Representatives from Spain, Austria and Ireland discussed the ‘frontiers of public fintech’ at the closing session of the Global Government Fintech Lab 2023
Where are the greatest opportunities and challenges for public entities with regards to fintech? To what extent, and in which fields, do public servants see the most obvious common ground with their peers in other countries?
These were two of the main questions driving the conversation during the concluding session of the Global Government Fintech Lab 2023, held on 18 May in Dublin.
The ‘Emerging Topics Discussion: Frontiers of Public Fintech’ discussion featured a three-strong panel, all from European Union (EU) member states: José Manuel Marqués Sevillano, director of the financial innovation and market infrastructures department in the Bank of Spain (Banco de España); Dominik Freudenthaler, fintech expert in Austria’s Federal Ministry of Finance; and Mai Santamaria, head of Ireland’s Department of Finance’s financial advisory unit.
The trio were invited by moderator Siobhan Benita to give their reflections on trends they had observed during the Lab’s discussions and then to select from nine pre-selected topics (which flashed up one by one on the overhead screen), setting out why their selection has growing salience to the public sector.
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Technology driving change in finance
The methods by which public services are delivered and how public authorities interact with citizens, as well as the very way that ‘public goods’ could be defined, are evolving as technology drives change in finance, Marqués Sevillano said in his opening observations.
He mentioned instant payments and central bank digital currencies (CBDCs) as examples (Bank of Spain is part of the Eurosystem, which comprises the European Central Bank and central banks of nations whose currency is the euro, and so has an interest in the digital euro, should a decision be made to introduce one).
He also identified increasing use of distributed-ledger technology (DLT) as an important trend, including in the context of wholesale CBDC (a CBDC for inter-institutional use).
In terms of changing internal processes to make use of new technology, Bank of Spain could provide “many” examples. He mentioned “new ways of doing forecasting” using AI; the deployment of “AI algorithms” to track cash circulation; and using “neuroscience technology” to improve banknotes’ security (to stop counterfeiting).
The Lab overall had, he said, served to highlight the increasing number of means by which public authorities can use to encourage what he described as “safer” innovation: for example, sandboxes, accelerators, techsprints, calls for interest and different funding mechanisms. “I don’t feel like there is some magical solution, it depends what your priorities are, inside your country, inside your area,” he said, adding that public authorities “should take into account that many [initiatives] complement each other [so]… try to have a framework in order to prioritise.”
‘Keep talking’ to facilitate innovation
Freudenthaler began by remarking how struck he was by the extent to which the Lab’s participants faced similar challenges and the importance of maintaining dialogue (an observation also made by Marqués Sevillano). “I think that’s probably something overarching that we all should care about – how important it is to keep stakeholders together, and keep talking,” he said, pointing out that there are some elements of public sector’s fintech jigsaw that public officials “can’t influence”: for example, regulation already in place.
In terms of encouraging dialogue between the public sector and business, he referenced a fireside chat (earlier during the day) with the UK’s Centre for Finance, Innovation and Technology (CFIT) chief executive Ezechi Britton. “From innovators I often hear that ‘regulation is the one [thing] that keeps us away from innovating’, and [that] supervisors are the ‘bad guys’ who impose it on us. And the supervisors say: ‘if only someone came along and explained what they really want to do, what their business model is, what the risks are, then we could even help to implement your business model in a compliant way’. So, it’s great what Ez and CFIT are doing,” he said.
He flagged that Austria’s Ministry of Finance had set up a fintech advisory board. “We tried to get stakeholders together and just keep them talking – and that is something that lets ‘steam get out of the system’, and sometimes facilitates innovation, just by [doing] that,” he said.
In respect of cross-cutting topics, he highlighted the possibilities enabled by data, including heightened demand for data to tackle climate change. In this regard he mentioned the ‘Climada’ app, an open-source modelling tool created through a collaboration between the European Insurance & Occupational Pensions Authority (EIOPA) and public research university ETH Zürich. “They are trying to make available scientific data in order to assess risks associated with climate change,” Freudenthaler explained. “I think we will see a lot of that.”
More broadly, he pointed out that “technology can be used in a bad way or in a helpful way”. In a similarly cautious vein, he urged people not to overestimate the importance of technology (and, at the same time, not to underestimate human intelligence). “We tend to say ‘there is technology, there is a solution, so we don’t have to think about it anymore’ – and that is definitely not true,” he said.
‘No end-point to fintech’
Santamaria kicked off by saying that humans have “been innovating since we got out of caves” and that “there’s no end-point to fintech, there’s no end-point to innovation.”
But technologies wax and wane, including financial technologies. She mentioned initial coin offerings (ICOs) – a way to raise funds using cryptocurrency that became popular about six years ago – as one example.
“It wasn’t so long ago, that ICOs were meant to be the solution to all the problems of SME [small- and medium-sized enterprise] funding. Probably lots of us spent a lot of time writing regulation for ICOs. Who talks about them today?”, she asked rhetorically.
Policymakers face a sea of opportunities. “We’re in a position that we get to look at an economy from a stand-back point and [are] able to say: ‘well, where do we spend our resources?’,” she said, moving on to emphasise that it was important “not to fall down to the latest fad”.
“It’s great to embrace innovation – but we must understand the use and how you apply it,” she continued. “I do think [that] as an administration, as policymakers, we have responsibility to also know when to stand back, and when to say ‘hold on a minute, let’s see how this plays’.”
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Fintech as a cross-cutting topic
The panel were asked to identify what they saw as the ‘big things coming down the road’ in respect of public sector interest in fintech.
“We cannot afford anymore to think of technology or fintech in isolation,” responded Santamaria. “It’s across the board: payments, AML [anti-money laundering], consumer protection,” she said. “We constantly have to look at it as a holistic piece. We used to look at horizontal things as a one-off but even the way we’re structured needs to start changing.”
Freudenthaler responded with an answer focused on the power of the world’s biggest tech companies.
“Probably the biggest challenge will be that we will see a lot more of the ‘winner takes it all’ – and Big Tech is here to stay, and it’s probably here to invade also the financial sector,” he said. “At the moment, it [fintech sector] is very diverse in Europe, and we have a lot of a lot of players, and that might consolidate. I think we should prepare for that.”
Marqués Sevillano made a similar point to Santamaria, observing that “most” fintech topics are cross-cutting and, increasingly, require the input of multiple authorities. This was complicated further by the international dimension, for example different languages and differing levels of co-ordination across borders, he said.
It is, he said, very challenging for regulation to keep pace with innovation, calling for “more imagination in how we develop the rules”, highlighting the EU’s distributed-ledger technology (DLT) pilot regime as a “very good example” of regulation.
Quantum computing and digital ID
Nine pre-selected topics – sandboxes, innovation hubs, access to cash, digital ID, AI, the metaverse, quantum computing, open finance/open data and crypto (from a ‘payments to government’ perspective) – were then displayed on screen above the panel. The trio were invited to select a topic that they felt was particularly significant in respect of the public sector and fintech.
Marqués Sevillano opted for quantum computing. “It will be the most one of the most disruptive issues because it will dramatically change all civil security and all the ways that we are doing cryptography,” he said, adding that it was currently “not really clear” precisely how. “I have the sense this could happen but in the long term,” he said.
He added that AI could be perceived as similarly transformative – and indeed was both a more immediate (and clearer) opportunity and challenge.
Freudenthaler chose to discuss digital ID, which he described as a “very important cornerstone of digitalising services and, of course, also government services.”
He summarised the development of ID Austria (a service provided by the country’s Federal Ministry of Finance and Federal Ministry of the Interior). “[When] it started you needed to have a special card [and] a reader for a card, it did not work at all,” he said. “But we are now in step two, which is you can use your mobile phone, and we even developed it further. We have [had] great success in implementation. It has to take up critical mass. You can see that this is now leading to results.”
He described digital ID as “key” in respect of finance-related applications such as wire transfers and digital contracts. He also pointed out the importance of the EU’s eIDAS regulation (which stands for ’electronic identification, authentication and trust services’).
AI: digging into the dangers
Santamaria decided to comment on AI, after initially joking that the nine topics – as presented collectively on the screen – risked causing her a “nightmare” as she imagined, for example, “spending my crypto in the metaverse”.
“We are giving it attention but maybe not in the right way,” she said in terms of AI, specifically describing AI-fuelled misinformation “and how that’s used”.
“So, again, look at a nightmarish examples,” she said, sustaining her focus on the risk(s) of new technologies in the financial world. “Imagine a prime minister or finance minister in any one country being used on a video saying (or purporting to be at some secret meeting saying) ‘x bank is going to fold’. The next thing you [could] have is a bank run, and you never know whether that video was right or not, and the impact that could have on a financial system.”
“I don’t think we’re dealing with this [threat],” she continued. “I think we’re still at the ‘headline interest’ of what’s happening. ChatGPT [AI chatbot launched in November 2022 and developed by San Francisco-headquartered OpenAI] was mentioned so many times today [during the Lab’s different sessions]. I think it’s scary that the man who has actually come up with ChatGPT is now asking for regulation of ChatGPT – that’s like the atomic bomb maker saying ‘we need regulation for the atomic bomb’.”
Boundaries are shifting
Overall the session illustrated that fintech is a quick-growing and increasingly sprawling space – and that central bankers and finance ministries are aware of, and in some cases capitalising on, the possibilities across a range of operational and service delivery areas.
But it also highlighted how senior public servants are alert to the many challenges, which include structural issues such as ensuring that engagement with fintech topics across public authorities is sufficiently cross-cutting and co-ordinated; the importance of international liaison; and regulation’s age-old battle to keep up with the pace of innovation.
In short, boundaries are shifting and public authorities have a lot to gain – and also potentially a lot to lose – as they strive to stay fit for an increasingly fintech-enabled future.
Watch the session in full (it runs from about 07:40:30 to 08:17:20 if clicking on the full-day event video) => https://www.globalgovernmentfintech.com/lab/live/