Governments worldwide are increasingly enthused by fintech’s possibilities. But the sector’s breadth and quick-moving nature are among the reasons why public authorities’ activity can be tricky to track, according to experts at a Global Government Fintech webinar
Governments are devoting growing attention to encouraging and regulating financial technology (‘fintech’), including the exploration and use of fintech solutions to improve their operations and delivery of citizen services.
This mounting interest has, naturally, been accompanied by indices ranking private-sector fintech hotspots and ecosystems. But public sector interest and investment in fintech is less consistently analysed.
With this in mind, Global Government Fintech organised an online event titled ‘Keeping track of fintech: how should governments measure fintech’s growing importance?’. The four-strong international panel described how (and why) governments’ interest in fintech is evolving and how public policy-related fintech challenges and opportunities differ worldwide.
International institutions and authorities producing fintech-relevant datasets include the World Bank (WB)’s ‘Global Findex’ – a vast exercise analysing data such as the use of mobile-phones for payments; and the Arab Monetary Fund (AMF)’s FinxAr’ ‘Index of Modern Financial Technologies in the Arab Countries’, which launched last year.
The WB and AMF were both represented in Global Government Fintech’s discussion, along with Surrey University’s Professor Bonnie Buchanan, whose research includes international comparisons of fintech trends; and Sam Sharps, executive director for technology and public policy at the London-headquartered Tony Blair Institute for Global Change, which earlier this year published a report – Supercharging Africa’s Startups: The Continent’s Path to Tech Excellence – highlighting fintech’s potential.
‘Innovations in fintech lowering costs’
Mahesh Uttamchandani, the WB’s financial inclusion, infrastructure and access to finance practice manager, kicked off the discussion. He said that policymakers’ main interest in fintech – particularly in the developing world – is typically focused on how it can improve citizens’ day-to-day lives. Viewed through the WB’s ‘Global Findex’ lens, this means “connecting the unserved and the underserved to financial services” and, ultimately, having a “material impact” in reducing poverty.
He referenced the importance of the ‘Bali Fintech Agenda: A Blueprint for Successfully Harnessing Fintech’s Opportunities’ (12 ‘policy elements’ jointly adopted by the WB and International Monetary Fund in 2018 – we list them at the end of this article), and outlined the size of the global challenge when it comes to financial inclusion. Despite the number of people living in extreme poverty having fallen by about one billion since 1999, the Covid-19 pandemic has been “incredibly regressive and very punishing for the poor, particularly for poor women”, with about 150 million people “falling back into extreme poverty,” Uttamchandani said.
The pandemic has encouraged many governments to accelerate the digitisation of payment systems, meaning that more people have their first financial services account, which can then be used for “more complex” financial services. “During the pandemic the growth of these accounts to receive a government payment grew at an amazing rate,” he said.
“Innovations in fintech are lowering costs and increasing the speed, transparency, security and availability of digital financial services to reach the poor at scale,” Uttamchandani said, referring to the growth of M-Pesa, the mobile-phone-based money transfer service that has expanded from Kenya into other African nations and beyond, as “staggering”.
“We think that fintech can – if fintech policies are properly invested in by governments – bring more women into the financial system, which will help alleviate the gender gap in poverty,” he added.
The next Global Findex is due to be published in late-June and will contain a treasure trove of fintech-relevant data.
Facing up to the data challenge
The AMF’s senior financial sector specialist, Dr Nouran Youssef, explained the rationale behind the creation of the FinxAr index, as well as its compilation’s challenges.
The index – whose first edition saw United Arab Emirates take pole position, with Saudi Arabia second and Bahrain third – is part of Arab authorities’ efforts to drive economic development through fintech, she said. Data is gathered across six ‘pillars’: fintech policies and legislation; demand for fintech products and services; access to finance (funding); financial markets infrastructure; talent; and ‘collaboration and partnerships.’
Youssef echoed Uttamchandani’s points about fintech’s potential to help improve access to financial services and the acceleration of government interest in fintech solutions during the pandemic.
But she described how data collection – a precursor to ‘tracking’ fintech growth and then using the findings to steer policy formulation – is difficult across such a diverse region. A need to “enhance” index-relevant data had become clear during the first FinxAr’s compilation, she said, adding that the decentralised and peer-to-peer nature of much fintech-relevant technology meant that sometimes data was insufficient, scattered or simply non-existent.
“Regulators or the government are really facing a good challenge in that space,” Youssef said, adding that ‘national databases’ would be helpful.
Practically, she said that it was important to ensure that public authorities supplying data had ample opportunities to provide feedback on the exercise.
The FinxAr’s second edition is due to be published during the third quarter this year and annually thereafter.
Quantum computing’s fintech potential
Fintech’s quick-moving nature was emphasised by Surrey University’s Buchanan. She described fintech’s most important role for governments as being its potential to improve financial and digital literacy – part of the greater goal of reducing wealth and income inequalities by helping people access banking systems, for example.
She outlined the large and growing spread of topic areas relevant to researchers and organisations interested in fintech, with many of those areas having data at their heart: for example, the use of artificial intelligence in data collection and the increased prominence of so-called synthetic data.
Sometimes newer technology is itself a data management solution. “When it comes to managing the huge amounts of data that often underpins the growth of fintech, that’s where blockchain becomes particularly useful, as well as valuable,” Buchanan said.
Looking to the future, quantum computing’s impact on fintech was unignorable, she said. “What quantum computing is bringing to the table for fintech is new potential to process information with speeds that we previously thought impossible for traditional programmes and processing. That has an enormous potential to change and help develop fintech.”
Other trends to have caught Buchanan’s eye include government interest in non-fungible tokens (the UK is developing a government-backed NFT); governments entering the ‘Metaverse’ (South Korea’s Seoul Metropolitan Government announced plans to establish a metaverse platform last year, for example); and blockchain’s use for tax administration, for example with real-estate transactions in Finland.
Fintech, she concluded, is a “constantly emerging field that’s just being added to all the time” – something that makes “keeping track” of fintech particularly challenging.
Policymakers ‘treading a tightrope’
Sam Sharps summarised the Tony Blair Institute’s ‘Supercharging Africa’s Startups…’ report’s findings, saying that the institute was “cautiously optimistic” about fintech’s prospects in Africa – albeit that governments have “quite a lot of work” to do to support the sector.
Encouraging and regulating fintech is not easy, however, with Sharps describing policymakers as “treading a tightrope”.
“If you are the financial regulator or the finance ministry, or whoever is responsible in any national capital for regulation, you face this dilemma of wanting to encourage innovation and competition, but at the same time not introduce systemic risk,” he said. “There are some interesting models emerging around sandboxes, and how you can gradually license the introduction of tech innovation to a market without putting all your eggs in one basket.”
Sharps emphasised, too, that fintech solutions are not developed – nor can they be judged – in a vacuum, with government policies on everything from taxation to infrastructure potentially having an impact. “All of these things can counteract all of the good work that could be done specifically on fintech,” he said.
Uttamchandani made a similar point about risk, and also the importance of governments implementing ‘enabling’ infrastructure that ultimately encourages fintech innovations. He described digital identification as one of the most critical – he gave the example of India’s Aadhaar digital ID system and also mentioned, on the regulatory side, e-KYC (know-your-customer) guidelines in Bangladesh that are helping people who were previously excluded from financial services.
Sharps also pointed out a generational challenge when it comes to governments and tech-based policymaking. “Our executive chairman, [former UK prime minister] Mr Blair, is quite blunt in saying that an awful lot of policymakers have come to prominence in an era before a lot of these technologies existed, [so] just trying to get a base level of understanding across policymakers is a real challenge,” he said. “That’s the nature of the technology we’re facing nowadays.”
He also picked up on Youssef’s point about the challenge of data collection. The institute had found publicly available “usable” and “comparable” technology-related data between national capitals “really, really difficult” to source, he said.
Governments on the right road?
It is frequently said that technology moves more quickly than legislators and policymakers – an observation that arguably becomes ever more valid as technology, including fintech, evolves relentlessly.
Many of the newer fintech (or fintech-relevant) innovations had scarcely any prominence even as recently as one year ago, Buchanan pointed out.
This reality means that keeping track of public policy-related interest in fintech – in terms of deciding what falls under fintech, deciding which metrics to track and then actually gathering reliable and comparable data – can be a bumpy journey.
But tech solutions themselves will help – and the panellists agreed that the possibilities enabled by fintech, whether in helping with fundamentally important challenges such as financial inclusion or enabling new possibilities for business or societies, make it an increasingly important arena for public policy.
In gathering data, and comparing data internationally, authorities should be able to better target funding and investment, facilitate projects with the greatest potential and apply regulations to ensure standards and compliance.
“In the fintech space, private-sector innovation and government infrastructure go hand in hand,” concluded Uttamchandani. “The perfect analogy is roads and highways: if government can build those roads and highways, we’ll get lots of different cars on them that may be very innovative.”
Bali Fintech Agenda
- Embrace the promise of fintech.
- Enable new technologies to enhance financial service provision.
- Reinforce competition and commitment to open, free and contestable markets.
- Foster fintech to promote financial inclusion and develop financial markets.
- Monitor developments closely to deepen understanding of evolving financial systems.
- Adapt regulatory framework and supervisory practices for orderly development and stability of the financial system.
- Safeguard the integrity of financial systems.
- Modernise legal frameworks to provide an enabling legal landscape.
- Ensure the stability of domestic monetary and financial systems.
- Develop robust financial and data infrastructure to sustain fintech benefits.
- Encourage international cooperation and information-sharing.
- Enhance collective surveillance of the international monetary and financial system.
Source: World Bank/IMF, October 2018
Watch the webinar, which was held on 17 May 2022, in full (1hr 15min 20sec) =>
Source: Global Government Forum YouTube page
‘Arab Monetary Fund launches regional fintech development index’ – our story just over one year ago (5 May 2021) on the inaugural ‘FinxAr’ index