Sunday,
May 19,
2019 / 07:10PM / By IMF / Header Image Credit: Pinterest
Remarks by Tobias Adrian in Belize City, Belize,
May 2019
Good morning, ladies and gentlemen. Thank you
for the opportunity to offer some reflections on financial technologies — or
“fintech ” — and the serious policy issues they raise.
Rapid advances in financial technology in recent
years are transforming the economic and financial landscape. They’re already
offering wide-ranging opportunities — and raising potential new challenges — for
consumers, financial and nonfinancial firms, service providers, and regulators
alike.
Fintech can support economic growth and poverty
reduction, by strengthening financial development, inclusion and efficiency.
Yet they may also pose risks to financial stability and integrity, as well as
to consumer and investor protection.
National authorities around the globe, and in the
Caribbean region, are eager to promote the benefits, and avoid the potential
risks, of fintech.
In my remarks today, I’ll begin by offering an
overview of the Bali Fintech Agenda — which offers an important framework for
how countries could approach fintech issues. Then I’ll focus on three topics
that are of particular relevance to policymakers and private-sector leaders in
the Caribbean region: financial inclusion, interoperability, and Central Bank
Digital Currencies (CBDC).
The Bali Fintech Agenda (BFA) was launched last
October, at the IMF and World Bank Group Annual Meetings, which we held in
Bali, Indonesia.
The BFA has been inspired by the need to deepen
understanding — among financial-industry leaders, policymakers and regulators,
and the general public — about how technological innovation is changing the
nature of providing financial services, for both incumbent firms and new players.
As a framework of concepts, for policymakers and
for the international community, the BFA has broad relevance to all of the
member countries of the IMF and World Bank. It will surely help all of our
member countries, as they shape their domestic fintech policy discussions —
deciding how to tailor their technology platforms and regulatory approaches to
fit each country’s particular circumstances.
The BFA is composed of 12 elements, which are
grouped into four objectives:
The challenge is how to strike the right balance
between (on the one hand) enabling financial innovation and (on the other hand)
addressing challenges to market and financial integrity, consumer protection,
and financial stability. Arriving at an appropriate balance is critical to
maximizing the social benefits of financial innovation.
Despite the challenge of achieving the right
balance, every country — including the countries of the Caribbean — would be
wise to prepare for and embrace the fintech revolution, in the hope of
realizing its far-reaching social and economic benefits.
Financial Inclusion
Financial inclusion is one of the areas where
fintech solutions have been identified as potentially transformative. Those
solutions can help address several chronic financial frictions:
To encourage the adoption of fintech solutions to
promote financial inclusion and develop financial markets, policymakers and
private-sector leaders should consider a number of practical steps.
One of the most important considerations is
embedding fintech topics in each country’s inclusion and financial-literacy
strategies.
Several countries are now focusing on the
development of digital financial services as part of their National Financial
Inclusion Strategies. Indonesia, Malaysia, Myanmar, the Philippines, and
Thailand, for example, have implemented such frameworks — with data-gathering
mandates, and, in some cases, with mechanisms for monitoring and evaluation.
Within the Caribbean region, countries now vary
widely in their levels of financial inclusion and development. This creates
significant opportunities for fintech growth, which could lead to positive
economic and social impact.
Around the world, mobile payment and lending
services have had profound impacts on financial inclusion. Mobile phone
operators in many countries have set up highly successful payment services that
have broadened the access to financial services broadly. This has had a
particularly strong impact in several African countries, in China, and in ASEAN
countries. In some of those countries, the mobile payment services have also
morphed into mobile lending services, based on novel technologies.
Despite the opportunities created by fintech, we
should also be mindful that fintech comes with important risks to financial
inclusion. Those risks arise from such fintech factors as the high speed of
transactions; remote interactions; automated decision-making; the extensive use
of data; and the involvement of unregulated or non-financial entities and
intermediaries.
Policymakers and private-sector leaders should be
vigilant as they watch for a number of risks — including:
·
Exclusion: Unequal access to infrastructure and technology — including
affordable data plans and access to the internet — limits fintech’s potential
and increases the digital divide. Women and the poor are usually
disproportionately disadvantaged.
·
Discrimination: The record is mixed, at best, on how successful fintech analytical
decision-making tools are in removing biases. Such tools often reflect the
biases in the underlying data, and in the mindsets of the people who are
designing them. They also can reflect existing social preferences or
prejudices, such as social views regarding borrowers who are members of minority
groups.
·
Consumer protection: Important factors in this area include risks related to transparency
and electronic disclosure; product suitability and over-indebtedness; agent
liability; data privacy; effective recourse mechanisms; safety of funds;
cybersecurity; and digital illiteracy.
·
Data-protection related risks. The potential for this type of risk (such
as the compromise of individuals’ privacy, identity theft, and fraud) is
greater where consumers have low levels of financial and digital capability, and
where there is a lack of alternatives (particularly in previously unbanked
populations).
Interoperability
Another significant element of the BFA calls for
reinforcing competition—and upholding the commitment to open, free, and
contestable markets.
That commitment is critical to achieving several
priorities:
The BFA highlights a number of considerations for
promoting fair competition and open markets. Those priorities include fostering
standardization, interoperability, and fair and transparent access to key
infrastructures.
Among those priorities, interoperability stands
out as a critical component in building up the backbone of the fintech
ecosystem.
What is “interoperability”? There are many
definitions — but, broadly, it means the ability of systems and applications to
communicate and share data in a seamless manner, without an effort from the end
user.
Interoperability is a transformative concept, and
its successful application has the potential to improve, fundamentally, the
landscape for many industries — including, in particular, financial services.
Let me offer an example from beyond the financial
sector. For a very long time, different communications systems and media
operated their own separate systems — producing services and content with
limited distribution channels; with significant inefficiencies; and at
relatively high costs to the consumer. Over the past 10 or 15 years, a push
toward interoperability — through many steps, including public policy actions —
have completely transformed the communications and media landscape. Telecom
firms are now distributing media content, and media companies are offering
telecom services, with new players entering and transforming the market. All of
that activity leads to much broader choice for consumers, at a lower cost.
Consider that experience when you weigh the
potential for interoperability in the financial sector. Interoperability is
critically needed, among financial-service providers, for sharing data and for
designing effective payments systems.
Interoperability includes concerns that go beyond
technical concerns. Yet its effective application also requires having in place
robust and supportive data frameworks. They’re pivotal to providing operational
resilience and in preserving confidence — as well as to protecting individual
and institutional data.
Data, after all, is the fuel of fintech innovation.
The collection, processing, and sharing of data amount to the bedrock of the
fintech revolution. Without the interoperability of the various data systems,
many fintech applications would simply not be able deliver on many of their
promises — including their potential for enhanced efficiencies and better
customer experience.
Significant aspects of fintech innovations do not
involve building new systems. Instead, they take advantage of existing systems
and technologies to create new products and services — as well as adding new
functionality to existing technology. The lack of interoperability would
effectively limit the scope of fintech innovations.
Interoperable and fast systems for payments and
settlement provide the critical infrastructure for innovative fintech payments
solutions. Such solutions can enhance payments efficiencies and reduce costs —
including the costs of cross-border transactions.
Fintech has stimulated competition, innovation and
diversity in the payments space with the direct access to payment systems by
non-bank payment service providers (PSPs). Recent developments have included
the granting of direct access to central bank settlement accounts with adequate
safeguards by a new generation of non-bank PSPs. In the United Kingdom, these
new players have included authorized electronic money institutions and payment
institutions. As these non-bank PSPs do not undertake maturity transformation
activities, they are not eligible for reserves accounts and intraday liquidity.
These new players are subject to supervisory assessments to ensure regulatory
compliance on governance arrangements, safeguarding of customer funds, and
financial crime. Also, they are required to periodically commission independent
audits covering key risk areas.
Interoperability also holds promise for greater
efficiency, operational resiliency, and fraud detection. Many countries have
adopted, or are in the process of implementing, the new open and global
messaging standard called ISO 20022. These new standards establish a common set
of rules for exchanging relevant payment information to enable efficient
communication between participants and infrastructures. ISO 20022 would support
the exchange of content in both large-value and retail payments, and could
enable the rerouting of payments across different platforms in the event of an
operational disruption. Furthermore, ISO 20022 adoption would improve fraud
detection by banks and non-bank PSPs. That is, the inclusion of the Legal Identity
Identifiers (LEIs) functionality would improve the information on the
identities of those in payment transactions.
The private sector should take the lead in the
development of interoperability standards and functionalities, based on market
needs. However, there is significant room for national governments to
facilitate broader dialogue among the various stakeholders — and to encourage
interoperability across different types of financial data.
The bottom line is: If the private and public
sectors fail to collaborate in building robust interoperable financial
infrastructure, the current seal for fintech could end, instead,
“interoperababble” — with many of its promising potentials unfulfilled. If
needless confusion were to undermine progress toward the ideal of greater
financial inclusion, it would be especially disappointing.
Central Bank Digital Currency
Another very significant area for policymakers
deserves thorough consideration: the issue of Central Bank Digital Currencies
(CBDC).
Many central banks have been pondering whether and
how to adopt CBDC. But less than one-quarter of central banks around the world
are actively exploring the possibility of issuing CBDC — and, so far, only four
pilot projects have been reported.
However, wide-ranging debates are under way about
the benefits and costs of issuing CBDCs. How such issues are addressed will be
of critical economic importance, considering that issuing CBDCs will have a
major impact on financial systems — and on monetary-policy conduct and transmission
channels.
In particular, policymakers much consider such
issues as these: Why should they consider issuing CBDCs, and under what
circumstances should they be issued? What are their design options, and those
options’ potential impact? What are the risks (if any) to central banks?
It seems clear that the case for CBDC adoption
depends on country-specific circumstances. There doesn’t seem to be a “one size
fits all” policy prescription.
There are surely some positive aspects of adopting
CBDC.
It could reduce the costs associated with the use
of cash, and it may improve financial inclusion in cases where there have been
unsuccessful private-sector initiatives and unsuccessful policy efforts. It
could also help central banks strengthen the security of, and trust in, the
payment system — and it could protect consumers where regulation does not
adequately limit private monopolies. Moreover, issuing CBDC could also
facilitate the “contestability” of the payments market, and could reduce the
risk of having a few large providers dominating the system.
Adoption of CBDC, and its impact on the financial
sector, will hinge in part on its design. Critical features that central banks
can control are the degree of anonymity (the traceability of transactions),
security (the risk of theft and loss), transaction limits, and interest paid.
Other features of CBDC follow from the nature of central banks. Settlement and
default risk are null, and transaction costs are low. Depending on the features
that central banks wish to build into CBDC, they will adopt a token- or
account-based approach. Token-based CBDC involves the transfer of an object —
namely, a digital token — between transacting parties. As such, CBDC would more
closely resemble cash. Account-based CBDC involves the transfer of claims
recorded on an account.
Yet central banks must also carefully evaluate the
potential downsides to issuing CBDC. These could include:
In addition, issuing CBDC would come with
potentially significant operational risks, which central banks must carefully
assess and manage.
These concerns are all very relevant to the debate
that’s occurring here in the Caribbean region. The Eastern Caribbean Central
Bank (ECCB) and the central Bank of the Bahamas are conducting extensive
research on all these issues in preparation for launching pilot projects within
the next couple of years.
About two weeks ago, central bankers and financial
authorities from throughout the Americas met in Costa Rica at a high-level
conference to discuss the Bali Fintech Agenda. The two central banks — the
Eastern Caribbean Central Bank (ECCB) and the central Bank of the Bahamas —
delivered excellent presentations there, highlighting their careful
deliberation of the prospects for issuing CBDC.
Considering the wide-ranging agenda that
policymakers and private-sector leaders are now confronting: It seems clear
that this is a thought-provoking and potentially creative moment in financial
technology — and the Bali Fintech Agenda is helping channel our conversations
along imaginative new pathways.
Surveying the potential for progress, that
accompanies so many ideas in fintech: In my summation, I’d like to reiterate
the message that I opened with: We should embrace the many opportunities that
fintech could bring to the Caribbean countries — while being mindful of its
potential risks.
That is the surest way to capture the greatest
benefits of the fintech opportunity, while steering clear of its potential
downside risks.
Thank you very much. Now, I’d be pleased to take any questions that you may have.
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