Ghiyazuddin Ali Mohammad, Policy Manager, Digital Financial Services, AFI

Five trailblazing DFS and FinTech regulatory trends not to miss in 2018

2018 is set to be an innovative year for regulators and policymakers!  

Innovative, technology-based financial services hold untapped potential for financial inclusion. Due to rapid growth and ensuing complexity of digital ecosystems, regulators will focus on building their capacities because learning is key to better regulation. Increasing number of regulators and policymakers are already embracing technology to achieve financial inclusion — strengthening the core mandate towards financial system stability, integrity and protection of consumers.

Read on for five key trends in digital financial services (DFS) and FinTech to look out for in 2018.

1. Digital identity

More than 1.1 billion individuals across the globe lack any form of legal identity. According to a study, 18 percent of the respondents cite ‘lack of identity’ as the reason for not owning a formal bank account.  Digital, biometric identification (IDs) is an effective tool to promote financial inclusion and at the same time, strengthen Know Your Customer (KYC), Anti-Money laundering (AML) and Countering Financing of Terrorism (CFT) strategies.

Countries such as India, Pakistan and Kenya have utilized the national digital ID infrastructure towards financial inclusion initiatives. In 2018, countries including Zambia[1], Nigeria, Afghanistan, Russia and Egypt will see increased adoption of digital ID for financial services. With the proliferation of digital ID programmes, there is a need to address key issues such as cybersecurity, data access and privacy.

2. Peer-to-peer (P2P) lending

There is a huge credit gap for individuals, small and medium size enterprises (SMEs) and micro SMEs (MSMEs); globally, only 11 percent of the adult population has formal credit. It is estimated that 200 million small businesses globally are unable to get the credit they need — an estimated credit gap exceeding $2 trillion.

FinTech models such as peer-to-peer (P2P) lending enables individuals and SMEs to gain access to formal credit by individuals, thus helping to reduce the credit gap. However, as micro and MSME loans based on alternate credit assessment models grow throughout the developing world, they also pose risk to the system in terms of:

  • Type of entities offering P2P lending platforms
  • Type of individuals/entities lending through the platforms
  • Types of individuals/entities borrowing through the platforms
  • Credit assessment and risk management models in place
  • Consumer protection related issues

In 2017, countries such as China, Indonesia, India, Malaysia and South Africa issued P2P lending regulations. Going forward in 2018, many more countries such as Mexico, Brazil, Cambodia are expected to come up with guidance and regulations on P2P lending.

3. Payment systems development

Safe, fast and reliable retail payment systems are a conduit to financial inclusion. In 2017, we saw significant developments on the payment systems front; Thailand, Singapore, Philippines and Jordan came up with their own payment systems. Going forward in 2018, we will see many countries and regulators come up with retail payment systems. This will be in the form of guidance or through promoting a national, interoperable payment platform themselves, drawing from Bangladesh and Paraguay as examples. 2018 will also see adoption of innovative opensource platforms by regulators and financial services towards interoperable retail payments. Real-time payments will become the new norm!

4. Regulatory sandbox and innovation hubs

Regulatory sandbox and other such approaches allow FinTech companies to offer innovative solutions within a controlled environment, without compromising on financial stability, integrity and consumer protection mandates. Till now, a total of 20 countries including emerging market economies such as Indonesia, Malaysia, Fiji and Sierra Leone have introduced the sandbox.

Regulatory sandboxes may still be in its infancy, yet they provide a collaborative platform for regulators to work with FinTech players.

  • Collaboration enables regulators to understand various business model innovations. Deeper understanding of the models along with learnings from pilot implementations help policymakers come up with evidence-based DFS/FinTech regulations. This approach also helps them adapt to the rapidly evolving financial services ecosystem in a gradual, incremental manner.
  • Collaboration equips FinTech players with the skills and knowledge to develop products and business processes that comply with regulatory requirements.

Moving forward in 2018, countries like Brazil, India, Kenya and Nigeria are planning to introduce the sandbox.

5. Regulations on cryptocurrencies and crypto-exchanges

Cryptocurrencies and more specifically, blockchain — the technology behind cryptocurrencies — hold promise for financial inclusion. These technologies offer potential benefits including making both domestic, and cross-border payments and transfers efficient and cheaper.

The demand for bitcoin and other cryptocurrencies is growing. The combined market cap of cryptocurrency assets rocketed from $15 billion in January 2017 to over $600 billion by the end of the year — an incredible 3900 percent growth! Bitcoin alone has grown by more than 1200 percent in 2017.

Riding on the demand for cryptocurrencies, Initial Coin Offerings (ICOs) — a means of raising capital for business ventures through cryptocurrencies — are also gaining prominence. In 2017 alone, 235 ICOs were issued, worth close to $3.7 billion. Growth in cryptocurrencies is wildly volatile and seems largely speculative; unregulated ICOs with few barriers to entry make these risky investments.

In 2017, many developed and emerging market regulators, like the European Union, United States, Japan, India, South Korea and China have taken measures to regulate the market including:

  • Banning cryptocurrencies (Bolivia, Ecuador, Bangladesh, Morocco)
  • Banning cryptocurrency exchanges (China, Russia, Namibia)
  • Issuing cautions (India, South Korea)
  • Treating cryptocurrencies as “security” or a “commodity” so that they come under existing regulations. (Germany, Japan)
  • Requiring cryptocurrency exchanges to conduct full KYC of their customers for AML-CFT purposes” (Philippines, Malaysia)

Coming up in 2018, many more countries are expected to provide guidance or issue regulations on cryptocurrencies and cryptocurrency exchanges, and ICOs as part of investor protection, AML and CFT efforts.

However, regulators are quite interested in blockchain. According to a recent survey conducted by Cambridge University, one in five central banks (out of the 25 interviewed) said they will use  blockchain technology by 2019, mainly for issuing digital currency (Russia, China, Sweden, Estonia), payments, regulatory compliance, ownership records management and identity.

Evidently, regulators and policymakers among the AFI membership have their task cut out. To enable our members to master the act of balancing innovation and oversight, AFI has a slew of activities scheduled in 2018 from knowledge products, capacity building events, peer learning activities to a variety of workshops and policy forums.

We look forward to an exciting 2018!