White PaperSummaryDay3 - FTS Inclusion Forum

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based), biometrics and digital id, open APIs and architectures, access to cheap computing power through cloud computing.
FINTECHSTAGE INCLUSION FORUM SUMMARY REPORT Jakarta, 22-24 March 2017

Day 3:

Regulators-Innovators Dialogue

Anchors and Sails Culture plays an important role in facilitating financial inclusion initiatives: at the moment we see it hinder openness for regulators to learn and test policies around innovation

If innovation was a sail boat, what would, from a regulatory point of view, be its anchors (things that stop it from moving) and sails (things that push it along)? Three main categories of “anchors” emerged from this discussion: • Infrastructure, which included both the lack of access to as a well as cost of existing infrastructure.

Culture, mind set and behaviour, such as fear of failure, lack of trust, silo thinking. Capabilities: which include understanding of technology, tools for learning, capacity (in terms of time and resources). Similarly, the main ”sails” were: • Market and political conditions, such as a strong political will to provide wellbeing to population, open debate, the millennial generation as a driving force, global access to markets, and the more frequent appearances of black swan events. • Technology, including developments in connectivity solutions worldwide (mobile and internetbased), biometrics and digital id, open APIs and architectures, access to cheap computing power through cloud computing. A few of the drivers were considered to have both a positive and an negative potential impact on innovation. Amongst those notably were Data, and Regulators. Regulators, it was recognized, play a key role in creating incentives and infrastructures, but can also be a serious obstacle with their “legacy behaviour”. • •

“Regulators ought to experiment, create test environments to learn and engage innovators”

RegTech for Regulators The R2A session started with a diagnostic, to poll the opinion in the room along 3 key statements related to the level of readiness of regulators to play an enabling role in the digital finance landscape. The opinions were varied and ranged between “somewhat agree” to “strongly disagree”, for most of the statements. A few key points for each statement are illustrated below. 1. Financial authorities are already well equipped to regulate and supervise the growing digital finance sector.

2. Financial authorities are already familiar with consumer experiences and needs, including feedback and complaints related to digital finance.

3. It’s easy for financial authorities to develop/acquire the right skills and tools to regulate/supervise markets and monitor consumer trends.

It was recognized that technology can play a key role in automating current processes and reporting mechanism, thus shifting valuable time and capacity away from manual supervision and towards learning, testing and creating new regulation adapted to the fast changing world of digital finance. R2A provides a structured approach to help regulators engage with technology to solve their regulatory and supervisory challenges. For more information see the session slides.

Regulatory Interventions Bellow is a short summary of 3 specific interventions that have been used successfully by Regulators in different jurisdictions to stimulate and promote innovation. Each of these was presented by 2 different practitioners with experience in this area, giving as well some variations and different flavors from different geographies. •Zoom into Ecosystem development; examples from Silicon Valley and around the world •Zoom into Specific regulations; examples from India and Mexico •Zoom in to Sandboxes; examples from Singapore and UK

“What VCs invest in, influences the types of companies created”

Ecosystem Development

Having a vibrant innovation ecosystem is essential for solving any “wicked” problems, such as Financial Inclusion. Vibrant ecosystems all have several critical ingredients. If these are not present naturally, other regulatory interventions should aim to create these conditions: •

Talent: access to educated digital and high tech talent. Research and development capabilities both in universities and private/publicly funded bodies. Gender diversity.



Culture: a recurring theme throughout the event, having the appropriate culture that encourages innovation is critical. This is often expressed as “fail fast” culture, but in fact the right attitude is characterized by ” fail fast, fail cheap, learn well” tagline. There is a chicken and egg relationship between culture and innovation: the more innovation happens the more the culture adapts to accepting it, the more the culture evolves towards agility, the more innovation happens.



Funding options: a multitude of different types of funding options must be available to startups. Often in immature ecosystems, the very early stages of angel and seed investments are missing and this hinders startups emergence. Moreover, educated VCs with entrepreneurial background are needed as well; corporate VCs while useful for filling in certain gaps cannot play all needed roles.



Market: accessible market that has the potential of scale.



Infrastructure: easily available infrastructure to support startup activity. This includes both legislative, regulatory as well as technical infrastructure.



Players: all ecosystem players must be present. This includes Startups, Clients, Banks, Telcos, etc.

Sandbox Regulatory sandbox is an environment created specifically to allow early stage startups to test and confirm their business models and product offerings without having to spend valuable time and effort to become fully regulated entities. The sandbox provides special exemptions and light rules for controlling risk. It is a tool to help startups survive the very difficult early stages of their business development until they have a well confirmed business model, product and customer segment. Jurisdictions providing such sandboxes tend to attract early stage startups and thus, this is also a tool for building the local ecosystem by attracting digital and entrepreneurial talent. There are several different regulatory sandboxes in existence, notably in Singapore and in the UK, and they are designed to different requirements. Both however aim to limit the risk of experimentation and customer exposure, while making it possible for startups to learn without applying for specific authorizations. • Singapore: live environment, controlled by limiting the duration a startup can stay in the sandbox, real time monitoring, grants • UK: Test environment, using qualifying criteria to accept startups It was recognized that today all of the sandboxes provide limited space for learning; in particular they do not help startups who want to act on a global scale. Therefore designing and implementing a global sandbox that allows for cross-border digital identity and KYC testing would be the next step in regulatory innovation.

Specific Regulation Specific regulation can lower the barriers to entry for new players in the Financial ecosystem, thus creating conditions for innovation. It can stimulate the local ecosystem by making it possible for startups to compete on an equal footing and survive for longer. Using a risk based approach to regulatory requirements, two conflicting interests can be served: safeguarding the financial system and protecting it from serious risk exposure, while at the same time supporting innovations. The example given in this session was adopting a risk-based KYC approach in India and Mexico. The exact specifics of the regulation was different but the overall result similar: • In Mexico KYC requirements were aligned with amount of funds handled – bigger amounts, more checks. • In India, in comparison, new categories were created that had specific rules applied to them; for example digital wallets had different digital ID verification rules than bank accounts. The implementation of this regulation was further supported by the establishment of a nation-wide digital ID infrastructure.

Mapping the Ecosystem The ecosystem maps the current state of relationships and dialogue amongst session participants. The relationships are represented by strings which connect stakeholders in the session to other stakeholders they are currently engaging with. The session participants included banks, central banks and regulators, some MNOs and innovators, some NGOs. As a result, the ecosystem map presents the state of dialogue happening from the point of view of these participants, particularly regulators. However, given the large representation of regulators in the room, this map is a good approximation for actual state of connectedness of regulators, globally, and gives a good basis for analysing the strong relationships that exist, the weak occasional links, and the missing connections.

Strong Links Amongst participants, Regulators and Startups are the most engaged stakeholders. They form two focal points for the ecosystem map. Regulators in particular are well connected and have most dialogue with Central Banks, other Regulators, Government, and Startups in general, Financial Institutions particularly banks and financial services providers. Startups bear the strongest links to VCs, Banks, NGOs and likewise the Regulator. The strong relationship between Regulators and Startups plays a bridging role between these two parts of the ecosystem, providing an essential link between the world of policy and the world of innovation/VC funding. Other essential players are NGOs and VCs, who play a prominent role as connecting hubs to the ecosystem, and have the widest diversity of stakeholder connections, even if not particularly strong. Banks are also a strongly connected player in the ecosystem, compared with Financial Providers and Payment Platforms.

Weak Links A number of ecosystem stakeholders are mostly weakly connected: NGOs ,Financial services providers, Payment platforms, Telcos and Governments have mostly weak links to other players and very few if any strong links. Notable weak connections between Regulators and other key stakeholders: • Regulators to VCs • Regulator to Telcos • Regulator to Government

Ecosystem Gaps There are three main types of gaps that become clear from this ecosystem map: • Periphery stakeholders: there is a number of players that are present in the ecosystem but not actively engaged vis-à-vis regulators. These include Telcos, MNOs, Device suppliers, ID Providers and Corporates. Given the critical role these play in solving key challenges related to Financial inclusion, they would need to be engaged more proactively and consistently. • Missing stakeholders: notably, the missing parties are the financially underserved. These include individuals as well as SMEs. This is a symptom that seems to indicate that the majority of relationships that Regulators are involved in are dealing with structural changes. There is currently a degree of detachment from the “customer”. A healthy ecosystem should involve actively and include those it is trying to serve – co-creating solutions with those who need them is a powerful approach to achieve Financial Inclusion. • Topics: currently Regtech does not seem to be on the radar screen of Regulators. From the discussion around the R2A project, using technology for creating more efficient regulatory processes would liberate valuable capacity that regulators can deploy in innovations. Thus getting actively involved with Regtech players and initiatives is a key step towards shifting focus and effort from manual compliance to Regulatory innovations.

Diagnostic tool Apart from informing our understanding of the current state of relationships and dialogue with in the Financial Inclusion ecosystem, the map serves as well a valuable role as a diagnostic tool. It helps us to • Understand what links need to be established or developed more; • Diagnose what links are critical (such as the link between startups and regulators – if it is not there, there, the ecosystem would fragment into several unconnected parts) • Assess a local ecosystem against the global one, in order to measure its level of maturity and suggest action plans for accelerating the process. A dynamic online version will be made available to assist with this process. See the Media library on FintechStage Inclusion Forum’s website (http://www.ftsinclusionforum.com/media-library/).

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