Paving the Way for Fintech
IMF News, May 9, 2019
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- Published: May 9, 2019
Overview — Bali Fintech Agenda (BFA) and framing
- Remarks by Tobias Adrian in Belize City, Belize, May 2019.
- Purpose of the BFA: deepen understanding among financial‑industry leaders, policymakers, regulators, and the general public about how technological innovation is changing the provision of financial services.
- Key structural fact: The BFA is composed of 12 elements, which are grouped into four objectives:
- Building an enabling environment for fintech innovation;
- Ensuring an adequate financial sector policy framework;
- Addressing risks and resilience;
- Encouraging international collaboration.
- Central policy challenge: strike the right balance between enabling financial innovation and addressing risks to market and financial integrity, consumer protection, and financial stability.
- Recommendation: Every country, including those in the Caribbean, should prepare for and embrace fintech while tailoring technology platforms and regulatory approaches to country-specific circumstances.
Financial inclusion — opportunities, frictions, and policy steps
- Potential of fintech:
- Can support economic growth and poverty reduction by strengthening financial development, inclusion, and efficiency.
- Mobile payment and lending services have had profound impacts on financial inclusion in several African countries, China, and ASEAN countries.
- Several countries have integrated digital financial services into National Financial Inclusion Strategies (examples in text: Indonesia, Malaysia, Myanmar, the Philippines, and Thailand) with data‑gathering mandates and monitoring and evaluation in some cases.
- Chronic frictions fintech can address:
- Cost barriers for delivering financial services in remote and marginalized communities.
- Information asymmetries between service providers and consumers.
- Lack of verifiable identification complicating “Know Your Customer” and customer due diligence requirements.
- Lack of suitable financial products for lower‑income populations.
- Risks to financial inclusion from fintech:
- Exclusion: unequal access to infrastructure and technology (including affordable data plans and internet), with women and the poor often disproportionately disadvantaged.
- Discrimination: automated decision‑making tools can reflect biases in underlying data and designers’ mindsets, and may reflect existing social prejudices.
- Consumer protection issues: transparency and electronic disclosure; product suitability and over‑indebtedness; agent liability; data privacy; effective recourse mechanisms; safety of funds; cybersecurity; digital illiteracy.
- Data‑protection risks: increased potential for compromise of privacy, identity theft, and fraud where consumers have low financial and digital capability and limited alternatives.
- Practical policy guidance:
- Embed fintech topics in national inclusion and financial‑literacy strategies.
- Use data‑gathering and monitoring mechanisms to assess digital financial services’ uptake and impact.
- Remain vigilant to exclusionary effects and discriminatory outcomes from automated decision tools.
- Strengthen consumer protection, data privacy, and digital literacy initiatives.
Interoperability — competition, standards, and infrastructure
- Policy priorities tied to interoperability:
- Reinforce competition and uphold open, free, and contestable markets.
- Harness fintech to reduce barriers to entry and deepen financial markets.
- Enhance efficiencies by reducing information asymmetries and operational/compliance costs.
- Improve customer experience via competition and innovation—important for underserved households and firms.
- Definition and role:
- Interoperability: broadly, the ability of systems and applications to communicate and share data seamlessly, without an effort from the end user.
- Data is the fuel of fintech innovation; interoperable data systems are pivotal for operational resilience, confidence, and data protection.
- Wider benefits:
- Interoperability can improve efficiency, operational resiliency, and fraud detection.
- Interoperable and fast payments/settlement systems are critical infrastructure for innovative fintech payments solutions and can reduce cross‑border transaction costs.
- Examples and developments:
- Over the past 10 or 15 years, interoperability transformed the communications and media landscape—an analogy for potential change in financial services.
- Many countries are adopting ISO 20022: an open and global messaging standard to exchange payment information for large‑value and retail payments, enable rerouting across platforms during disruptions, and improve fraud detection. Inclusion of Legal Entity Identifiers (LEIs) functionality would improve identity information in payment transactions.
- Fintech prompted direct access to payment systems by non‑bank payment service providers (PSPs); new non‑bank PSPs may receive direct access to central bank settlement accounts with safeguards, and are subject to supervisory assessments and periodic independent audits.
- Roles and responsibilities:
- Private sector should lead development of interoperability standards and functionalities based on market needs.
- National governments should facilitate broader dialogue among stakeholders and encourage interoperability across financial data types.
- Cautionary point: Failure of public–private collaboration on interoperable infrastructure risks producing “interoperababble,” undermining fintech’s potential and financial inclusion gains.
Central Bank Digital Currency (CBDC) — considerations, benefits, and risks
- Current status and engagement:
- Less than one‑quarter of central banks around the world are actively exploring issuing CBDC.
- Only four pilot projects have been reported.
- Key questions for policymakers:
- Why consider issuing CBDCs and under what circumstances?
- What are design options and their potential impacts?
- What are the risks to central banks and financial systems?
- Potential benefits of CBDC:
- Could reduce costs associated with cash.
- May improve financial inclusion where private initiatives and policy efforts have failed.
- Could strengthen security and trust in payment systems and protect consumers where regulation does not limit private monopolies.
- Could facilitate contestability of the payments market and reduce concentration risk from a few large providers.
- Design features that influence outcomes:
- Degree of anonymity (traceability of transactions).
- Security (risk of theft and loss).
- Transaction limits.
- Interest paid on CBDC.
- Token‑based approach (digital token transfer resembling cash) versus account‑based approach (transfer of claims recorded on accounts).
- Central banks control settlement and default risk (null) and low transaction costs by nature.
- Potential downsides and risks:
- Integrity risks if issued as anonymous instruments usable for illicit activities; many central banks favor a hybrid approach allowing only central banks to trace transactions.
- Potential impact on financial intermediation: depending on design, bank deposits could migrate to CBDC, fundamentally changing financial intermediation.
- Impacts on monetary policy conduct and transmission channels.
- Potentially significant operational risks requiring careful assessment and management by central banks.
- Regional context:
- The Eastern Caribbean Central Bank (ECCB) and the central Bank of the Bahamas are conducting extensive research and preparing pilot projects within the next couple of years.
- Two weeks before the speech, central bankers and financial authorities from throughout the Americas met in Costa Rica to discuss the Bali Fintech Agenda; ECCB and the central Bank of the Bahamas presented their deliberations.
Summary recommendations and concluding points
- Embrace fintech opportunities while being mindful of potential risks to capture the greatest benefits and steer clear of downsides.
- Key policy actions:
- Prepare country‑specific fintech strategies informed by the BFA’s 12 elements and four objectives.
- Promote financial inclusion through targeted digital financial service strategies, data gathering, monitoring, and financial‑literacy programs.
- Advance interoperability through private‑sector led standards, with government facilitation to ensure open access, standardization, and robust data frameworks (including ISO 20022 and LEI usage).
- Carefully evaluate CBDC adoption on a case‑by‑case basis, paying close attention to design choices, impacts on intermediation and monetary policy, integrity safeguards, and operational risk management.
- Final note: The Bali Fintech Agenda helps channel discussions along imaginative pathways; collaboration between public and private sectors is essential to realize fintech’s promise.
Remarks by Tobias Adrian in Belize City, Belize, May 2019.