Fintech boom continues but needs better regulation - World Bank report
It’s an exciting time to be in Fintech and banking. The latest World Bank report authored by Erik Feyen, Harish Natarajan, and Matthew Saal acknowledges that excitement but tempers it with caution: better policy-making and regulation will be needed in order for everyone to benefit.
Fintech and the Future of Finance
When the World Bank releases a major report covering Fintech and finance, it's wise to pay attention. The Fintech and the Future of Finance report is a joint effort by the World Bank and the International Financial Corporation.
Its summary alone runs to 85 pages and there are eight individual report documents that make up the whole, covering Fintech activity, market participants, market structure, regulation, consumer protection, payments, SMEs and digital money. It's certainly comprehensive, if a little dry in its prose.
The report looks at the current state of Fintech, crypto-assets, open banking, policy, regulation and other relevant topics, bringing them together into a coherent picture of where we are now and where we're going.
Given the World Bank's stated goals of ending poverty and increasing prosperity, there's a broad theme in this report: increased accessibility and availability of finance and banking services to everyone, everywhere. Good policy-making and regulation are seen as the methods by which that will happen.
The Fintech revolution
As described in the report, Fintech has seen explosive growth since the open banking initiatives in the EU and UK in 2018, but the COVID-19 pandemic gave it a big boost. The move to cashless payments for hygiene purposes, coupled with increased online spending during prolonged lockdowns, brought Fintech to the attention of many new customers.
Driven also by mobile devices, better communications networks and low-cost computing and data storage, Fintech has boomed. Old ways of doing business (in particular credit-scoring, real-time payments and catering to under-served SMEs) have been swept away - arguably not before time.
Having set the scene, the report delves into the key technological and economical drivers of Fintech-led change, describing how products, business models and infrastructure have all changed dramatically in recent years, and are predicted to continue to do so. It looks at risks and policy challenges, and talks with justification of the transitional state of Fintech being a 'paradigm shift'.
That's especially true of customer relationships, with potentially no single 'owner' of a customer in the traditional banking sense. Banks may step into the background in some cases, acting as the fundamental infrastructure while Fintech firms sign up customers who don't even know or care what lies beneath.
Crypto's role: good or bad?
It's clear that crypto is seen by the report's authors as the fly in the Fintech ointment, yet also the potential salvation of monetary systems everywhere. On the one had, 'unregulated' crypto-assets threaten to reduce the legal and practical influence and control maintained by banking institutions and financial regulators.
On the other hand, central bank digital currencies (CBDCs) could be tremendously helpful in streamlining wholesale banking transactions, although introducing them into retail banking markets could cause serious upheaval.
There's no doubt that crypto is forcing regulators and governments to change their game. The report foresees some kind of hybrid approach being adopted in the near future, with CDBCs being used alongside conventional monetary systems in a limited way.
Transactions without borders
Like the internet itself, Fintech respects no borders by default, so artificial barriers must be applied by regulators if they wish their laws to remain relevant. Furthermore, Fintech can't be neatly divided into market sectors, since one app or company might provide access to banking, investment, insurance and other services.
The report accepts that policy-makers and regulators are going to have to stay on their toes, working with competition authorities to try to keep the playing field level for the benefit of customers. Given the pace of technological change, that's going to be a serious challenge.
A recurrent theme in the report is the drive for fairness and customer safety. Almost every section includes a nod to the need for effective policy, regulation, supervision and oversight frameworks, while maintaining competition so that growth doesn't stagnate.
A fast-changing future for Fintech and Finance
One is left with the impression that Fintech and banking are in an exciting phase, in which dramatic change is happening continuously.
The struggle from the World Bank's perspective is to ensure that this change results in benefits for everyone: not just the rich in Western countries, but everyone from SMEs to poor people in rural areas of developing countries with no existing banking infrastructure.
In this respect, the report notes repeatedly the negative association between Fintech activity and bank development. In other words, Fintech is reaching people that conventional banking cannot, or at least so far has not.
As with a racehorse that's galloping ahead, almost-but-not-quite out of control, the challenge is to ensure that the horse finishes the race and the rider doesn't fall off. There's no shortage of fences for Fintech to leap, including the ethical use of AI, which gets a short Appendix of its own yet arguably deserves a lot more.
If governments do follow the recommendations of the Fintech and the Future of Finance report, we can expect stronger policy directives and regulations coming soon. With luck, those will be designed and applied in ways that encourage growth and competition without sacrificing fairness and accessibility.
You can read the report and download its individual documents via this link.
Image: World Bank Group
