www.pwc.in RBI Working Group report on FinTech: Key themes April 2018
Ten key themes: 1 2 3 4 5 6 7 8 9 10 Need for deeper understanding of Fintech and inherent risks Regulatory supervision, realignment of existing supervision and requirement of sector-specific supervision for various regulatory bodies Development of innovation labs and regulatory sandboxes Potential of Institute for Development and Research in Banking Technology (IDRBT) operating as a regulatory sandbox Collaborative approach via engagement amongst regulators, FinTech companies, industry incumbents and clients Introduction of RegTech for regulators Pitfalls of FinTech: Risk of privacy breaches and cyberthreats Symbiotic relationship between incumbents and FinTechs: How they can leverage FinTech Requirement for organisational changes within regulators Role of government 2
Understanding FinTech 1 2 3 4 5 Currently, there is no standard definition for FinTech and regulators are trying to frame one. Given the nascence and complexity of the industry, it is imperative for regulators to first gain a deeper understanding about FinTech and its implications on the financial services industry before they can start regulating and formulating policies. There are multiple products and services which are seeing rapid growth within FinTech, and it is important for regulators to develop a more detailed understanding of the inherent risks which are posed by these products and services. Regulators need to asses the existing skill sets they have with regard to evaluating FinTech innovations and identify the gaps to up-skill themselves in order to appropriately regulate. This could be achieved via lateral inductions into the regulatory bodies. 3
Regulatory supervision 1 Regulators need to examine how the existing framework can be realigned to deal with the rapid structural changes being brought about by FinTech in the financial sector. 2 Depending on the risk implications, the degree of supervision and regulatory action can vary from disclosure to light-touch regulation and supervision to full-fledged supervision. 3 Given that FinTech pervades multiple financial sectors, there is a need to examine the approaches of various sectoral regulators and identify sector-specific FinTech products and services to devise a regulatory approach. 4 The regulatory and legal framework is essential for the sustained development of a digital financial industry and continuous innovations in FinTech. 5 Regulations should foster healthy competition between players, regardless of whether they offer conventional approaches or use new technological solutions. 6 They should be cognisant of the fact that the framework does not impose barriers to innovation and whether and to what extent these can be removed. 4
Innovation hubs and regulatory sandboxes proactively fostering innovation Regulators should look at supervisory initiatives like innovation hubs and regulatory sandboxes to efficiently manage the financial innovations in the FinTech sector. An innovation hub serves as a central point of contact and reduces regulatory uncertainty by providing guidance on the framework. It also supports innovators by helping to identify supervisory, policy or legal issues. Innovation hubs could be as simple as web pages dedicated to answering queries from innovators regarding regulations. A regulatory sandbox is a (controlled) testing environment, which may have some regulatory relief for live or virtual testing of new products or services. This could be used to carve out a safe and conducive space to experiment with FinTech solutions, where the consequences of failure can be contained. Many jurisdictions have created sandboxes for example, ASIC (Australia), FCA (UK) and MAS (Singapore). 5
IDRBT: A potential regulatory sandbox IDRBT has developed expertise in the area of banking technology by working closely with banks and technology companies. In view of IDRBT s unique positioning as an RBI established institute, and its expertise and experience, the institute is well placed to operate a regulatory sandbox in collaboration with the RBI. The institute can continue to interact with the RBI, banks and solution providers regarding the testing of new products and services and, over a period of time, upgrade its infrastructure and skill sets to provide a full-fledged regulatory sandbox environment. The RBI may actively engage with the institute in this regard. Other sector regulators may also leverage the expertise of IDRBT to create a sandbox for their respective solutions. This is essential to increase efficiency, manage risks and create new opportunities for consumers in the Indian context, similar to other regulatory jurisdictions. 6
Collaboration is key 1 2 Financial sector regulators need to adequately engage with FinTech entities in order to chalk out appropriate regulatory frameworks and realign the existing regulatory and supervisory framework. Banks should be encouraged to collaborate with FinTech/start-ups to improve their customer experience and operational excellence. 3 4 FinTech companies should take an approach that is more collaborative than disruptive. This will provide the financial services sector a sense of security because incumbent players will not be threatened by start-ups that are out not to disrupt but to collaborate. Partnerships/engagements between regulators, existing industry players, clients and FinTech firms will enable the development of a more dynamic and robust financial services industry. 7
RegTech: FinTech for regulators In order to cope with the advancement in technology innovations, regulators should also adopt advanced technology for supervision. RegTech is a subset of FinTech that focuses on technologies that facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities. RegTech facilitates the various functions of regulators like regulatory reporting, risk and compliance monitoring, protecting customer interests and detecting financial crime. RegTech offers multiple benefits: - Allows data to be provided differently - Use of cloud to share services - Advanced data analytics solutions - Allows always-on, non-invasive surveillance of transactions, behaviour and communications 8
Pitfalls of FinTech: Risk of privacy breaches and cyber threats 1 2 3 4 5 6 Vast amounts of data are being generated every day by the use of FinTech products and services, of which a significant portion is customer data. To counter this risk, there is a need for an exhaustive stand-alone legislation on data protection in India, keeping in mind the innovations in FinTech and the risk to personal data within the custody of FinTech players. The FinTech entities should ensure that their systems and infrastructure adhere to all necessary standards and specifications in order to counter any cyberthreats. Customer data can include personal and sensitive information as well, which gives rise to privacy and data protection issues in light of the increase in cyberattacks in recent times. With the dependence on IT systems increasing day by day, cyberattacks pose a serious threat with the potential to cause a systemic crisis. It is imperative that market regulators and the self-regulatory body for FinTech companies highlight the requirement for increasing customer education/awareness levels. 9
Symbiotic relationship: Incumbents and FinTechs Existing regulated entities likes banks, NBFCs and insurance providers can leverage FinTechs and reinforce their positions as incumbents. In the insurance sector, the adoption of digital channels to replace manual time-consuming processes will empower customers and the workforce. Innovation labs within insurance companies may be established to combine brand and product managers with technological and analytical resources. Banks may be encouraged to collaborate with FinTechs/start-ups to improve their customer experience and operational excellence. There are many applications of FinTech in the areas of payment, data analytics and risk management, where incumbents can leverage technology. Technological innovations within the financial system will make it more efficient, and also lead to an increase in competition, which in turn will benefit the end consumer. 10
Organisational restructuring for regulators To keep pace with the advancing industry, the regulator also needs to rethink its strategies in order to efficiently supervise the markets. The organisational structure and human resources (HR) practices of regulators need to be geared up to meet the challenges of innovation, in terms of adapted HR hiring profiles, learning and educational programmes. Identify organisational structure considerations that regulatory agencies can apply in responding to new innovations. Identify specific technologies that regulatory agencies may benefit from having or may need to have appropriate expertise to supervise. A dedicated organisational structure may be created within each regulator. This structure would focus on identifying and monitoring the challenges associated with the development of major FinTech innovations and would assess opportunities and risks for the financial system arising from these innovations. 11
Role of the government 1 2 3 4 Some governments and regulators are backing FinTechs as a way of introducing more competition and transparency and preserving the competitiveness of the financial services industry. The government can support FinTechs/start-ups by launching FinTech-focused funds like other sovereigns in Asia. For instance, in order to develop and promote Singapore as a smart financial center, the Government of Singapore, through MAS, has committed 160 million USD to the FinTech and Innovation Scheme during the next 5 years. Similarly, in November 2016, the Hong Kong government announced a 370 million USD VC fund investment as part of its drive to position Hong Kong as Asia s FinTech hub. Given that FinTech companies are in their infancy but are growing at a rapid pace, the government may consider introducing tax subsidies for merchants that accept a certain proportion of their business revenues from the use of digital payments as opposed to cash. However, in the name of fostering competition, there should be no undue favors for newcomers to make sure that all participants have a level playing field. 12
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