annual financial statements;
  - electronic monitoring of tax audit activities;
  - a data warehouse system;
  - automatic validation of taxpayer location to validate registration; and
  - electronic purchase of tax stamps using a single-use QR code.

### Compliance improvements observed (2016–2019)
- M-Tax – small businesses declaring and paying taxes increased from 0 to 70 percent.
- E-Tax – online declarations and payment by large-size taxpayers grew from 1 to 100 percent, and medium-size taxpayers from 0 to 65 percent.
- Electronic filing of annual financial statements grew from 0 to 91 percent (large-size taxpayers) and to 42 percent (medium-size taxpayers).
- Electronic monitoring of audit activities increased from 0 to 100 percent.

### Broader examples and integration considerations
- Similar non-tax revenue collection platform example: Tanzania’s Government e-Payment Gateway administered by the Ministry of Finance; it provides e-payment collection services to all government agencies and processes payments via on-line banking, credit cards, and mobile money.
- Brazil example: PagTesouro, developed by the National Treasury and operated over the Brazilian Payment System (SPB), exchanges information with the accounting system and the treasury system, registers revenues automatically in the FMIS’s general ledger, and immediately transfers funds to the TSA.
- U.S. example: the General Lockbox Network supports federal agencies in processing and digitalizing paper checks and other remittance documents (not related to taxes) received by mail.

### Requirements and risks for successful adoption of fintech for tax and non-tax revenue collection
- Successful adoption requires:
  - existing IT systems in treasury to be updated;
  - banking and service providers to be integrated with the FMIS;
  - business processes to facilitate online collection to be developed or updated; and
  - bank reconciliation to be flexible enough to allow adoption of fintech applications.
- A partial adoption of the solution may lead to a loss of information, fraud, and challenges for accounting and reconciliation of the funds.

*IMF Working Paper — Box 1. Fintech Applications in Senegal for Tax Collections*

### 7.1 Incomplete coverage of central government ministries and

### 7.1 Incomplete coverage of central government ministries and agencies

### Key implementation constraints and enablers
- Authentication of citizens and businesses for digital payment solutions may prove difficult if digital ID solutions are not well established.
- A strategy to promote the adoption of fintech applications in PFM should consider, as a key enabler, initiatives to strengthen the ministry of finance institutional and technological capacities.
- Integration with databases that identify the eligibility of the receiver of cash transfers is important for targeted social transfer; even with a large fintech payment network, targeted social transfers utilizing fintech applications are practically impossible without robust beneficiary identification processes and/or information systems, complemented by digital ID initiatives.
- Privacy requirements: PFM IT systems collect sensitive information on suppliers, public employees, cash transfer beneficiaries, and taxpayers that must be compliant with legal requirements protecting privacy.
- Programmability of CBDC to better track and target government expenditures requires striking a balance between efficient delivery of service and maintaining user privacy.

### Digital risks in public sector fintech adoption
- Principal concerns:
  - cybercrimes;
  - biases in automated decision making;
  - breaches in data privacy;
  - new avenues for tax evasion and fraud.
- Specific threats and experiences:
  - Criminals target government PFM systems to steal digital assets, seek ransoms (using ransomware), undermine government operations, and disrupt financial services.
  - Fraud can exploit weaknesses in internal controls and steal funds from poorly designed PFM information systems, as experienced by Malawi and Kosovo.
- Operational control note:
  - Errors in payment transactions using crypto assets cannot be reversed because transactions are executed using distributed ledger technology, such as blockchain, creating an immutable record; an erroneous payment cannot be reversed by the banking system and only a new transaction must be initiated to reverse payment by the final recipient. (footnote 24)

### Crypto assets: potential PFM risks and challenges
- TSA functioning and cash management:
  - High volatility in crypto asset prices might lead to unpredictable cash requirements—a challenge for cash management.
  - Crypto assets could disrupt a centralized model of TSA by introducing crypto asset e-wallets to existing subaccounts and bank accounts of TSA, weakening active cash management practices, tangling liquidity management, and requiring significant resources to adjust TSA design and operations.
  - The public sector could face issues around protocols to create new invoices/addresses to send and receive funds from individuals and businesses.
- Government fiscal accounting and reporting:
  - Measurement of value and registration issues may arise in accounting due to high volatility in crypto asset prices; the value of payments will hinge on the timing of conversion of the crypto assets, which could impact the accuracy and reliability of fiscal reporting.
- Internal and external oversight:
  - Audit functions need capacities to analyze the crypto assets ecosystem, including nodes and transactions, to properly audit crypto asset operations.
  - Absent such procedures, risks like rent-seeking produced by slow settlement processes (i.e., between the crypto currency e-wallet and the treasury, in the context of highly volatile crypto asset prices) could materialize.
- Storing private crypto assets in government treasuries:
  - Crypto assets may be stored via privately managed crypto exchanges, mobile wallets, or cold stored (e.g., offline wallet-ledgers like Trezor).
  - Managing private keys is complicated and requires high personal accountability; losing a private key could mean permanent loss of public resources with no restoration mechanisms.
  - Protecting these digital assets from cybercrime will require sophisticated technologies and high technical capabilities within government treasuries and the public sector.
- Fiscal risks:
  - If a crypto asset is adopted as legal tender, fiscal risks would be amplified.
  - Significant fiscal costs and contingent liabilities could arise if convertibility to fiat currency is guaranteed by the government and operationalization of the e-wallet is under a state-owned enterprise.
  - Example: El Salvador adopted Bitcoin as legal tender (alongside the U.S. dollar). In June 2021, a law enacted that the U.S. dollar will be used as a reference currency for accounting purposes, mandating acceptance of Bitcoin by economic agents in exchange for goods and services, and guaranteeing automatic conversion from Bitcoin to U.S. dollars through a trust fund.
  - IMF (2021c) note preserved verbatim: “Initiatives to improve financial inclusion are welcome, but Bitcoin use carries significant risks and Bitcoin should not be used as an official currency with legal tender status. Narrowing the scope of the Bitcoin law will contain some of the macroeconomic risks. Strict regulation and supervisory oversight are needed to mitigate remaining fiscal, financial integrity and financial stability risks.”
- Policy implication:
  - Adoption of crypto assets for public finance should not be considered without an adequate regulatory framework and accompanying processes, systems, and procedures to address related risks.

### Central Bank Digital Currencies (CBDC): opportunities and trade-offs
- Opportunities:
  - Programmability aspects of CBDCs could be used when a particular digital payment is used by a particular individual (digital identity) for a particular purpose or geographical region.
  - Governments could use programmability to enhance public spending accountability and transparency, address income and regional disparities, and design/implement new fiscal policies.
  - Transactions data collected by public sector entities could unlock new insights into public policy implementation.
- Trade-offs and challenges:
  - Governments must recognize the trade-off between expenditure targeting and individual data privacy depending on CBDC rollout and design.
  - The impact of CBDC adoption on government banking arrangements, cash management, and TSA design and operation should be analyzed.
  - CBDCs could have particular appeal for EMDEs, but also merit in advanced economies depending on design—particularly whether governments can monitor all or just some individual transactions and considering anonymity aspects. (footnote 26)

### Example: E-vouchers in India (Box 2)
- E-vouchers are a type of digital money to pay for particular services.
- National Payments Corporation of India is considering e-vouchers for health services payments.
- e-RUPI, issued by India’s National Health Authority:
  - Distributed to beneficiaries for a specific purpose or activity via SMS or QR code.
  - Redeemable without a card, digital payments app, or internet banking access, at any merchant able to accept the Unified Payments Interface (UPI).
  - Enables direct payments to beneficiaries, helping better target subsidies or social sector payments and preventing “leakages” by organizations.
- Requirement: To adopt this solution a robust digital ID solution needs to be in place and the technological capacities of the Ministry of Finance need to be assessed. (footnote 27)

### Concluding findings and policy recommendations
- Fintech innovations offer opportunities to enhance delivery and access to financial services and to strengthen data-reliant financial services in public and private sectors.
- Benefits for PFM where fintech adoption is promising:
  - Increased efficiency and effectiveness of resource allocation and fiscal policy implementation (e.g., cash transfer social programs).
  - Strengthened fiscal transparency via reliable and more granular high-frequency payment data.
  - Faster and more precise establishment of treasuries’ cash positions and upgraded cash management practices when fintech payments are integrated with treasury management and government banking arrangements.
- Implementation challenges to address:
  - Overcome legacy information systems, inefficient business processes, inconsistent data, and limited institutional capacity.
  - Manage operational risks, notably cyber risks.
  - Address challenges from digital money, crypto asset spread, and data privacy issues.
  - Adopt a robust digital ID as a key enabler.
- Overall recommendation:
  - Authorities and policymakers should handle fintech adoption with attention and care—implementing appropriate regulations, institutional capacity building, and technical measures to manage risks while realizing efficiency gains.

*Source: Una, Allen, and Botton (2019); content as presented in the supplied chapter/section.*

### 58. Washington, DC: International Monetary Fund.

### Fintech Payments in Public Financial Management: Benefits and Risks

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- IMF WORKING PAPERS                                  Fintech Payments in Public Financial Management: Benefits and Risks 

- INTERNATIONAL MONETARY FUND 
33

- Fintech Payments in Public Financial Management: Benefits and Risks  
Working Paper No. WP/23/20

*Source: wpiea2023020-print-pdf - 58. Washington, DC: International Monetary Fund.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023020-print-pdf.pdf_