FSI Paper Discusses Regulatory Framework for Digital Banks
FSI published a policy implementation insights paper that explores the frameworks in place in worldwide to regulate digital banks and fintech platforms. The paper provides a cross-country overview of the regulatory requirements for digital banking and fintech platform financing in 30 jurisdictions. It describes the range of licensing and ongoing regulatory requirements for digital banking, including transitional arrangements in the startup phase, and fintech platform financing, also offering considerations for financial authorities. The paper suggests that financial authorities will likely have to weigh a number of elements when assessing whether their regulatory framework is adequate or needs to be adjusted to account for new fintech activities.
The proliferation of new technology-enabled business models has raised questions about the regulatory perimeter. Authorities are assessing whether their existing regulatory framework needs to be adjusted. For digital banking, most jurisdictions apply existing banking laws and regulations to banks within their remit, regardless of the technology they apply. From these jurisdictions, a few have put in place initiatives that are intended to ensure that new banks find it easier to enter the market by allowing them time to complete their build-out or to meet the requirements of the prudential framework in full. The paper highlights that, in the few jurisdictions that have set specific regulatory frameworks for digital banks, the main licencing and ongoing requirements are similar to those for traditional banks.
The main difference between licensing requirements for traditional and digital banks is in technology-related elements and the aims of the business plan. Digital banks face restrictions on their physical presence and, in some cases, the market segments they are allowed to serve. Their fit-and-proper requirements tend to be more prescriptive in relation to board members’ expertise in technology; a satisfactory track record in operating a technology business; and assessments of technical infrastructure by independent third-party technical experts. In addition, some jurisdictions require digital banks to demonstrate a commitment in driving financial inclusion, particularly for under-served and hard-to-reach market segments. However, most surveyed jurisdictions have no specific regulatory framework for fintech balance sheet lending and many surveyed jurisdictions have introduced crowdfunding regulations.
The paper concludes that, in general, financial authorities will probably have to weigh a number of elements when assessing whether their regulatory framework is adequate or needs to be adjusted to account for new fintech activities. Authorities will need to assess not only potential risks of these new activities to consumers and investors, financial stability, and market integrity but also potential benefits for society in terms of strengthening financial development, inclusion, and efficiency. Based on this assessment, authorities will have to consider whether fintech-related risks are adequately dealt with under the existing regulatory framework and whether opportunities for regulatory arbitrage have opened up. Overall, the challenge for authorities will be to achieve a balance that encourages innovation without compromising the soundness of the financial system.
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Keywords: International, Banking, Digital Banks, Fintech, Regulatory Framework, Prudential Framework, Bank Licenses, BIS, FSI
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