– Virtual Webinar, Organized by the IMF – Singapore Regional Training Institute (STI), May 11, 2023
By Deputy Managing Director Bo Li
Across the world and especially in this region, fintech is revolutionizing the delivery of financial services.
Digital banks or neo-banks are growing, relying on new technologies such as cloud computing, artificial intelligence and more, to make banking services available around the clock. The role of nonbank financial institutions is increasing, too: in particular, BigTech firms are expanding rapidly into key financial services, from payments, to lending, to insurance.
Why? Because the benefits of fintech can be enormous. It can foster greater financial inclusion, including in this region where hundreds of millions of people are still underbanked. And think of how BigTechs can leverage big data effectively, which could create new business models, drive economies of scale and ultimately improve consumer welfare.
At the same time, the pace and scale of BigTech expansion brings potential financial stability risks.
BigTechs can use their large client base to quickly scale up their financial services across several jurisdictions. This can be problematic, especially where cross-sectoral regulation is lacking or ineffective. Risks can also arise when BigTechs are interconnected with traditional banks or use systemically important services like the cloud or payment infrastructures. Taken together, these risks can create scenarios where BigTechs become “too big to fail.”
Clearly, policymakers must monitor and respond to these risks to ensure financial markets function smoothly and soundly. But this is easier said than done.
BigTechs can be difficult to regulate as banks, because they do not generate most of their revenue from financial activities. They are less exposed to credit and liquidity risks than traditional banks. And they can potentially exhibit anticompetitive behavior. This is especially challenging for emerging and developing economies, where strong regulatory frameworks and enforcement are needed so that firms of all sizes can continue to innovate.
So how can policymakers take urgently needed regulatory and supervisory actions? Let me make three points:
First, in the near term, it is important to improve disclosure and transparency, while strengthening outsourcing requirements. Authorities should use all available tools of both prudential and conduct regulations to manage risks to consumers, markets, and financial stability.
Second, in the longer term, countries should move toward a regulatory model focused on entity-based, group-wide regulation for home authorities, as well as targeted, activities-based regulation for host authorities. This holistic approach is necessary to effectively address growing systemic risks. China, for example, has required that certain BigTechs create a holding company for their financial services activities, which can then be subject to prudential and conduct regulation. But no country can regulate this alone.
This brings me to my third point: due to the cross-border nature of BigTechs, international cooperation must underpin any emergent regulatory framework. Developing global standards may prove challenging, but there are several steps we can take in the meantime:
Improving information sharing, both bilaterally and through global and standard-setting bodies – is a good place to start. Creating supervisory colleges can also improve cross-border cooperation.
And with blurry lines between BigTechs’ financial and nonfinancial activities, coordination across domestic agencies is equally important. Financial regulatory authorities need to be well-coordinated, not only among themselves but also with other financial sector regulators, competition authorities, and relevant government departments.
For our part, the IMF aims to serve as a transmission line of best practices across our membership. Today’s event is an excellent opportunity to learn lessons from regional policy responses and discuss how the IMF is building capacity development for our membership in this fast-growing area.