I just came from a conference hosted by Banco de España attended by representatives from 19 central banks and 3 international research institutions and one of the liveliest discussions in that conference was on the digital transformation (fintech or digitech) of the banking and financial sector. What was equally interesting was the commonality of reactions among the regulators on the issues brought about by this development.
There was recognition that such technological transformation, which has given rise to a lot of emerging companies, numerous solutions, new ideas and products, is happening at breakneck speed, posing challenges just to keep up with it. All interconnections among all levels and sectors, laterally, downwards and upwards, have now only one basic origin: information technology.
Trade and business cannot exist without it. It is the foundation of commercial transactions. One central banker said that today is not merely an era of change, but a change of era!
There are positive aspects to this progress. The availability of big data has contributed greatly to more efficient operations, more comprehensive bases for supervision, forecasting, risks identification and decision making. The transformation has provided entry points for financial inclusion and stimuli for capital market growth. This is very true in the Philippines where availment of financial services is being encouraged via cellphones. On the other hand, there are also downsides and these would include new cyber threats, breach of privacy issues, regulatory arbitrage (or keeping out of the regulator’s way through shadow banking), and opportunities for money laundering.
How then would a regulator perform amidst such environment? The suggestions given are basic and these would apply not only to regulators but also in general to whoever will participate in such transformation. The foremost suggestion is to settle down and not be intimidated by the technicalities. The burden is on the proponent to make you understand their product and services. Surely, if they fail to convince, they will not be patronized. Therefore, be deliberate and diligent. Do not be rushed into making any decision without full understanding.
Another basic suggestion is to invest in people who are knowledgeable and competent in this field. Decision-making should not rely solely on the presentation by the proponents, but more importantly on the evaluation by technical people on your side. In other words, your organization should be well-attuned towards digitalization.
For regulators, another basic suggestion is to be guided consistently by their mandate to protect funds of the public which pass through payments systems. Disruptions in payments processes could pose risks to financial stability. To avoid these risks, aside from reviewing the security and reliability of systems, much emphasis should be given on the fitness, capability and track record of the proponents, together with the sustainability of their business model. As one regulator said, if the proponent cannot even raise sufficient capital, cannot explain how income will be derived, how returns can be delivered to their stakeholders, and how it all operate in the long-term, such proponent does not deserve a license. Such proponent, he said, may have a different purpose in mind such as diversion of funds, unauthorized investments, pyramiding or any other scam.
There were many other points of interest discussed in that conference and looking at the future horizon, the aspiration is for a uniform regulatory framework among central banks in dealing with digital transformation. Digital transactions are borderless transactions and the regulatory issues arising therefrom are common worldwide thereby calling for enhanced cooperation and coordination among the central banks.
The above comments are the personal views of the writer.
His email address is [email protected]