The rise of fintech has the potential to extend the benefits of financial inclusion to millions of people but also poses complex regulatory challenges, says a new UN-backed report which also questions the value of the increasingly popular sandbox approach.
In a report for the UN Secretary-General's Special Advocate for Inclusive Finance for Development (UNSGSA), written with the Cambridge Centre for Alternative Finance and backed by the Monetary Authority of Singapore, fintech is praised for its impact on the unbanked over the last decade through developments such as mobile payments, P2P lending, alternative credit scoring and new forms of saving and insurance.
This positive impact can continue, helping to reach the 1.7 billion still without a bank account. But, warn the authors, the extent to which these new technologies can boost financial inclusion is subject to the regulatory environment in which they operate in emerging economies, where watchdogs have limited resources, and tech-driven innovation adds to their burden.
The report is wary of the sandbox approach to regulation that has begun to dominate in developed economies, arguing that it is ill-suited to countries with large unbanked populations.
"Lessons learned from early regulatory sandboxes highlight that they are neither necessary nor sufficient for promoting financial inclusion. Sandboxes do offer benefits but are complex to set up and costly to run. Experience shows that most regulatory questions raised in connection with sandbox tests can be effectively resolved without a live testing environment. Similar results may be more affordably achieved through innovation offices and other tools," says the report.
More valuable are innovation offices, facilitating early regulator-innovator engagement to help both sides understand each other.
Regtech, which the report defines in relation to monitoring and enforcing compliance, has yet to take off in emerging markets. Regulators seeking to adopt regtech tools should start small with one or two test cases and build momentum from there, the report says, adding that to succeed, dedicated staff familiar with new technologies are needed.
Overall, the authors encourage regulators to be agile and open as they innovate and create initiatives, engaging with a broad range of stakeholders and carrying out small experiments.
Concludes the UNSGSA, Queen Màxima of the Netherlands: "This report comes at a key moment when fintech has given us an unprecedented opportunity to bring more people into the formal financial system,” said . “While these innovative tools are exciting, countries need guidance on how to regulate them in a way that maximizes their potential and minimizes their risks."
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