DGM of BIS Examines Impact of Fintech on Emerging Market Economies

Mr. Silva reviewed the fintech developments relevant for emerging markets, with focus on distributed ledger technology (DLT) and mobile and internet; he also touched on machine learning and big data. While examining some recent applications to mobile banking and payments, peer-to-peer lending, remittances, trade finance, and credit extension, he highlighted the potential of these innovations as new forms of financial inclusion and financing channels. He added that commercial banks and central banks (such as HKMA, RBI, and MAS) have collaborated with startup companies to explore an application of DLT to trade finance. One transaction conducted in late 2016 showed that DLT could cut processing time from 20 days to only a few hours relative to a paper-based system. Other banks are also reported to have tested similar DLT-based trade finance systems successfully. However, commercial viability hinges on widespread adoption and cross-border interoperability. Finally, after discussing their potential implications for monetary and macro-prudential policies, he concluded by examining the options for a regulatory response.

The DGM of BIS highlighted that many of the emerging market economies have a relatively less developed financial sector and a larger share of the population that is financially excluded. Such economies naturally have more scope to reap significant benefits from these technological transformations. However, these innovations could also undermine the franchise value of existing financial institutions and lead to excessive risk-taking or regulatory arbitrage. Thus, it is important for central banks and the regulatory community to keep track of current developments and to keep regulatory frameworks up to date. He finally outlined the pragmatic strategies for responding to these fintech developments:

• First, many central banks are equipping themselves to cope with the challenges; they have set up dedicated fintech units or working groups, often with specialized staff members, to keep up with technology developments.
• Second, central banks are taking a proactive approach to foster technological developments. For example, some central banks are offering research and development support, or plan to engage in such activities themselves. Some central banks are also facilitating knowledge-sharing and the exchange of ideas between innovators, industry participants, and/or academics via forums. Another important measure is to establish controlled regulatory environments, or “regulatory sandboxes,” to allow innovators to test their products and services, sometimes with real customers. By helping with the identification of active fintech players and evolving risks, these initiatives could serve as an effective guide for regulators as they strive to adjust their regulatory standards in response to fintech.
• The third approach is to pick the low-hanging fruit. To that end, some central banks are collaborating with technology companies to develop applications that aim to improve some long-standing “paper-heavy” inefficient practices in areas such as trade finance and domestic letters of guarantee.
• Fourth, central banks are striving to maintain a level playing field by promoting interoperability in fintech. For example, central banks may invite technology companies to develop common Quick Response codes for acceptance across different mobile wallets, or internet platform operators, and banks to become stakeholders in an online clearing house.
• A fifth approach consists in acting tough on those innovations where central banks find it difficult to draw a line. The recent bans on initial coin offering activities imposed by the Chinese and Korean authorities are an example of the readiness of central banks to intervene if needed.

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Keywords: International, Banking, PMI, Securities, Regtech, Fintech, Emerging Markets, BIS