Fintech has so far enjoyed favourable media coverage and light levels of supervision, says Bank of England governor Mark Carney. However, he warns, as platforms diversify and proliferate, G20 regulators will need to ensure that their safeguards evolve at the same pace.
In a 25 January speech to a Deutsche Bundesbank conference on digital finance, Carney identified a range of potential setbacks that could stem from fintech in the coming months and years.
National regulators that liaise with the pan-G20 Financial Stability Board, he advised, had to approach fintech’s development in ways that would meet that body’s objectives for calm in the broader financial system.
The Bank of England (BoE), he stressed, has already adopted the required level of scrutiny.
“Our starting point is that there is nothing new under the sun,” he said. “We need to be disciplined about consistent approaches to similar activities undertaken by different institutions that give rise to the same financial stability risks. Just because something is new doesn’t necessarily mean it should be treated differently.”
Carney reflected on his banking career in Canada, pointing out that clients were more loyal back then than they are likely to be amid the more fragmentary financial services landscape of services that is now emerging.
“While fintech may make conventional banking more contestable,” he said, “the opening up of the customer interface and payment services business, could, in time, signal the end of universal banking as we know it.
“If today’s universal banks lose the loyalty I saw [in Canada], and instead have less stable funding and weaker, more arms-length client relationships, the volatility of their deposits and liquidity risk could increase.”
Plus, he pointed out, “with weaker customer ties, cross-selling (my old preserve as a teller) could be less prevalent, hitting profitability. The system as a whole wouldn’t necessarily be riskier – but prudential standards and resolution regimes for banks may need to be adjusted.”
Turning to other potential areas of concern, Carney noted that:
On that third point, the governor added: “As the fintech future envisages the sharing of data across a wider set of parties – coupled with greater speed and automaticity in executing transactions – the challenges around protecting data and the integrity of the system are likely to increase. One sign of this is a growing preoccupation in the insurance industry with how best to underwrite such risks.”
To help realise fintech’s promise in a climate of safety, Carney called for national regulators to refresh their supervisory approaches.
“First,” he said, “regulatory sandboxes can allow businesses to test innovative products, services, business models and delivery mechanisms in a live environment and with proportionate regulatory requirements.
“This supports innovation and learning by developers and regulators. The Financial Conduct Authority [FCA] was an early mover, launching Project Innovate in 2014. The G20 might consider the extent to which such approaches should be adopted more widely.
“Second, existing authorisation processes can also be adapted to ensure they do not unnecessarily block new business models and approaches. This is why in the UK, the Prudential Regulatory Authority and the FCA now work closely with all firms seeking new authorisation as banks.
“Third, the BoE is expanding access to central bank money to non-bank payments service providers (PSPs). Allowing access to the Bank’s real-time gross settlement System allows PSPs to compete directly with banks, and so supports innovation, competition and financial stability.”