Riding the wave of technological innovation, BSP navigates the future at 25
TECHNOLOGY-DRIVEN innovations in financial services, or fintech, have become a prominent driving force in reshaping the financial system landscape here and abroad. Fintech is fast transforming and disrupting traditional financial services delivery with the increased adoption of innovative digital solutions to maximize operational efficiency, enhance customer experience, and gain competitive advantage.
Fintech allows consumers ( including those untapped by traditional financial intermediaries) to access financial services with utter speed, efficiency, affordability and convenience via multiple channels.
In this changing and dynamic ecosystem, financial institutions, regulators and consumers must be vigilant and aware of fintech risks that may adversely affect the general safety and soundness of the banking system. The challenge is to capitalize on fintech while mitigating its associated risks.
BALANCED APPROACH TOWARDS INNOVATION
The Bangko Sentral ng Pilipinas (BSP) recognizes the potential of innovative digital solutions in fostering greater efficiency in financial services delivery, and in further advancing financial inclusion. Thus, one of its strategic policy objectives is to support responsible fintech innovation.
The BSP systematically adopts a regulatory environment that allows innovations to flourish while ensuring that risks are effectively managed and that consumer welfare is equally protected. The BSP recognizes that regulations should be agile to respond to fast changes in the fintech space.
The BSP has a balanced regulatory approach to fintech anchored on three core principles, namely, risk-based and proportionate regulation, active multistakeholder collaboration, and consumer protection.
These principles are implemented through the BSP’s flexible “test and learn” approach to financial innovations. In this approach, innovators can connect to banks and other financial system players with clear authority from regulators. The approach is also known as the “regulatory sandbox.”
HARNESSING BENEFITS WHILE MANAGING RISKS
Fintech innovations also support the BSP’s financial inclusion objectives. Leveraging on safe, innovative and cost- efficient digital solutions, financial institutions can significantly reduce transaction costs, provide faster banking services and expand market reach. Fintech innovations provide people from all walks of life (especially the unbanked and underserved populace) alternative access to much needed financial services and investments.
Consistent with the BSP’s thrust to promote a truly inclusive and efficient financial system, regulations allow BSP supervised financial institutions ( BSFIs) to leverage on innovative digital banking solutions to expand the scope of delivery of financial services to the financially unserved and underserved market. The BSP allows the use of third-party cash agents as a cost- efficient service delivery channel and encourages banks to implement risk-based Know-Your- Customer ( KYC) rules for certain low-risk accounts. The use of technology as a substitute for faceto-face contact requirements to facilitate customer on- boarding has become an allowable option for banks to benefit from innovative solutions. The BSP has enhanced its regulatory oversight for pawnshops and money service businesses ( MSBs) allowing them to play a greater role in providing basic financial services to the unbanked.
The use of innovative technologies also creates opportunities for both regulators and financial institutions to effectively pursue regulatory oversight and supervisory functions as well as to efficiently comply with regulatory requirements.
Given the promising role of regulatory and supervisory technology, or RegTech, and the efficient data analytics, the BSP is currently exploring the possible adoption of RegTech solutions to strengthen its risk-based regulatory oversight and supervisory activities.
The BSP has partnered with RegTech for Regulators Accelerator ( R2A) to assess the feasibility of two (2) RegTech solutions which include an Application Programming Interface ( API) system that will allow machine-to-machine reporting by banks to the BSP that further utilizes the more current and advanced Extensible Markup Language ( XML) format in lieu of the existing reporting for-
mats ( Excel and CSV), thereby fully automating the end-to- end process of data capture and dissemination and an automated complaints- handling system or “chatbot” that will enable financial consumers to submit their concerns to the BSP via SMS, Viber and web portal for automatic processing. R2A is a pioneering project that provides technical assistance for financial sector regulators to develop and test the next generation of digital supervision tools and techniques.
Cognizant of the clear benefits and opportunities offered by technological advancements, the BSP remains committed to further enhance and strengthen its supervisory framework to balance the benefits that fintech may bring with its potential risks. The BSP has taken a proactive stance in implementing various regulatory reforms and initiatives to strengthen its supervisory and technical capacity.
In 2017, the BSP issued the appropriate prudential guidelines on mitigating technology-related risks, including anti-money laundering/combating the financing of terrorism ( AML/CFT) concerns related with the use of fintech. These include the issuance of guidelines on virtual currency ( VC) exchanges which facilitate the conversion or exchange of fiat currency to VC or vice versa; social media risk management which advocates responsible use by BSFIs of social media; and business continuity management which incorporates cyberresilience in the BSFI’s business continuity planning process to adequately capture the potential impact of cyber events. Practical guidelines were also issued on the adoption of multi-factor authentication ( MFA) measures for high-risk transactions and sensitive communications in response to rising cyber- attacks and threats involving fund transfers, payments and card-not-present transactions.
Parallel to this, the BSP is monitoring other fintech activities by emerging market players such as industry developments on crowd- funding and peerto-peer lending to determine if regulatory action is necessary.
Recently, the BSP established a unit dedicated to studying cybersecurity threat and tasked to enhance regulatory policy framework and to institutionalize cybersecurity due diligence within the financial industry. Similarly, the BSP has approved in May 2018 the creation of a regulatory subsector to serve as primary contact point of the BSP for fintech firms.
Recognizing the cross-border nature of digital services, the BSP also strengthens multisectoral and regional collaborative engagements with relevant stakeholders to boost the financial
system’s cyber-posture and resilience. At present, the BSP is part of information sharing fora, in both domestic and international fronts, on various topics such as technology risk management, innovation, payment systems and cybersecurity.
Moreover, the BSP closely coordinates with its foreign counterpart regulators for benchmarking and knowledge exchange with particular focus on fintech. In November 2017, the BSP and the Monetary Authority of Singapore ( MAS) entered into a Fintech Cooperation Agreement which enables both regulators to refer capable fintech firms, share emerging fintech trends and developments, and facilitate work on fintech projects together.
Indeed, both financial institutions and regulators must know how to keep pace and ride the waves of technological innovations to thrive and survive in this increasingly digital environment. On the part of the BSP, remains committed in monitoring fintech developments to ensure the stability of the banking system and to preserve the trust and confidence of the banking public. The appropriate game plan is to design and implement clear and appropriate fintech policies and framework which are the important catalysts to innovation and opportunities inherent in fintech to successfully navigate the future.