FinTech

What does it mean for us and what are we

doing ?

Carlo Corazza

Payment Systems Development Group

March 14, 2018

Covers:

1. Overview of FinTech opportunities and challenges

2. Payment-specific considerations on FinTech policy and regulation

3. WBG work / roles on Fintech

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Payment Services and Market InfrastructuresMobile Money; Acceptance devices, Crypto Currencies; Central Bank issued Digital currencies;Distributed Ledger: Xborder payments, FMIs, regional payments system, collateral registries

Deposits, Lending, Capital Raising, and InvestmentOnline Banks, P2P lending, Market Place lending, Crowdfunding, Roboadvisory

ID, Authentication, and Know Your Customer (KYC) utilitiese-KYC, Digital signatures, KYC registries

Alternative dataSocial media, Call records, App downloads and usage, bill payments, payment behaviors

Many ways of categorizing FinTech, many overlaps

RegTechEase compliance burden for banks, improve effectiveness and efficiency for regulatorsShared KYC registries, APIs, SmartContracts, Applications of AI

AICross-cutting theme with applications in RegTech, lending, investment, fraud detection, etc.

1. Disintermediation and Disaggregation of the Value Chain

2. Application Program Interfaces and the Opening of Platforms

3. Use of Alternative Information

4. Customization

• New trends emerging that enable full financial inclusion:FinTech enables Financial Inclusion

• Entry of new class of institutions disintermediating role of banks - more tailored and efficient products

• Financial services value chain is being disaggregated through partnerships, outsourcing, specialization.

• Enabling new market players to overlay features or functionalities to existing programs or platforms.

• ID platforms can transform economics of account-opening

• Developing digital alternatives to traditional means of authentication for account opening, data used for assessing credit worthiness, etc.

• Digitally-available data allows machine learning, AI

• Using digital technologies in order to more efficiently design targeted, appropriate and quality products for underserved markets.

• Also applies to financial literacy, investment advice

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Fintech present new challenges

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• Fintech has the potential to rapidly expand financial access and inclusion• Technological developments and increased interest from new players is

leading to a re-imagining of traditional processes and business models• FinTech can disrupt markets/established providers and present new

challenges and risks:

Regulatory & Supervisory Perimeter, Capacity:

Fintech players may not fit with current regulatory/

supervisory remits.

Developing country supervisors have systems &

capacity constraints

Depositor and investor risk: Many new

providers, like P2P lenders, are insufficiently

regulated/monitored, and may not fully comply

with disclosure or transparency requirements.

Financial Stability: Unsupervised linkages;

Exacerbate credit cycles; Untested credit models; Affect banking system

profitability

Over-indebtedness:

New/easier access to digital credit may cause borrowers to be more

susceptible, particularly without adequate financial capability.

Vulnerability to cyber threats:

At multiple levels: cyber attacks can affect financial market

infrastructures, financial institutions, consumers,

authorities.Fraud or other market abuses, inc. AML/CFT:

Access to customer information can lead to abuse without adequate

consumer protection mechanisms.

Cryptocurrencies (like Bitcoin) have been used for

illicit activities.

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The role of policy makers and regulators is evolving, and places new demands on capacity and remit:

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Limited data and international best practices / frameworks available

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Open questions on FinTech risks and opportunities

• Does data support a scenario where FinTech displaces traditional bank-based transaction and payment product?

• Can FinTech reach the scale needed to reach billions?

• Deposit transaction accounts are the main gateway to financial access, whereas e-money accounts represent 12% of total transaction accounts created in 2015. In 16 UFA focus countries, e-money represents over one third of new transaction accounts created in 2015

• While less prominent than deposit transaction accounts on a global level, e-money accounts, particularly mobile money accounts, have been gaining ground in certain regions, especially Sub-Saharan Africa. In Tanzania, Zambia and Rwanda (all UFA focus countries), mobile money accounts made up the majority of all transaction accounts in 2015 (87%, 62% and 60%, respectively).

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1.43bnnew accounts

created in 2015

85%of them

in China and Indiawhere 30% of the unbanked reside

33%of new accounts in Sub-Saharan Africa

are e-money accounts

7*Source: World Bank Global Payment System Survey 2015 data

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• If the increasing pace of technological change offers opportunities for accelerating the pace of reduction in remittance costs, to what extent have these innovations disrupted the remittances market?

• And if not, what are the frictions that prevent them from achieving the impact and scale we have seen in other sectors?

The Global Average cost of sending the equivalent of USD 200 was 7.32 in Q2 2017

The International Money Transfer Operator (MTO) Index slightly increased from was recorded at 8.20 in the same period

The ambitious target of reducing the global average of sending USD 200 or the equivalent to 5% is still not achieved.

Open questions on FinTech risks and opportunities

Source: The World Bank, Remittance Prices Worldwide, http://remittanceprices.worldbank.org

• Do current regulatory frameworks enable business model innovation / non-bank service provisions and the level playing field?

• Are central bank mandates / institutional arrangements / tools adequate to fulfill regulatory, supervision, and oversight responsibilities?

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Open questions on FinTech risks and opportunities

*Source: World Bank Global Payment System Survey 2015 data

Broad regulatory and policy considerations

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• Three fundamental FinTech developments which create new / heightened existing regulatory issues:

i. re-engineering of existing processes by adoption of new technological developments;

ii. entry of a new set of providers in the financial services ecosystem; and,

iii. greater integration of data from economic and social interactions in financial sector processes.

Authorities’ revisions to regulatory and institutional frameworks around the world:

i. allow new approaches and processes, through adaptation, tweaking, new regulation, or “regulatory sandboxes”

ii. extend the regulatory / supervisory perimeter to handle new class of players;

iii. improve coordination with other sectoral regulators and amongst other financial

sector regulators.

The long-standing international best practice of focusing the regulatory interventions on underlying economic functions rather than specific categorization of entities or technology, is applicable to FinTech as well.

Challenges faced by central banks in oversight of non-bank PSPs

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Generations of technology bring in new

threats whose implications require time

and effort to be fully appreciated, and demand

more forward-looking monitoring tools and sufficient technical

expertise.

Fraud and operational disruptions become

major sources of risk in networks that are open to

large numbers of participants and users, and integrate various

technological components.

Outsourcing to non-banks may generate uncertainties in the

assignment of responsibilities, and scope of authorities’ direct intervention.

Concentration can create the potential for a single

point of failure with widespread

consequences. Question whether authorities have

the tools (legal and technical) to identify and

possibly address concentration issues.

Adequacy of oversight tools, cooperation

–Overseers’ preference for “soft” instruments

–Formal / informal cooperation mechanisms

and regulatory silos.

–Limited shareholder involvement mechanisms.

Maintaining level-playing field

• Incentives to unfair competition could be

strong, leading to exclusivity.

•When, how, to what extent to impose interoperability is a significant policy issue.

•Authorities to monitor access conditions to C&S

Evolving oversight function: useful lessons learned

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• LEGAL CAPACITY

- Legal bases that grant oversight authorities sufficient (or greater, broader) powers to oversee all the participants of their NPS, including non-financial entities

- Building own internal legal capacity (by adding legal specialists to skill mix) vs. on-demand to legal department expertise

• DESIGNATION

– Designation to extend beyond systemic importance considerations, to cover systems that large enough to have potential effects on public confidence, and widely-used payment instruments.

– For non-designated systems/entities, it is critical that central banks can gather and analyze the necessary information to identify cases requiring closer scrutiny - legal and capacity issues.

– Need to bring intermediaries (e.g., online payment gateways) under direct oversight, while keeping a balance between light-touch regulation on one hand, and a focused oversight including authorization on the other hand.

• CHANGE-DRIVEN OVERSIGHT AND POLICY GUIDANCE

– Payment systems/services are characterized by constant innovation and changes deliberately introduced from the outside / emerging as part of the internal dynamics of the systems. Oversight authorities should be able to assess the extent of the impact of such changes, and in a position to intervene if and when necessary, possibly before they become effective.

– Policy dialogue is more generally used as a means to improve overall NPS policy and to align the overseer’s objectives with NPS participants’ – need to have the appropriate forum in place.

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Creating conditions for FinTech to develop safely:• Enabling Policy, Legal and Regulatory Framework, complemented by improvements to

financial infrastructure (inc. for payments, credit, data, ID)• Focus areas include: payments, digital financial services, consumer protection• Work of WBG in eGovernment/digital government also directly relevant (inc. for data

availability, and for incentivizing/pushing uptake of digital financial services)

Technical Tools, Reports:• FinTech Technical Note Series• Leveraging Technology for Financial Inclusion• Regulating Technology for Financial Service Providers (Regtech)• G20 High Level Principles for Digital Financial Inclusion• Developing Global Data and Analytics on Marketplace / Alternative Finance

Global and Country Engagements:• ID4D (cross-WBG), inc. Digital ID platforms, country diagnostics and implementation• Supporting national authorities through global technical assistance programs: Financial

Inclusion Support Framework (FISF), Harnessing Innovation for Financial Inclusion (HiFi).• Digital Finance Interoperability and Financial Inclusion (CGAP)• Expert participant in Standard-Setter working groups (FSB, CPMI, FATF) and G20

World Bank work / roles on FinTech

The Finance Competitiveness and Innovation GP is working with WBG and external partners to develop knowledge and guidance/tools, and to apply that through our country engagement (policy/advisory/diagnostic/financing).

Thank you!

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