Fin­tech: Cap­tur­ing the ben­e­fits, avoid­ing the risks

Financial Nigeria Magazine - - Contents - By Chris­tine La­garde Chris­tine La­garde is the Man­ag­ing Di­rec­tor of the In­ter­na­tional Mon­e­tary Fund. Source: IMFBlog

When you send an email, it takes one click of the mouse to de­liver a mes­sage next door or across the planet. Gone are the days of spe­cial air­mail sta­tionery and colour­ful stamps to send let­ters abroad.

In­ter­na­tional pay­ments are dif­fer­ent. Des­ti­na­tion still mat­ters. You might use cash to pay for a cup of tea at a lo­cal shop, but not to or­der tea leaves from dis­tant Sri Lanka. De­pend­ing on the car­rier, the tea leaves might ar­rive be­fore the seller can ac­cess the pay­ment.

All of this may soon change. In a few years, cross-bor­der pay­ments and trans­ac­tions could be­come as sim­ple as send­ing an email.

Fi­nan­cial tech­nol­ogy, or Fin­tech, is al­ready touch­ing con­sumers and busi­nesses ev­ery­where, from a lo­cal mer­chant seek­ing a loan, to the fam­ily plan­ning for re­tire­ment, to the for­eign worker send­ing re­mit­tances home.

But can we har­ness the po­ten­tial while prepar­ing for the changes? That is the pur­pose of the pa­per pub­lished today (June 20, 2017) by IMF staff, Fin­tech and Fi­nan­cial Ser­vices: Ini­tial Con­sid­er­a­tions.

The pos­si­bil­i­ties of Fin­tech What is Fin­tech pre­cisely? Put sim­ply, it is the col­lec­tion of new tech­nolo­gies whose ap­pli­ca­tions may af­fect fi­nan­cial ser­vices, in­clud­ing ar­ti­fi­cial in­tel­li­gence, big data, bio­met­rics, and dis­trib­uted ledger tech­nolo­gies such as blockchains.

While we en­cour­age in­no­va­tion, we also need to en­sure new tech­nolo­gies do not be­come tools for fraud, money laun­der­ing and ter­ror­ist fi­nanc­ing, and that they do not risk un­set­tling fi­nan­cial sta­bil­ity.

Al­though tech­no­log­i­cal rev­o­lu­tions are un­pre­dictable, there are steps we can take today to pre­pare.

The new IMF re­search looks at the po­ten­tial im­pact of in­no­va­tive tech­nolo­gies on the types of ser­vices that fi­nan­cial firms of­fer, on the struc­ture and in­ter­ac­tion among these firms, and on how reg­u­la­tors might re­spond.

As our pa­per shows, Fin­tech of­fers the prom­ise of faster, cheaper, more trans­par­ent and more user-friendly fi­nan­cial ser­vices for mil­lions around the world.

The pos­si­bil­i­ties are ex­cit­ing.

Ar­ti­fi­cial in­tel­li­gence com­bined with big data could au­to­mate credit scor­ing, so that con­sumers and busi­nesses pay more com­pet­i­tive in­ter­est rates on loans. · “Smart con­tracts” could al­low in­vestors to sell cer­tain as­sets when pre-de­fined mar­ket con­di­tions are sat­is­fied, en­hanc­ing mar­ket ef­fi­ciency.

· Armed with mo­bile phones and dis­trib­uted ledger tech­nol­ogy, in­di­vid­u­als around the world could pay each other for goods and ser­vices, by­pass­ing banks. Or­der­ing tea leaves from abroad might be­come as easy as pay­ing for a cup of tea next door.

These op­por­tu­ni­ties are likely to re­shape the fi­nan­cial land­scape to some de­gree but will also bring risks.

In­ter­me­di­aries, so com­mon to fi­nan­cial ser­vices – such as banks, firms spe­cial­ized in mes­sag­ing ser­vices, and correspondent banks clear­ing and set­tling trans­ac­tions across bor­ders – will face sig­nif­i­cant com­pe­ti­tion.

New tech­nolo­gies such as iden­tity and ac­count ver­i­fi­ca­tion could lower trans­ac­tion costs and make more in­for­ma­tion avail­able on coun­ter­par­ties, mak­ing mid­dle­men less rel­e­vant. Ex­ist­ing in­ter­me­di­aries may be pushed to spe­cial­ize and out­source well-de­fined tasks to tech­nol­ogy com­pa­nies, pos­si­bly in­clud­ing cus­tomer due-dili­gence.

But we can­not ig­nore the po­ten­tial ad­vances in tech­nol­ogy that might com­pro­mise con­sumer iden­ti­ties, or cre­ate new sources of in­sta­bil­ity in fi­nan­cial mar­kets as ser­vices be­come in­creas­ingly au­to­mated.

Rules that will work ef­fec­tively in this new en­vi­ron­ment might not look like today's rules. So, our chal­lenge is clear – how can we ef­fec­tively build new reg­u­la­tions for a new sys­tem?

Reg­u­lat­ing with­out sti­fling in­no­va­tion First, over­sight needs to be reimag­ined. Reg­u­la­tors now fo­cus largely on wellde­fined en­ti­ties, such as banks, in­sur­ance com­pa­nies and bro­ker­age firms. They may have to com­ple­ment this fo­cus with more at­ten­tion on spe­cific ser­vices, re­gard­less of which mar­ket par­tic­i­pants of­fer them. Rules would be needed to en­sure suf­fi­cient con­sumer safe­guards, in­clud­ing pri­vacy pro­tec­tion, and to guard against money laun­der­ing and ter­ror­ist fi­nanc­ing.

Sec­ond, in­ter­na­tional co­op­er­a­tion will be crit­i­cal, be­cause ad­vances in tech­nol­ogy know no bor­ders, and it will be im­por­tant to keep net­works from mov­ing to less reg­u­lated ju­ris­dic­tions. New rules will need to clar­ify the le­gal sta­tus and own­er­ship of dig­i­tal to­kens and as­sets.

Fi­nally, reg­u­la­tion should con­tinue to func­tion as an es­sen­tial safe­guard to build trust in the sta­bil­ity and se­cu­rity of the net­works and al­go­rithms.

The launch of our pa­per today is one of the steps in the process of prepar­ing for this new dig­i­tal rev­o­lu­tion. As an or­ga­ni­za­tion with a fully global mem­ber­ship, the IMF is uniquely po­si­tioned to serve as a plat­form for dis­cus­sions among the pri­vate and public sec­tors on the rapidly evolv­ing topic of Fin­tech.

As our re­search shows, adapt­ing is not only pos­si­ble, but it is the only way to en­sure that the prom­ise of Fin­tech is en­joyed by ev­ery­body.

A sign­board at a store in Guangzhou, China, lists var­i­ous forms of mo­bile pay­ment

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