Home Policy & Governance Governments’ fintech navigators: charting a course through public sector possibilities

Governments’ fintech navigators: charting a course through public sector possibilities

Panel (clockwise from top left): Vittorio Tortorici, Ian Hall (moderator), Barbara Voelkl and Hunt La Cascia

Representatives from two finance ministries and the World Bank discuss how they engage with the fintech sector and the possibilities for public sector use of fintech solutions

Governments and other state authorities are increasingly exploring and using fintech solutions to improve their operations and services.

But fintech’s very nature – combining finance and technology – means that exploring its possibilities and implementing policies typically spans job remits, departments and organisations. In addition, fintech can be tricky to define; is growing (as technology evolves); and brings legal considerations (where laws often lag technology).

Those with fintech solutions, meanwhile, can often find (or at least perceive) obstacles in seeking to supply their services to the public sector. This is particularly the case for smaller companies, such as fintech providers, without the capacity and antennae to pick up opportunities typically found at established corporations.

It is against this background that Global Government Fintech convened a webinar titled ‘Lost at sea? Helping to navigate fintech solutions’ possibilities for governments’. The discussion featured representatives from two of the biggest European Union (EU) member states’ finance ministries, complemented by a global perspective from the World Bank.

Held on 22 February as a ‘look-ahead’ to our third Global Government Fintech Lab event (25 April 2024), the session addressed questions including: how governments are trying stay alert to the possibilities of fintech; what barriers exist to governments procuring fintech solutions; and how governments are changing their processes to make it easier to work with fintech solutions.

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‘Fintech is far more than start-ups’

Barbara Voelkl, policy adviser for digital financial technologies, payments and cyber-security in Germany’s Federal Ministry of Finance – who was among the panellists at Global Government Fintech Lab 2023 – began by saying that defining ‘fintech’ was an ongoing challenge.

“One of the key issues that we are having is: ‘What is fintech? What is digital finance? We often use the latter phrase,” said Voelkl.

She mentioned fields including blockchain, cryptoassets and artificial intelligence (AI), as well as ‘greentech’. “So, this is something that is actually a reoccurring question: what is fintech and what are the companies associated with it?,” she asked rhetorically.

“Fintech is far more than start-ups,” Voelkl continued. “It’s often associated with small companies, bringing out innovative solutions. But, actually, we see a lot of scale-ups, particularly in the payments branch, we see incumbent firms, we see basically each bank being a tech provider as well. And, on the other hand, we also see non-financial institutions entering the fintech area, and questions come up with that as well.” 

The ministry operates a ‘Digital Finance Forum’, formerly named the ‘Fintech Council’, which has about 40 individual (mainly private sector) members (and was also described by Voelkl’s departmental colleague Doris Dietze in the opening session of the Global Government Fintech Lab 2022).

“We try to both make the public side understandable to the market, but also make the market understandable to the public side,” Voelkl said.

Ministry of the Interior as ‘GovTech’ hub

Digital finance has received growing attention from policymakers and public officials since Germany’s most recent federal election in September 2021. Goals include seeking “to understand it better as a government and to actually be able to not only make [relevant] regulation, but also make use of it,” Voelkl said, explaining that “a lot” of ministries, authorities and other ‘public stakeholders’ were engaged.

She described the Federal Ministry for Finance team in which she sits – digital financial technologies, payments and cybersecurity (within the financial market policy department) – as, in effect, the ministry’s ‘fintech team’, albeit closely linking with other units.

She referred to a Digital Finance Forum roadmap (the link is to a six-page DE-language document – also mentioned at the Global Government Fintech Lab 2023) as a “concrete product” to have emerged from the Digital Finance Forum. This roadmap is, she said, “guiding our fintech activities along the months and years to come.”

Supervisory authorities are among the other public sector bodies invited to participate in Digital Finance Forum activities, alongside the Federal Ministry of the Interior. She described the latter ministry as the hub of ‘GovTech solutions’ at a federal level, with the Federal Ministry for Digital and Transport also highly relevant; as well as Germany’s powerful states (the 16 Länder).

“We strongly believe that you need to actually understand the market and understand fintech business models [in order] to regulate it, use it, deploy it and navigate it, as is the title of this webinar,” Voelkl said, adding that engagement in international expert groups was also important. Overall, she said, organisations were akin to “ships… trying to navigate [fintech] waters [while] also needing to cooperate”.

‘“Fintech” is an umbrella term’

Vittorio Tortorici from the directorate for regulation and supervision of the financial system in Italy’s Department of the Treasury (part of Ministry of Economy and Finance) was the webinar’s second speaker.

“Initially we were ‘lost at sea’ but we have done [the] navigation,” he opened, like Voelkl riffing on the webinar’s maritime title.

Italian authorities realised some years ago, he said, that they needed to “overcome a knowledge gap” via directly engaging with fintech start-up companies and also with the “overall financial services community”.

“We followed the path that is very similar to the one described for Germany […] allow[ing] us to stay alert to the possibilities of fintech and somehow change our internal processes to be faster and more flexible to keep up with the financial world’s pace of change,” he said.

Tortorici, who is senior adviser for fintech and payments at the Treasury, continued his opening reflections by focusing on the webinar’s title.

“We [initially] found ourselves lost in the fintech world because ‘fintech’ is an umbrella term and – like with the with the term ‘fintechs’ – refers to a very broad range of different technologies applied to very different products and services,” he continued. “So, there was the risk of fragmenting our vision, our approach to towards these very broad phenomenon.”

‘Fintech is a moving target’

An Italian public sector ‘Fintech Committee’ – which Tortorici currently chairs – was established more than three years ago. Meeting quarterly, it helps to inform annual updates of a national fintech strategy and to define programmes and implement policies to foster digital finance’s development.

The committee’s composition reflects the “cross-sectoral, cross-cutting” nature of fintech, with representatives included from Italy’s Presidency of the Council of Ministers (the administrative structure that supports the prime minister) – “which gives us very strong political input”, Tortorici said – as well as financial sector authorities. Other bodies represented include the Ministry for Economic Development, Ministry of Economics and Finance, Agency for Digital Italy (AgID), as well as competition and data protection authorities.

The committee’s membership may evolve to include further parts of the public administration “because fintech is a moving target”, Tortorici said, giving the example of AI’s surge to prominence.

Separately to the committee, the creation of ‘innovation facilitators’ has been particularly important in respect of engaging with the fintech sector, including the creation of Italy’s regulatory sandbox in 2021.

The committee also facilitates “less formal” approaches to engagement, for example visiting fintech ‘accelerators’ and incubators to acquire “first-hand knowledge of industry developments.”

World Bank ‘whole-of-government’ approach

Hunt La Cascia, senior public sector specialist in the World Bank’s Governance Global Practice, set out how the Washington DC-headquartered financial institution defines and approaches ‘GovTech’. Specifically, he said that the World Bank takes a “whole-of-government approach to public sector modernisation that promotes simple, efficient and transparent government with the citizen at the centre of the reforms”. Its in-the-field activity is multi-pronged, with many programmes involving fintech elements or having the potential to be fintech-relevant.

One core element of the World Bank’s work is helping to transform core government systems, for example public financial management systems and ‘sectoral information systems’ (the World Bank includes fintech matters in this latter bracket). Examples of programmes include the implementation of ‘smart’ payment systems or working with central banks on improving real-time gross settlement (RTGS) systems.

Then there is the World Bank’s work enabling public service delivery through online services, for example the development of new portals or mobile apps; what the World Bank refers to as ‘ID for development’, for example civil registration and identification, and ‘e-ID’ services; as well as its activity seeking to capitalise on the potential of “disruptive technologies” such as AI, blockchain and RPA (robotic process automation).  

A further important element is fostering what the World Bank refers to as GovTech ‘enablers’, for example, digital skills and innovation-friendly legislation.

These components interlink, of course. “Once you get those core government systems [in place], then you start talking about some of the digital public services that can pull into this,” La Cascia explained. “There’s where the smaller or mid-size fintech companies could come in and integrate with those bigger systems to provide solutions that meet the needs of the beneficiaries or the various stakeholders.”

WB ‘GovTech Maturity Index’

Among many World Bank resources relevant to governments’ fintech use is its ‘GovTech Maturity Index’ (GTMI) described by the World Bank as ‘the most comprehensive measure of digital transformation in the public sector’.

The GMTI tracks 198 economies through 48 ‘key indicators’. It aims to provide a baseline and benchmark for GovTech ‘maturity’ and identify areas for improvement as part of broader aim to help in the design of new digital transformation projects.

Other initiatives include the World Bank’s ‘GovTech Academy’, launched in 2021 to ‘equip government officials, its staff, practitioners and development partners with the knowledge base to understand GovTech concepts, solutions and good practices and proactively apply those in digital transformation of the public sector’; and its Innovation Lab, through which the World Bank “works closely with countries on innovating and using disruptive technologies and fintech solutions”.

Picking up on Voelkl’s mention of ‘greentech’, La Cascia also mentioned that volume two of a recent World Bank publication – ‘Greening Public Administration with GovTech – Embracing a Green Digital Transition: Guidance Note – Volume 1’ (2023) – was coming soon.

La Cascia concluded his opening remarks by mentioning that the World Bank also convenes working groups, for example in areas including mobile government, cloud computing and interoperability.

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GovTech’s growing prominence

During the Global Government Fintech Lab 2023, Voelkl described how Germany’s Federal Ministry of Finance was ‘very heavily characterised as a lawyer- and economist-intensive ministry’ and was ‘trying 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.’

Asked how this drive had progressed, she responded that indeed the number of new recruits with a background “not traditionally the first to be approached by the ministries” had increased “significantly”. This was the case not only, she said, in the team interacting with fintechs “from a financial market perspective”, but also in teams interfacing with other units and agencies in fields such as tax and anti-money laundering.

It was proving useful, she said, to have colleagues close at hand who can explain to team members with, for example, economic or legal backgrounds “what a blockchain can actually do, and if I negotiate a law around it, is that actually matching that technology behind it”.

The ministry has established both an (internal) ‘Innovation Hub’ and ‘Data Hub’, something increasingly replicated in other ministries “so there’s also interconnectedness,” Voelkl explained. Asked whether the finance ministry’s Innovation Hub was focused on innovation in technology (of which financial technology could be a part) or focused on innovation in a broader sense, Voelkl responded that it was “basically both” and that it was “quite openly phrased regarding the use-cases that you can approach with”.

“On the one hand, it’s about how to make our internal processes more innovative and also more tech-driven. But it’s also, of course, [for] our ‘classic’ tasks, if we have problems to solve. For example, I think one of the latest use-cases was how to automise donations and associated tax aspects,” she said.

She said that there was increasingly regular exchange between Germany’s federal ministries at “higher levels” on “GovTech topics”, including, for example, digital ID.

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‘Lack of an innovation mindset’

Italy’s public sector often finds itself in a similar situation to that described by Voelkl in Germany when it comes to fintech-relevant skills and knowledge, Tortorici said.

“The Italian public administration has a legacy issue in the sense that most employees have an economic or legal background,” he said. “There aren’t many IT capabilities around […] when needed to implement most of the technologies – [for example] we have a lot of artificial intelligence projects and initiatives [and] we do not have enough IT engineers or STEM [Science, Engineering, Technology and Mathematics] profiles that could develop these initiatives.”

There can be legal and, of course, also budget constraints acting as roadblocks to recruiting and retaining the best talent. “Often we cannot offer the same salaries and benefits as enterprises, and so it’s not easy for the public sector,” he said.

 But he went further. “One [barrier] is the lack of IT capabilities and the right talent, but also sometimes there is a lack of an innovation mindset,” Tortorici said. “There aren’t many leaders that have the strength to sometimes overcome and/or challenge conventional wisdom and a lot of legacies that our public administration have.”

“In my experience, most of the real changes have stemmed from bright-minded leaders who are brave enough to challenge this [conventional] wisdom,” he continued. “I think the role of international organisations and knowledge partners is somehow to help these leaders to have a new idea to start the journey, to find stronger ideas to then propose internally and to try somehow to break convention. So, I think the cultural aspect is one of the main barriers. But we are working on it.”

Digital skills investment crucial

La Cascia referred to ‘Korea Digital Days 2023’, a conference hosted by the World Bank in Washington DC exploring the ingredients that have played a part in the Asian nation’s development. “The leader from the [Korean] delegation gave his keynote, saying that 50 years ago Korea was a different country, and that they had invested heavily in technology from the government since then, [spending] more on digital skills. That really shines a light on where to put these investments in government,” he said.

The World Bank had “historically” spent a lot of money on technology but had sometimes “missed the target” because programmes had put insufficient weight on digital skills, he said.

Views had now changed “profoundly”, La Cascia continued, saying that “we have to spend the money on putting people first” in terms of building capacity and implementing ‘change management’.

“These are huge people-centric activities that, historically for one reason or another, haven’t had the importance,” he said.

“Technology comes and goes, but the more that you can skill up the civil servants in the country in general, the better,” he continued, pointing out that the World Bank not only finances GovTech and fintech solutions but also accompanying “change management” and “adoption” programmes. “Where we’re doing that, it’s not just a little slice of the pie – it’s a big slice of the pie,” he said.

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Fintech procurement barriers

Discussion focused next on the extent to which fintech providers are able to secure public-sector contracts.

Responding that the World Bank is engaged with this question “very often”, Le Cascia made various points. First was that, from a government perspective, a prospective “piece of software or technology needs to be out in the market for at least six months – stable and working – before it can be considered for a procurement”.

“Maybe the private sector can really take those risks,” he said (referring to the purchase and use of very new solutions) but governments need to take a more cautious approach. “This is public money, and we [governments] need to be purchasing solutions and working with companies that are going to be there in six months, in a year or two years, supporting and maintaining the solutions that the governments are purchasing,” he said.

“The real barrier for these small- to mid-size fintech companies are the qualification requirements within procurement processes,” he continued. “Many times they don’t meet the financial criteria (for example, turnover). Additionally, they [typically] don’t meet specific technical criteria, which is usually [to have undertaken] similar projects of similar complexity with other governments. That’s going to be really hard for a small company.”

One way, therefore, for smaller fintech companies to make a breakthrough into public-sector work, he said, was to become a sub-contractor or involved in a joint-venture. “The only way that they can truly survive is if they team up with a larger firm that meets those qualification requirements,” La Cascia said.

Innovative approaches that the public sector can use to procure such solutions, he suggested, include organising ‘prize competitions’ or ‘piloting’ a solution before making a fuller commitment. (The World Bank has a ‘GovTech Procurement Practice Note’).

Germany and Italy making progress

Voelkl said that public procurement had been discussed by Germany’s Digital Finance Forum and pointed out that it was a topic relevant for all start-up companies (not just fintech providers).

She highlighted that some German states, for example Hamburg, had introduced “experimental clauses” in public procurement guidelines to enable “more innovative, younger companies” to be able to, firstly, meet procurements requirements, and then, secondly, have a chance to actually secure contracts.

“We are working on changing legislation and our regulatory framework to allow for procurement to be more fit for small enterprises,” said Tortorici, speaking of the Italian context.

He referred to a major recent tender for the creation of a new cloud infrastructure for all Italy’s public administrations (the Polo Strategico Nazionale / ‘National Strategic Hub’ project) that saw a joint-venture win the contract but with “many” fintech providers involved as sub-contractors.

AI prominent among priorities

The webinar drew to a close with the panel describing their current priorities and how they envisaged the future for ‘fintech for government’.

Voelkl said that, from a regulatory perspective, she would like to see “a lot of consolidation” after a flurry of EU lawmaking. “I think what we need is to give the market a bit of slack to actually adopt these [new rules], and actually be able to evaluate these, particularly regarding new technologies,” she said. In the meantime she envisaged significant private-sector progress in areas including green and sustainable fintech, AI and ‘RegTech’ (regulatory technology), adding that these were also fields where she envisaged “probably being surprised what we will be talking about in three years.”

Public sector uptake of AI solutions was mentioned by Tortorici. As an example, he said that Italy’s supervisory authorities are “working on AI tools that will allow us to screen the 1,000s and 1,000s of complaints and petitions [received] from the public [on an ongoing basis] and help us to understand which ones are the most important, [direct] them to the human analyst [who will] then focus on the more sensitive ones that need a follow-up.”

Two topics were highlighted by La Cascia: sustainability, saying that the World Bank was “looking at everything from an economic, social and environmental lens”; and AI, which he described as a “game-changer” to improve efficiencies.

These answers alone illustrate excitement about AI specifically (mentioned by all three panellists) but, more broadly, the diversity of challenges and possibilities created by ‘fintech for government’.

Global Government Fintech Lab 2024 – being held on 25 April 2024 in Dublin, Ireland – will continue the conversation featuring further perspectives across keynotes, panel sessions and fireside chats.

WATCH THE WEBINAR (1hr 15min 31sec)

Source: Global Government Forum YouTube page