Home Policy & Governance Digital transformers: government finance and innovative technology

Digital transformers: government finance and innovative technology

Global Government Fintech Lab 2024 panel session two: Siobhan Benita (moderator), Dina Buse, Diego Villafáñez Sagardoy and Sandy Sancaster| Credit: Deirdre Brennan for Global Government Fintech

GLOBAL GOVERNMENT FINTECH LAB 2024: PANEL SESSION TWO

The opportunities and complexities surrounding the adoption of innovative financial technologies across government operations were disussed during the Global Government Fintech Lab’s second panel session, Daniel Tost reports

Public finance authorities worldwide are increasingly exploring and engaging innovative technology solutions.

The question of which technologies are proving most interesting, which challenges may be arising during adoption and which barriers may be restricting take-up, were the focus of the Global Government Fintech Lab 2024’s second panel session ‘Governments and the future of finance’.

The session featured senior public servants from two European Union (EU) member states, Latvia and Spain, alongside a private-sector voice from UK-headquartered ClearBank (one of the event’s knowledge partners).

Dina Buse, deputy director in the financial market policy department and head of the credit institution and payment services policy division in Latvia’s Ministry of Finance opened the session. Diego Villafáñez Sagardoy, digital finance co-ordinator in the department of digital and sustainable finance in Spain’s Treasury, followed. Sandy Sancaster, head of government and strategic accounts at ClearBank, completed the line-up.

The discussion, moderated by former UK civil servant Siobhan Benita, saw the trio introduce their thoughts before the discussion took in topics including modernisation costs, procurement obstacles and artificial intelligence (AI) preparedness.

Latvia: ‘still development potential’

Dina Ruse (right) at Global Government Fintech Lab 2024

Buse kicked off by highlighting collaborative efforts between government and the private sector in creating Latvia’s national fintech strategy, which was published last year. “We [government] understand that developing the fintech ecosystem is very important for developing the future of finance,” she said.

There are similarities between Latvia’s fintech strategy and Ireland’s (as discussed at the Lab by Neale Richmond and Karen Cullen), Buse said, with a focus on talent development, regulatory elements, state (financial) support and awareness as essential pillars. She pointed out the “major” role of regulators, mentioning the central bank’s Innovation Hub and sandbox (Marine Krasovska from Latvijas Banka was also a speaker at Global Government Fintech Lab 2024).

The Baltic country, which has a population of about 1.9 million, has a high rate of digital payments use across society. Government services that are digital include an electronic system for interactions between taxpayers and State Revenue Service, a digital ID service provided by the State Regional Development Agency and e-government portal Latvija.lv.

“Of course, we see that there is still development potential,” Buse continued, underscoring the importance of education, including a need for closer collaboration between the financial sector (including fintech companies) and universities, including to address skill shortages. “I think the greatest investment we [could] make to have a tangible change is exactly in human capital – this is key,” she said.

In terms of public-sector use of fintech she spoke of “potential for fintech companies [to] engage in public procurement and provision of services to public authorities” but that this is a “very complex field”, and “not all fintechs [companies] are skilled in European public procurement rules”.

Buse, who was also a panellist at the 2023 Lab (speaking on blockchain), also mentioned the transformative potential of AI in finance and need for regulatory clarity (which, in itself, would drive further growth). She cited examples of AI applications in Latvia in credit-scoring (for loans) and investments.

Spain’s Villafáñez: five use-case areas

Diego Villafáñez Sagardoy (second from right) at Global Government Fintech Lab 2024

Villafáñez Sagardoy used his opening remarks to specify five areas where technology is applied across Spain’s governmental apparatus.

First, he focused on a technology use-case closest to his own day-job – “policy work” – specifically leveraging ‘micro data’, ‘big data’ and machine learning. “For the ministry in terms of policy evaluation [and] policy impact analysis, it’s key to have, first of all, big data, and second of all, having people trained in machine learning and exploiting this data,” he said.

Second, transitioning to the realm of welfare benefits, he outlined the role of algorithms in determining eligibility and distribution. “We are a country of 47 million inhabitants, so it’s very challenging for a government to assess who has the right specific subsidy, and whether these conditions are kept throughout the life of the subsidy – there are many complexities,” he explained, adding that algorithms were used in the deployment of Spain’s ‘Ingreso Minimo Vital’ (‘minimal vital income’) social security scheme during the Covid-19 pandemic. However, he cautioned against biases (“if we introduce biased data into a state algorithm then we will have a very biased result”) and dangers of creating “new digital divides”. Additionally, he emphasised the need of upholding administrative law and citizens’ rights while deploying automated decision-making systems.

In respect of the use of technology for payments (for example, subsidies) – “an area of huge potential, as well” – he mentioned Bizum (an instant payment service created by Spanish banks in 2016 to enable person-to-person payments through a smartphone). He also mentioned the potential arrival of central bank digital currencies (CBDCs). “Governments need to use these types of technologies – it’s ridiculous that the private sector can [enable] payments within 10 seconds and governments can’t do that, that would be a failure,” he said.

Third, Villafáñez focused on government financing. “We are actually financed using very traditional technology,” he said, raising the potential of distributed-ledger technologies (DLT) in modernising debt issuance processes. While acknowledging DLT’s apparent efficiency gains (in terms of speed), he highlighted the importance of market interest and investor preferences in adopting such technologies. “From the perspective of the Treasury, what we need first of all is interest in the market – are investors interested in buying DLT bonds?” he pointed out.

Fourth, he touched upon cybersecurity as a critical concern for national security and economic stability. He emphasised the need for robust cybersecurity measures, particularly in the financial sector, to mitigate cyber risks effectively.

Fifth, he briefly mentioned the potential of supervisory technology (SupTech) in enhancing regulatory capabilities – for example, “the use of microdata to predict infringements and to learn more about the market” – while cautioning against intrusive predictive practices. “We don’t want to jump into a Minority Report situation,” he joked – a reference to a 2002 US film in which police use technology to apprehend criminals before they commit a crime.

ClearBank’s expansion ambition

Sandy Sancaster (right) at Global Government Fintech Lab 2024

Sancaster used his opening remarks to explain ClearBank’s business model and role in supporting government innovations.

He explained how the inception of the UK-headquartered company (which he described as a ‘RegTech’ rather than ‘fintech’) stemmed from a “necessity” to challenge the limitations of legacy platforms used by pre-existing clearing banks, leading to its establishment as a regulated entity in 2016.

ClearBank exclusively serves regulated and public sector entities, abstaining from B2B and B2C services. Currently “UK-centric”, it intends to launch ClearBank Europe “at the back-end of this summer”, with plans for expansion into the US in summer 2025.

Turning to how ClearBank collaborates with the public sector, Sancaster mentioned a partnership with UK company PayPoint to facilitate efficient benefits disbursement to the homeless through QR code-enabled transactions at retail outlets; and a partnership with another UK company, Allpay, which works with the city councils of two of the UK’s biggest cities, Birmingham and Glasgow; and offering ‘confirmation of payee’ services through the Crown Commercial Service (CCS).

“The contentious point I want to raise is that everyone thinks digitisation is a good step forward,” he said, addressing the overarching theme of the session. “To us, it’s a pathway towards transformation. Digitising a manual process is not good enough. Transformation is looking at the process and asking if it’s fit for purpose.”

He concluded his opening remarks by emphasising how ClearBank’s technology provides ‘straight-through processing’ and ability to access real-time and “rich” data that public sector clients can use to improve what they do.

RELATED ARTICLE Ireland hosts public sector fintech pioneers in Dublin for third ‘Lab’ – an on-the-day event summary of Global Government Fintech Lab 2024

The cost of modernisation

The Q&A section began with the panel being asked whether the cost of modernisation is one of the biggest barriers facing the public sector when it comes to adopting fintech solutions.

Buse responded by saying that although innovation entails costs, it was essential to keep up developments in the “real economy”. Government, she asserted, should be a leader rather than a laggard in fostering innovation.

Villafáñez acknowledged the financial constraints inherent in government modernisation efforts but deemed technology skills to be major barrier: specifically, the challenge of remuneration when it comes to fintech-related skills.    

“No ‘normal’ government will be able to pay as much as the private sector can – that’s a fact,” he said. “We have very good lawyers in the public sector, we have very good economists – this is not happening with technology aspects.”

He then made a different point as regards the private sector, emphasising the importance of maintaining independence and transparency in public service provision.

“The public sector cannot be dependent on private actors,” he said. “We can use technologies, we can leverage on this – it’s where innovation is taking place, of course, in the private sector and it should be this way – but the end of the journey cannot be a situation where public services are run and decided and completely depend on the private sector.”

RELATED ARTICLE Evolving engagement: governments forge new frontiers with fintech – a write-up of the Global Government Fintech Lab 2024’s opening panel session featuring representatives from Ireland, Austria and Slovenia

Passport to the future

Sancaster was asked about ClearBank’s plans to grow its footprint across Europe.

“It’s been a challenge,” he responded, saying that a submission for regulatory approval in the UK could not be simply translated into regulatory submissions to operate elsewhere.

The UK’s exit from the EU (in January 2020) had meant the regulators had, he remarked, been “inundated with requests” as companies scrambled to evolve their European strategies in the wake of the country’s departure from the now 27-member bloc.

ClearBank opted to apply for a banking licence in the Netherlands and will aim to ‘passport’ – so, to expand across Europe without need for further ‘local’ authorisation.

He also highlighted specific challenges encountered in Europe, such as what is known as ‘IBAN discrimination’ (when a bank or company declines to accept an IBAN because it’s not from the same country in which the bank or company is based). He suggested potential solutions, such as the creation of an ‘EU IBAN’. “Life could be straightforward but I don’t think Europe is as harmonised as it could be,” he said.

ClearBank’s strategy for growth in the US is focused on acquisition, which the company believes would be a quicker route to market.

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AI: use-cases in progress

The panel was asked how well prepared the public sector is for potentially fundamental changes brought about by AI.

Buse emphasised the potential of AI tools, particularly in supervisory activities, for detecting fraudulent and suspicious transactions. But she warned that although awareness within the public sector about AI’s potential had grown significantly, more education was needed about what precisely AI is and how it can be used in the provision of public services (and supervisory activities). “There is some way to go,” she said.

Villafáñez began his answer by pointing out that the EU lawmakers had recently approved landmark regulation on AI, which mandates member states to create AI sandboxes. A lot of what he described as “techno optimism” related to AI owes to its cost-cutting potential yet governments should not necessarily be driven by a cost-cutting logic “because there is accountability and public trust involved”, he said. “We need a prioritisation and to really see in which fields AI can deliver to everyone,” he explained, urging a prioritising of ‘AI use-cases’ in the public sector.

Sancaster said that AI “is not generally understood from a general public perspective” and “there’s ‘fear factor’ of ‘Big Brother’ getting access to data and how it’s going to impact jobs.” Bias, too, was also an issue. “I think that, at this point in time, it’s ‘watch this space and see how things develop’,” he said.

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Transformative potential

Overall, the session delved into the complexities surrounding the adoption of new technologies, highlighting collaborative efforts between public and private entities to drive innovation forward.

Topics such as modernisation costs, technology skills and procurement challenges were explored, with themes emerging including the need for responsible use of technology and regulatory clarity.

Despite the challenges of moving from interest to deployment, the panel seemed optimistic about the transformative potential of innovative technology in enhancing their operations and driving positive outcomes for both government entities and citizens.

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We expect to upload a session video recording here shortly.