GLOBAL GOVERNMENT FINTECH LAB 2023: PANEL SESSION ONE
The Global Government Fintech Lab 2023’s first session explored how financial authorities in three European nations are engaging with fintech, Daniel Tost reports
The fintech sector is growing in scale, breadth and impact, establishing itself as a force transforming the global financial landscape.
The question of how public authorities should ‘get organised’ to reflect this – and are alert to fintech’s possibilities and also its regulatory challenges – was the focus of the Global Government Fintech Lab 2023’s opening panel discussion, which featured perspectives from two central banks (supervisors) and one government finance ministry.
The session, titled ‘How best should financial authorities explore fintech solutions?’, featured: Denise Delaney, head of the policy and risk horizontal function at the Central Bank of Ireland; Marine Krasovska, head of the financial technology supervision department at Latvia’s central bank (Latvijas Banka); and Barbara Voelkl, policy officer for digital financial technologies in Germany’s Federal Ministry of Finance.
The discussion, which was moderated by former UK civil servant Siobhan Benita, saw the trio give their own authority’s take on the principal question before moving into topics such as cross-border collaboration.
The session was ideally teed up by the Dublin-hosted Lab’s keynote address from Ireland’s minister of state with responsibility for financial services, Jennifer Carroll MacNeill, who spoke of the public sector’s potential as a ‘positive force for achieving greater scale for the existing players and innovative start-ups’ and talked up the role that fintech ‘can play for governments in the future as we look to achieve our public policy goals’.
Irish central bank to ‘enhance’ engagement
Delaney began by describing the role of the Central Bank of Ireland’s Innovation Hub, which was set up in 2018 as a “direct and dedicated” conduit to encourage fintech innovators – “whether large or small” – to engage and “understand the regulatory perspective”.
Ireland’s financial services ‘action plan’ for 2023, published earlier this year, stated that the central bank is to undertake a ‘detailed review’ of the Innovation Hub ‘including peer comparisons, to expand its impact and functionality’ (the action plan followed the release six months previously of an updated ‘Ireland for Finance’ strategy that referred to a ‘plan to consult on proposed enhancements to [the] Innovation Hub in 2023 with any changes to be implemented over the course of the current central bank strategic cycle: 2022-2026’).
The Innovation Hub has engaged with 319 firms or innovators (by end-December 2022), Delaney said, with some being projects being beyond financial services (she referenced fashion and livestock projects “that thought non-fungible tokens might have been relevant”).
In respect of the Innovation Hub review, she said the central bank was “going through a discovery phase and a lot of engagement to understand what others are doing and what our own internal and external needs are”, adding that it expected to publish a proposal “towards the end of this year” on “how we can enhance how we engage”.
Delaney described innovation more broadly as “relevant across the entire organisation”, which has about 2,100 staff. The central bank has a “leadership-level” innovation steering group and an (internal) fintech network, consisting of a “very large” group of subject-matter experts spanning the “vast majority” of the authority’s functions. “It helps us to share skills, knowledge, experience, case studies, but it’s also a support to our Innovation Hub,” she said.
When a firm or innovator approaches the Innovation Hub with an inquiry, a small central team ‘funnels’ that and it then goes out to the broader network. “The innovator can then meet with a potentially large number of subject-matter experts from the regulator,” she explained.
The central bank also has an innovation policy team and is in the throes of creating an innovation strategy team. In addition, it is one of two ‘observer members’ of an Ireland Department of Finance-led fintech steering group (this group, a co-ordination body for fintech-related matters, was discussed by the department’s Karen Cullen at last year’s Global Government Fintech Lab).
Latvian authorities’ ‘huge step forward’
Krasovska also spoke at the inaugural Global Government Fintech Lab (held on 1 June 2022). Since then Latvia’s government has published a fintech strategy and the Baltic nation’s Financial and Capital Market Commission (FCMC) has merged with Latvijas Banka (Krasovska‘s own role was previously in the former authority).
The merged entity operates both an Innovation Hub and regulatory sandbox (sandboxes allow fledgling fintech projects to conduct ‘live’ experiments under regulatory supervision).
Krasovska said the Innovation Hub had about 60 interactions with private-sector fintech projects per year, with companies engaging with authority experts in areas such as anti-money laundering (AML), payments and investments.
The sandbox has proved particularly useful for firms in the field of RegTech (the use of technology to improve regulatory compliance), she said. “These companies were out of focus from the regulatory perspective because they do not require any licence,” she said. “But they are a very significant player in the financial sector, because all market participants are using these services.”
Latvijas Banka also has an internal ‘innovation lab’. “Anyone from within the organisation can come and start to experiment with a new type of technology that market participants are using in order to understand it ourselves – for example, how a crypto [digital] wallet is working,” she said. The lab provides a ‘safe space’ to learn and make mistakes, she explained. Over two years, 18 per cent of employees have used the lab, she said.
Latvian authorities have also been working to improve licensing procedures, she said. Approval of the fintech strategy – which contains a 21-task ‘activity plan’ – was a “huge step forward in identifying fintech as a priority for the country”. Four working groups are up and running.
German ministry seeks common tongue
Digital finance has received substantial attention from Germany’s government since the federal election in September 2021, Voelkl said, setting the political context for some of the Ministry of Finance’s fintech-relevant initiatives.
“We are very heavily characterised as a lawyer- and economist-intensive ministry and we are trying to break this up by bringing in people from the technical side,” she said. “We try to get people who might have actually worked for a fintech or a start-up, who actually speak the same language as the industry does.”
The ministry operates a ‘Digital Finance Forum’, which has about 40 individual (mainly private sector) members (and was also described by Voelkl’s colleague Doris Dietze in the opening session of last year’s Global Government Fintech Lab). Formerly named the ‘Fintech Council’, the forum has working groups in fields such as payments, insurance, blockchain and investment. Because topics cross into the orbit of other public institutions, such as Germany’s central bank or financial supervisory agency, these authorities are typically included, too, in order to “break up silos”, Voelkl explained.
In March 2023, the Digital Finance Forum published a roadmap (the link is to a six-page DE-language document). As Voelkl put it, the roadmap “shows what the industry, regulators and supervisors should do to actually bring us forward”.
She also pointed to a new draft law aimed at “de-bureaucratising” the financial market. Jointly published in April 2023 by the finance and justice ministries, the draft bill for a Future Financing Act (‘Zukunftsfinanzierungsgesetz’ – the link is to a five-page summary document in EN published in June 2022) proposes modernising capital markets for the digital era.
Knowing me, knowing EU
Ireland, Latvia and Germany are all part of the European Union (EU) and the panellists were asked to what extent public officials shared fintech-related expertise across the 27-member bloc (beyond liaison on specific EU regulatory files).
In response Delaney mentioned the EU Supervisory Digital Finance Academy, which was established by the European Commission in October 2022 to help authorities to ‘seize the opportunities and cope with the risks related to the use of advanced technologies’.
“The networking has been really beneficial,” she said, adding that about 35 of her Central Bank of Ireland colleagues had to date been involved.
Krasovska said that while collaboration across the EU occurred through numerous working groups, she would be interested in taking it to “the next level”. She pointed to the European Forum for Innovation Facilitators (EFIF) – also mentioned by Delaney – which was established in 2019 following a joint-European Supervisory Authorities (ESAs) report on regulatory sandboxes and innovation hubs that identified a need for action to promote better co-operation.
“It gives you an update on the working conditions in all European countries,” Krasovska said (of EFIF). “We need to take more time for specific topic[s]. For me, for example, it would be much more interesting to know the kinds of differences between sandboxes because we all have different approaches.”
Latvia’s sandbox lessons
Asked what learnings she would offer regulators that are considering establishing a sandbox – one such country is Ireland – Krasovska explained the challenge of classifying whether companies’ activities actually already fit within current regulatory frameworks (or not). “Is, for example, [a company with a service related to] open banking ‘innovative’ since this [open banking] was developed five years ago? Should we consider this innovative and take the company into the sandbox? Or should we reject it?”, she asked rhetorically. “Each start-up thinks that it is changing the world, but in reality you come to find they are offering something that already exists.”
In addition, start-up companies sometimes think of the sandbox as a business incubator rather than a regulatory initiative, Krasovska said. She raised the example of a RegTech company that created a know-your-customer (KYC)/AML solution that it was not able to test in a real-world situation. “We just took this app to our own in-house infrastructure and we started to play with the data by ourselves to understand what this solution offers,” she said. “Then we created a report for them showing them areas that needed more work to match with AML regulation.”
Voelkl added that, in terms of new regulations, a lot of uncertainty is created for the private sector if they do not feel that supervisory agencies across EU member states are aligned. “We often do receive feedback that the industry would wish for us to co-ordinate even more and actually share our approaches more,” she said.
She was keen to keep exchanges of ideas flowing within and across borders. In respect of a domestic approach, she pointed to the example of Ireland’s Department of Finance-led fintech steering group as typical of the direction that Germany’s authorities want to pursue.
Sustainability and procurement considerations
The Q&A section included an audience question on fintech as an engine for social good and how public authorities can help.
Efforts are ongoing to “make a deeper connection” between digital finance and sustainable finance, Voelkl responded, saying that Germany’s government has a similar forum to the Digital Finance Forum for sustainable finance. But she added that it was not yet completely clear how these two trends could ‘actually benefit each other’. “How can we use open finance to actually enable data access for greater good, maybe accelerated by a certain fintech business model?” she asked. “We are still very much in the investigation phase on this.”
Delaney pointed out that the Central Bank of Ireland has a ‘Climate Forum’ and ‘Climate Change Unit’. “We bring together academics, firms and other stakeholders within the climate sphere,” she said.
Krasovska said that government procurement could do more to help start-ups, including fintech companies, while acknowledging that a hiring public sector agency needs to be cognisant of any risks with engaging a new company. “If we look to current procurement [procedures] at a state level, there is no room for small companies even to participate because they don’t match the criteria,” she said. “We need to create some kind of governmental support for such activities and engage those fintech companies to be more active.”
‘Plenty of opportunities’ ahead
Jennifer Carroll MacNeill said in the Lab’s keynote speech that ‘we are still in the very early stages of the fintech era’ and this session’s panellists overall largely reflected that.
But private-sector fintech innovation moves quickly. Can authorities keep up? One audience member (who had travelled to Dublin from New Zealand) pointed out that the “rapid pace” of technological development underpinning the fintech boom had left legislators playing catch-up (a state of affairs typical across most tech-driven fields in most jurisdictions).
Another audience member asked about the extent to which the Wirecard fraud scandal had impacted fintech’s reputation across the German public service. Voelkl acknowledged “short-to-medium-term caution”, particularly at Germany’s financial services watchdog BaFin (whose powers have been reformed), but also pointed to the detrimental effect of “certain scandals in the crypto industry being in the newspapers on a more regular basis”.
Practically, the panel shared a spirit of aspiration to continue to evolve and improve public authorities’ understanding of the sector – and also fintech’s possibilities for government operations.
“In the future we want to see even more how fintech companies and IT companies can help government institutions to build new types of processes,” said Krasovska, in terms of authorities not just upping their dialogue with fintech providers but also engaging their services. “If we’re talking about, say, blockchain it gives a fantastic opportunity for government institutions to, for example, keep records of how public money is used and decrease corruption. There are plenty of opportunities in front of us.”
Watch the session in full (it runs from about 00:40:20 to 01:39:55 if clicking on the full-day event video) =>