Kristine at ABD-ABAC-APFF-Fintech Workshop - Blog 1

July 05, 2017


APFF Fintech Workshop

Manila, Philippines, July 5, 2017

By Kristine Yang 

For layman, FinTech, or financial technology, may seem a fancy concept. But for professionals in the financial sector, FinTech, is far from new, dating back to the 1970s when electronic trading began or even earlier when ATMs began to replace bank tellers in dispensing cash. But even today, technology has been moving so fast that it is hard to narrowly define what exactly people mean when they talk about financial technology, except to say that it generally describes any technological innovation that enables financial services covering payment, insurance, investment and lending. It could be big data analysis, block chain, digital currency, Peer-to-Peer (P2P) lending or crowd funding, etc.

It was not so long ago that e-commerce was still the buzz word for revolutionary change. Now, driven by mobile payment, those e-commerce leaders are going global, and expanding their footprints into financial services, along with other innovators and entrepreneurs, challenging all legacy systems. Tech giants like Alibaba, Tencent, Amazon, Facebook, have become so influential nowadays even Demark has appointed a Silicon Valley Ambassador to deal with them.

What is also evolving rapidly is recognition of the great potential of FinTech for traditional financial institutions and regulators – now called “RegTech (regulatory technology)”. Despite the destructive challenges to traditional players being generated by the new entrants, Fintech offers lucrative opportunities to increase efficiency and transparency, to reduce cost, risk and leakage, and perhaps most important, to foster greater financial accessibility and inclusiveness.

When the financial landscape is undergoing fundamental change, regulators face the simultaneous challenge of overseeing the “too small to take care of” and the “too big to fail”. Technology innovation, on the other hand, offers a tremendous new area for regulators to use new technologies to resolve regulatory and compliance requirements more effectively and efficiently. That is the RegTech. It could be used by financial providers in compliance or by regulators in improving regulatory enforcement or building new financial infrastructure. For example, it could be using machine learning in presetting compliance rules, or using big data to meet Know Your Customer (KYC) requirements or to underpin regulatory reporting frameworks.

FinTech and RegTech are two sides of one coin, one covering the financial transaction between customers and financial service providers, the other covering the regulatory process between financial institutions and regulators. To be simply, FinTech requires RegTech.

Since the 2008 financial crisis, compliance has been the red line for regulators. Over $320 billion has been fined as banks have been ruled to have failed in compliance. But regulators are now becoming more proactive in terms of balancing the risks and rewards. In particular, central banks in the emerging markets of the Asia Pacific where the needs of a largely unbanked population remain unmet and have great potential to grow, are closely monitoring Fintech developments and creating space or “sandboxes” to allow pilot programs to be tested without the suffocating encumbrance of the regulatory frameworks that apply to established financial institutions.

The key challenges in RegTech are digitalization and digital protection. Who owns the data? How to manage data acquisition and data flow? How to ensure cyber security? How to address the cross-border jurisdiction issue? How to standardize the financial reporting language? Without doubt, cooperation is essential, among FinTech participants, financial institutions and policymakers, among different sectors such as banking, insurance, trade and telecom, as well as among different jurisdictions. This is infrastructure that is urgently needed. 

Human capital is another challenge to equip the regulators on dealing with changes in financial system and improving the entire regulatory framework– not least the haunting questions of how FinTech is likely to affect monetary policy, and what direction meaningful regulation is heading in the new tech era.

The Asian Development Bank (ADB) and APEC-ABAC conceived Asia Pacific Financial Forum is addressing all of these pressing issues. I will be reporting back.

 

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