Balancing Fintech opportunities and risks

Remarks by International Monetary Fund  Deputy Managing Director, Tao Zhang on June 10, 2019 at  Lithuania

Thank you, Governor Vasiliauskas, for your welcoming speech and Minister Sapoka for your eloquent remarks outlining the government’s strategy to foster fintech in Lithuania. Thank you as well to the Bank of Lithuania for hosting this conference in such a representative place when we talk about innovation in financial services.

Technological change has brought rapid advances in financial technology that are transforming the economic and financial landscape. Smartphones today have more processing power than “Deep Blue”—the supercomputer that beat chess legend Gary Kasparov in the late 1990s. Data that we now conveniently store on these smartphones would require at least a dozen cartons of floppy disks twenty years ago. Such technological changes have also brought about rapid changes in financial technology—or fintech as we call it. They offer wide-ranging opportunities but also raise potential risks. Fintech can support productivity and growth by strengthening financial development, inclusion, and efficiency, but may pose risks to consumers and investors and, more broadly, to financial stability and integrity.

Fintech is expected to promote competition in the financial sector particularly in payments clearing and settlement, and is helping to expand financial inclusion. However, there is a perception that fintech brings risks too, and that monitoring is still limited and largely confined to activities and entities in the regulatory perimeter. Gaps in the legal framework are widely acknowledged, as is the need to modernize data governance frameworks. There is a need for greater international cooperation, particularly on cyber security and AML/CFT risks, the development of legal, regulatory and supervisory frameworks, payment and securities settlement systems and cross-border payments.

Recognizing these opportunities and potential challenges, the Fund and the World Bank launched the Bali Fintech Agenda last fall. The Agenda brings together and advances key issues for policymakers and the international community to consider as countries formulate their policy approaches. In the coming days we will present the conclusions of a new study conducted to better understand how the countries in the world are dealing with these issues. This work clearly indicates a common concern about cybersecurity, money laundering and payment services and a need for greater international cooperation in fintech.

Moreover, there are important regional and national differences. For example, Africa has become a leader in mobile money as a driver for greater financial inclusion, while Asia has made significant advances in nearly every aspect of fintech.

Regarding Europe, the growth of fintech has been rapid but unevenly distributed with Western Europe leading the way. Europe is already among the most financially-developed and inclusive regions in the world. Therefore, unlike some other regions, fintech would mainly affect the intensive margin of the provision of financial services.

Some countries in Europe have been encouraging fintech innovation and exploring regulatory responses proactively. Lithuania is a clear example of this effort. The government and Bank of Lithuania have streamlined licensing procedures, offered regulatory sandboxes for testing financial innovation, accelerated the development of RegTech solutions, and built a platform for blockchain-based solutions. The Bank of Lithuania created CENTROlink, a payment system which provides direct access to the Single Euro Payments Area for institutions that do not have a banking license and is pushing forward with open banking. At the same time the Bank of Lithuania, Minister of Finance and other agencies involved in this area are aware of the challenges, are strengthening the AML/CFT regime and have continued a proactive regulatory approach.

Unfortunately, this is not going to be enough. Technology knows no borders. Neither does financial misconduct. There is a need for greater international cooperation on cyber security and money laundering risks, on developing legal, regulatory and supervisory frameworks, on domestic and cross-border payment and securities settlement systems.

We need to avoid the fragmentation that comes when countries develop isolated national approaches. The IMF has been playing a key role in fostering this international cooperation due to our unique position and universal membership. Including through the Bali Fintech Agenda I referred earlier in my remarks.

This conference provides an excellent opportunity to exchange views on how these high-level considerations translate into the development of a vibrant fintech community and the policy framework to embrace it. I am sure the world can learn a lesson or two from Lithuania.

Let me conclude my remarks with a final thought. Lithuania is a small country in a globalized world. You face significant demographic challenges that can only be resolved by providing opportunities to everybody. Being at the forefront of fintech could create some of these opportunities so that the talent that you have nourished at home stays in Lithuania and contributes to a more prosperous future.