Financial Supervision Is Set for Digital Transformation

In the last decade, we’ve seen the financial sector grow faster and in new directions than ever before by including millions of people who were previously unbanked. In fact, much of this expansion in the banking supply globally comes from innovative non-banks such as mobile network operators and payment companies, FinTech startups and regulators that have enabled these new, technology-driven financial services.

Between 2011 and 2014, 700 million new accounts were opened around the world, according to the Global Findex. We expect the trend to continue when the World Bank releases new Findex data next year.

While digitization is expanding the banking supply, an increase in providers and consumers entering the financial sector places more burden on regulators to protect against fraud and other risks. Regulators also need to keep pace with the emerging technologies used by financial service providers and find effective ways to supervise them in the new digital environment.

Innovative use of technology – cloud computing, data analytics, machine learning, and artificial intelligence – is opening new opportunities for consumers. In India, for example, where account opening has traditionally been a tedious, paper-based process, it now takes only a couple of minutes to complete using eKYC systems.

The same technologies transforming finance could be used by regulators themselves – to make financial supervision more efficient and timely.

In the last couple of years, a subset of FinTech startups have been designing regulatory technology or RegTech to streamline the compliance efforts of banks by digitizing their processes and applying big data analytics. Now, forward-looking regulators all over the world are exploring the potential of RegTech to transform their supervisory activities.

Regulators too can harness technology to enhance the efficiency and effectiveness of supervision and surveillance, said Ravi Menon, Managing Director of the Monetary Authority of Singapore, at an international symposium of financial authorities in March 2017.

We’ve started calling this niche RegTech for regulators. Financial authorities like Menon have taken to calling it supervisory tech or SupTech.

The Monetary Authority of Singapore (MAS) launched a Data Analytics Group this year that includes a SupTech Office dedicated to fostering innovation and promoting data analytics for financial supervision. The office is developing algorithms to scan suspicious transaction reports (STRs) and trading accounts to identify activity that warrants further attention.

Singapore and the UK are pushing the frontier of financial supervisory innovation. Both MAS and the UK Financial Conduct Authority (FCA) are pioneering the use of regulatory sandboxes, where FinTech innovations can be tested in the marketplace under real-time monitoring and protected from enforcement – an approach that is spreading to Australia, the UAE, and other countries. We also expect India to develop a sandbox as the Reserve Bank of India explores these options.

There’s even more potential with financial authorities in emerging markets looking to leapfrog traditional, paper-based methods of financial oversight and move ahead with digital-first supervision. India has accelerated the pace of financial sector growth through new categories of bank licenses and the India Stack, which includes Aadhaar-based eKYC, a unified payment interface, e-signatures, and other initiatives. In this environment, RegTech can further reduce compliance costs and fraud threats.

Omidyar Network and our partners have had overwhelming demand for the RegTech for Regulators accelerator (R2A) that we launched in April 2017. The central banks and financial authorities of the Philippines, Ghana, and Mexico are collaborating with R2A to prototype new RegTech solutions with software developers and entrepreneurs.

There is real global potential for financial authorities to not just be more effective or efficient, but cutting-edge, said Amando M. Tetangco, Jr., Governor of the Bangko Sentral ng Pilipinas at the launch of R2A.

That’s the real promise of RegTech – not just modernizing the regulator, but a complete re-architecting of financial supervision operations: digitally, in real-time, powered by transparent data and predictive analytics.

The adoption of these technologies is just the beginning. At their annual gathering, members of the Alliance for Financial Inclusion, a peer-learning group of emerging market central banks, voted to look at issues of RegTech more systematically.

Re-architecting financial regulation will require the public and private sectors to work together. Omidyar Network and our partners at R2A believe that the potential of RegTech lies in financial authorities undertaking their own digital transformation. If the future of banking is algorithmic, financial supervision needs to go algorithmic too.