Sharing AFI’s lessons on FinTech and de-risking through peer-learning in the Caribbean
The annual Caribbean Group of Banking Supervisors (CGBS) XXXV conference took place in Antigua & Barbuda on 6 – 8 July 2017 to discuss the impact of technology on supervision. The event gathered more than 50 regulators and policy practitioners from 17 jurisdictions in the Caribbean, representatives of the US Department of Treasury, the International Monetary Fund, US Federal Reserve Board of Governors, and the Alliance for Financial Inclusion (AFI).
During the three days of discussions, participants exchanged ideas on the impact of technology in fostering financial inclusion, as well as regulatory challenges and supervisory implications of using innovative financial products provided by non-financial institutions.
AFI was invited to share its experience on recent developments in financial intermediation through digital channels and trends of cross-border payments in de-risking.
The financial sector in Latin America and the Caribbean (LAC) is facing lower levels of spreads (difference) between lending and deposits rates. According to the World Bank, the spread in 1995 was 13 percentage points (p.p.) but in 2016, the spread is estimated to be below eight p.p. This has translated into lower profitable levels for banks despite their efforts to generate revenue from other sources other than credit portfolio.
As a result, new players are entering the market to provide credit. In 2000, the share of credit provided by non-bank financial institutions was 3% of the Gross Domestic Product (GDP). However, in 2016, the share of credit is estimated to be 8 percent, less than a fifth of the credit provided by banks but it represents a significant source of financing for excluded segments of the population.
According to the Cambridge Centre for Alternative Finance, US$35 billion were channelled through online platforms in 2016 within the Americas (includes US, Canada, and LAC), three times the amount that was recorded in 2014. However, this was different for LAC where US$342 million were directed through these platforms in 2016, five-fold from the reported figure in 2014. The steady growth rate of these new financing models is attracting the attention of regulators given the impact this could have on over-indebtedness at a household level, and origin of the funds and compliance with Anti Money Laundering and Combating the Financing of Terrorism (AML/CFT).
However, these new channels of financing are facing challenges in LAC. Given the competitive environment of online platforms, 86% changed their products, and 57% made reforms to their business models in 2016, as reported by the Cambridge Centre for Alternative Finance. In addition, four out of 10 platforms are perceived to have a high risk of collapse due to malpractice. The industry is not only facing operational challenges; 26% of platforms do not have specific regulations in their home countries to govern their activities.
The LAC region is also facing challenges related to cross-border payments in de-risking. Taking into account stricter rules on risk management and regulatory requirements, a few global banks have opted to terminate their relationship with counterparts that have a high-profile risk or restrict certain services for selected regions in the world, which could potentially impact the sending of remittance to LAC.
Despite the drivers of de-risking, which traditionally include a strong component of risk and uncertainty regarding these types of payments, the regional behavior has shown significant decreases in costs, accompanied by an increase in remittances worldwide. This is primarily driven by increased competition among service providers. In addition, alternative channels offer services that are efficient and affordable compared to traditional channels.
In order to tackle the consequences of regulatory policies, it is critical to ensure that the most impacted countries have a voice — a global dialogue on constructing a supportive regulatory environment that is continuously strengthened. These countries should work towards improving their standards, providing information on risk, and implementing customer due diligence requirements, and know your customer (KYC) procedures.