Financial authorities in the developing world are increasing the priority they give to fintech with greater intensity than authorities in advanced economies, according to a survey.
The 3rd Global Fintech Regulator Survey, produced by the UK’s Cambridge Centre for Alternative Finance (CCAF) and the World Bank, aims to collate information that regulators can use to benchmark, evaluate and prioritise policy responses to fintech developments. It captures how the regulators’ mindsets are evolving, including how much resource they are devoting to enabling the fintech ‘ecosystem’ and the extent to which they are prioritising fintech (versus ‘traditional’ finance) in their own supervisory activities.
Covid-19 continues to be a catalysing force, particularly in emerging markets and developing economies (EMDEs), for financial authorities to prioritise fintech-related initiatives, the report – which collates responses from 128 authorities in 106 jurisdictions – highlights. This is illustrated by 56 per cent of EMDE respondents increasing the priority ceded to fintech, compared to 35 per cent of respondents in advanced economies.
The trend is most acutely observed in Sub-Saharan Africa, where 75 per cent of respondents reported an increase in fintech prioritisation. Regulatory innovation initiatives, such as innovation offices and regulatory sandboxes, are specific areas of growth in EMDEs.
The 78-page report notes that financial regulators around the world recognise the importance of fintech business models for helping with financial inclusion alongside technology’s benefits for managing consumer risks associated with digital financial services. But authorities also have ‘significant’ concerns about mitigating existing and emerging consumer risks – most notably cybersecurity (78 per cent of respondents – the same figure as the previous survey, published one year ago), fraud and scams (67 per cent of respondents, a figure that has rocketed from just 18 per cent), and in the digital assets sector.
Research’s four themes
The survey asked questions covering four themes: the medium-term impact of Covid-19 on policy responses to fintech; perceptions of continuing and emerging consumer risks within fintech and their implications for consumer protection; the landscape of digital regulatory and supervisory infrastructures (DRSI) used to enable effective regulation and oversight of fintech markets; and mapping the emerging field of SupTech (supervisory technology) activities.
It is an evolution of the previous (second) research, ‘The Global Covid-19 FinTech Regulatory Rapid Assessment Study’, which surveyed 118 financial authorities from 114 jurisdictions about how they had responded to the pandemic (in the context of regulating and supervising fintech activities and other forms of digital financial services).
In terms of the medium-term impact of the pandemic, the latest findings – which are based on fieldwork undertaken between April and July this year – show an overall increase (from 45 per cent to 50 per cent) in the proportion of respondents that consider that the priority given by their authority to fintech has risen due to the pandemic.
General consumer protection risks are of greater concern for financial authorities in EMDEs (56 per cent) compared to those in advanced economies (43 per cent). Respondents reported capacity and resource constraints as the main challenge, with authorities most worried about their internal capacity to effectively mitigate consumer risks related to digital assets and crypto-assets.
Far more respondents in advanced economies use DSRI than those in EMDEs, with the most common applications being for consumer protection and ongoing supervision. The most desired area for DRSI application is monitoring competition practices (cited by 50 per cent of respondents). However, this is also the regulatory function with the lowest currently active/operational DRSI (reported by just six per cent of respondents). Forty per cent of respondents indicated an aim to apply DRSI to open banking. Other digital initiatives that regulators and supervisors are interested in are: digital ID/e-KYC (know-your-customer); central bank digital currencies (CBDCs); and digital asset supervision.
In terms of SupTech, existing initiatives largely support collecting or analysing data or automating workflows, with more than half the respondents (60 per cent) reporting that their SupTech initiatives are underpinned by application programming interfaces (APIs); 58 per cent by ‘descriptive analytics tools’; and 50 per cent by web portals. Limited data analytics capabilities, budgetary constraints, and data and reporting issues are the main obstacles to implementing SupTech tools.
‘Data-driven’ risk assessment tools
“This comprehensive dataset offers a unique view into the world of fintech regulators and their respective institutions at a time of rapid changes in digital financial services globally,” said CCAF co-founder and executive director Bryan Zhang. “We hope that the data and insights generated will inform the work and practice of fintech regulators, supervisors and policymakers, help them benchmark responses, frameworks and activities, and facilitate meaningful peer learning and knowledge exchange.”
“At the World Bank, we see a growing demand from client countries for data-driven assessment tools of risk in financial services,” said Jean Pesme, global director for finance, competition and innovation at the Washington DC-headquartered World Bank. “In addition to seeking insights into the management of persistent and emerging risks, the survey has also explored how and where regulatory authorities are using different types of digital infrastructures to enhance regulatory and supervisory functions. Understanding and mitigating risks is key – the survey and experience around the globe also demonstrate that this can be done while harnessing the tremendous potential of fintech for financial inclusion and access to finance.”
The research was financially supported by the UK government and US-headquartered philanthrophic organisation the Bill & Melinda Gates Foundation (BMGF).
“The UK is committed to the development of fintech domestically and internationally, supported by regulatory environments that enable innovation, as well as the protection of people and businesses,” said Sian Parkinson, inclusive digital finance lead at the UK Foreign, Commonwealth and Development Office. “The report’s findings share valuable insights for the development of future policy and regulation, to ensure fintech continues to increase its reach, safeguarding consumers, deepening domestic capital markets and accelerating economic growth globally.”
*** Separately, the CCAF held a webinar on 1 December to officially launch its ‘Regulator Knowledge Exchange’ – described as a community-focused digital hub for regulators and policymakers ‘to network, share knowledge, seek technical assistance, debate and collaborate on matters related to the regulation and supervision of digital financial services’. The United Nations secretary-general’s special advocate for inclusive finance for development, HM Queen Máxima of the Netherlands, delivered (virtually) the keynote address.
‘Global surge in digital payments aids financial inclusion: World Bank’s Findex’ – our news story (30 June 2022) on ‘The Global Findex Database 2021: Financial Inclusion, Digital Payments and Resilience in the Age of Covid-19’ (a 225-page report)
‘Cambridge SupTech Lab launches with focus on low- and middle-income nations’ – our news story (6 April 2022) on a ‘SupTech Lab’ launching at the Cambridge Centre for Alternative Finance
‘Global study explores fintech regulators’ Covid-19 response’ – our news story (30 November 2021) on the previous year’s 81-page report