Inter-institutional and Global Coordination
Cooperation at the Domestic Level
Effective regulation and supervision of DFS can be facilitated by coordination and information-sharing between domestic authorities. DFS activities may fall in the regulatory perimeter of multiple agencies but only a few jurisdictions have a formal body in charge of coordinating fintech policies, such as South Africa’s Inter-Regulatory Fintech Working Group and the HKMA Fintech Supervisory Sandbox. Collaboration mechanisms may be formalized through memoranda of understanding (MoUs) to cover cross-cutting issues such as AML/CFT or consumer protection.
A good example of cross-sectoral cooperation is found in Bangladesh, where the central bank and the Telecommunications Regulatory Commission are part of a multi-stakeholder consultative committee on USSD communications, which is an essential upstream input for mobile money services. The national or federal government might get involved in these MoUs when the impact transcends the financial sector, for example in relation to digital ID, data privacy, or cybersecurity. This work is often done, under ministerial responsibility, by a sub-committee, taskforce, or working group (for example, Thailand’s Three Regulator Steering Committee). Their mandates are to study and understand DFS activities and business models, assess opportunities and risks, and investigate the necessary changes to align regulation and supervision with how the market is evolving. In some jurisdictions, authorities engage with industry to speed up the analysis and adoption of innovations, including through innovation accelerators. Involving the industry in coordination efforts in cybersecurity, payments and securities is becoming frequent. In Brazil, there are various private/public working groups, involving, inter alia, the Payments Association, the Association of Digital Credit, and the Association of Fintechs.
As DFS is technology-driven, its supervision requires sporadic specialized information technology inspections. The department in charge of DFS supervision may not have sufficient IT expertise, in which case it may rely on specialists from other supervisory departments. Supervisors must plan carefully to optimize scarce IT resources, keeping in mind the risk profile of DFS providers as informed by the risk-based supervision approach.
DFS also blurs the lines of responsibility among financial regulators and supervisors due to the various types of DFS providers, business models, and products. Another aspect finds some DFS products being sold as bundles or one type of product under one supervisor’s remit using a product under another’s remit as a channel. In East and West Africa, for instance, mobile savings and insurance are usually distributed through mobile money accounts offered by different DFS providers. Coordination may be needed on an interdepartmental or interagency basis, depending on the country.
The link between prudential and market conduct supervision is another area that needs coordination. DFS brings many opportunities for improving consumer experience, value, and outcomes, especially for financially unserved and underserved individuals, such as more effective disclosure of costs and greater convenience. At the same time, DFS raises consumer protection concerns such as fraud, data misuse, and inadequate redress mechanisms. While a single authority may be responsible for both prudential and market conduct supervision, separate departments may undertake these two tasks. In a few countries (e.g., South Africa, U.K.), different authorities perform prudential and market conduct supervision. Both institutional models require a proper coordination mechanism. Supervisors can also collaborate on implementing specific supervisory tools, such as market monitoring or design and commission research such as demand-side surveys and behavioral research.
AML/CFT concerns require coordination as well. One of the basic regulatory enablers for DFS is a proportionate framework for DFS providers to implement risk-based customer due diligence (CDD). When disproportional or unclear, AML/CFT rules can become one of the most significant obstacles to a thriving inclusive DFS environment. It is fundamental that the authorities or departments involved in designing and enforcing AML/CFT regulations coordinate, considering the need to balance both AML/CFT and financial inclusion goals. For instance, collaborative CDD mechanisms carry potential benefits for DFS providers, customers, and supervisors but have yet to be developed in most EMDEs, partially because they require interagency coordination.
Coordination may also be needed between financial and nonfinancial authorities such as telecommunications, competition, and data protection—for example, DFS providers owned by MNOs or that are themselves MNOs. Issues in the regulatory domains of telecommunications and competition can impact the financial sector, including fair access to, quality of, and pricing of USSD services by MNOs to different DFS providers. Data protection and privacy issues may also become prominent due to the extensive use of digital personal data in DFS. New approaches to data protection that are more appropriate for low-income segments may be needed. For better interagency collaboration and coordination, including the clarification of respective responsibilities over DFS providers, authorities could consider signing memoranda of understanding (MoUs) as a first step. Examples include the MoU between the Bank of Ghana and the National Communications Authority and the MoU between the Reserve Bank of Malawi (RBM) and the Malawi Communications Regulatory Authority.
Inter-institutional and Global Coordination
Global coordination
International cooperation partners include host supervisors; regional supervisory bodies, standard-setting bodies such as BCBS, CPMI, International and Regional Financial Institutions including the IMF and World Bank, and the recently created BIS Innovation Hub. Several economies have signed Fintech Cooperation Agreements between the innovation units of regulatory agencies and projects such as Jasper (Canada-Singapore cross-border central bank settlement based on digital-ledger technology) demonstrate the successful completion of joint fintech proofs-of-concept. The MoU signed in June 2020 between members of the Canadian Securities Administrators (CSA) and the Financial Supervisory Commission of Taiwan, China (FSC) offers another example of bilateral cross-border cooperation. Initiatives to foster cooperation to agree on standards to develop regtech and suptech solutions that are compatible across countries are particularly necessary and valuable.
The Global Financial Innovation Network (GFIN) is a new model of international cooperation on DFS regulation and supervision that aims to increase collaboration between regulatory agencies regtech. The network includes more than 60 financial services regulators, international organizations such as the IMF and World Bank, and other observers. Founded in 2018, it provides a venue for engagement and sharing of lessons learnt on fintech aspects and has three workstreams: (i) cooperation and sharing innovation experiences; (ii) forum for joint work and regulatory trials, including regtech; and (iii) providing an environment to test cross-border solutions. As part of the latter workstream, GFIN organized a cross-border solution pilot that attracted 44 applicants, of which eight were accepted. In the end, none of the selected firms could develop testing plans that satisfied the criteria of the participating supervisors. Moreover firms were not able to find regulated firms in other jurisdictions to joint-test with and, in some cases, the activities proposed were not part of the mandate of participating agencies. The new post-pilot cross-border test (ongoing) has incorporated lessons learned, including clarifying the mandates of participatory agencies in a regulatory compendium and centralizing the application process.
Regulators and supervisors can also find key support with IFIs with near-universal memberships. The IMF organizes an annual Fintech Roundtable for supervisors with broad participation, conducts training and workshops on the challenges of fintech regulation and supervision in various jurisdictions, and has organized regional Bali Fintech Agenda Outreach Conferences.