R²A’s Simone di Castri and Aneth Kasebele spoke with regulators and participants from the FSD Africa network on the use of technology for regulation in emerging markets.
The value of tech for regulators is strong. Here are takeaways from the Regtech for Regulators Accelerator after 2 years of collaboration and innovation.
On a recent trip to Asia, I visited the offices of a federation of cooperatives. The backroom where the cooperatives’ files were kept had the musty smell of a library, with stacks of paper and folders with wilted edges teetering toward the ceiling. The scene was a stark reminder of how captive many financial institutions still are to a paper-based reality, with data on customers or operations often buried or hard to access.
This year, I also heard a representative of a central bank in East Africa share how the lack of up-to-date data in-house, such as rates of access or the gender gap, forced it to ask financial institutions it supervised for data. The bank might then have to wait days for an answer, even for a potentially straightforward type of information.
Despite two very different environments, these two offices share a common challenge: the need for data and better ways to collect, store, and analyze it. This, in a nutshell, is what prompted the U.S. Agency for International Development (USAID), Bill & Melinda Gates Foundation (BMGF), Omidyar Network, and BFA to launch the Regtech for Regulators Accelerator (R2A) in 2016.
Simone di Castri, R²A Managing Director, spoke with Sean Creehan and Paul Tierno of the Federal Reserve Bank of San Francisco's Pacific Exchanges Podcast on the biggest challenges facing financial authorities, and what technological solutions R²A has been developing to help regulators in emerging markets.
"Now the fact that fintech is there makes the financial authorities a little more audacious because they see the private sector using all these technologies. And some regulators are asking, why we’re not? Why we’re not adopting the same technologies for our needs, which is exactly the point of R²A. We don’t build new technologies, we package technologies in a way that are useful for financial authorities.
If you don’t have the right tools in place to supervise this new market, your readiness for fintech is at a different level. So RegTech can really help to accelerate financial innovation."
Listen to the R²A podcast.
R²A Managing Director Simone di Castri spoke with Global Risk Regulator about how the initiative is working with supervisors to realize the value of cutting edge technologies using proofs of concept.
“We are trying to create a comfort zone for supervisors,” he said. “The Mexican regulator, the Comisión Nacional Bancaria y de Valores, is planning to open the market to approximately 70 new firms, but their supervisory capacity will not grow in proportion. So how will the anti-money laundering [AML] supervisors handle this increase in workload? We think the only way for any supervisor to deal with this issue is to leverage technology in order to change the way they work and augment their capacity.”
The latest Insights Paper from BIS's Financial Stability Institute highlighted R2A's collaboration with regulators in Mexico and the Philippines to use technologies like APIs and chatbots in ways that make it easier to receive, store, analyze, and act on the growing tidal wave of banking data.
A new report from the Milken Institute’s Center for Financial Markets cites R2A as an example of the push toward toward a digital future for regulators as it encourages U.S. lawmakers to establish an inter-agency RegTech2 task force to coordinate engagement efforts and drive the conversation on how to enable RegTech2 solutions and create a RegTech2 caucus to explore RegTech2’s potential to foster safer, more efficient financial markets.
Although technological solutions promise access to cheaper and safer financial services, creating regulation that enables innovation in the FinTech industry remains a challenge. Regulators must protect the public interest while still providing an environment conducive to product and partnership innovation. In response, many financial authorities are introducing regulatory sandboxes to simultaneously give providers the opportunity to test their innovations while also giving regulators time to learn about the risks of the products.
Learn more in this blog by Simone di Castri and Ariadne Plaitakis here
The Financial Action Task Force (FATF) held its second FinTech and RegTech Forum on 9 and 10 October 2017 in Berlin, Germany, chaired by the President of the FATF, Mr. Santiago Otamendi (Argentina).
The meeting, hosted by Germany, was attended by over 150 participants from the FinTech and RegTech sectors, financial institutions, and FATF members, associate members and observers.
Simone Di Castri, R2A Project Director attended the Forum.
Learn more http://www.fatf-gafi.org/publications/fatfgeneral/documents/fatf-fintech-regtech-forum-oct-2017.html
Photo Courtesy of FATF
The future of banking is algorithmic. Bringing together big data and predictive analytics is already enabling financial service providers to make better real-time decisions on loans and other products, with a more flexible, customer-centric user experience. Read more.
R2A, a global RegTech prototyping lab designed for financial authorities such as central banks, rolls out partnership in Ghana, Mexico and Philippines to better serve the needs of all consumers
WASHINGTON, D.C., April 20, 2017--The RegTech for Regulators Accelerator (R2A), a first initiative to deploy RegTech innovations by working directly with financial supervisors, regulators and policymakers, today announced its three partners. The central banks Bangko Sentral ng Pilipinas (BSP) in the Philippines and Bank of Ghana (BoG) as well as the regulator and financial supervisor, the Comisión Nacional Bancaria y de Valores (CNBV) in Mexico are collaborating closely with R2A through July 2018 to prototype new RegTech solutions with software developers and data architects.
Until now, RegTech has typically catered to the private sector and compliance. RegTech is the application of existing and new technologies to improve the efficiency and efficacy of regulatory compliance and oversight. Now with R2A, some of the most forward-looking financial authorities from emerging economies are driving what the future of supervision, regulation and policymaking could look like in the US and the rest of the world.
The R2A prototyping approach is geared toward the development and adoption of fintech solutions for the collection, analysis and usage of data by financial authorities to not only improve market oversight and reduce compliance costs but also to develop smarter regulation and increase consumer trust, well-being and participation in the financial system. R2A also emphasizes rethinking the processes with which financial authorities acquire and use technology in the regulatory space. The R2A partners are collaborating on prototypes starting with:
- Consumer Protection: Crowdsourcing, chatbots and Natural Language Processing (NLP) to monitor and manage consumer service complaints
- Data Analytics: API-based solutions, data visualization and smart analytics for improved reporting and compliance
- Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT): Machine Learning, Optical Character Recognition (OCP) and NLP for mining known and untapped sources of financial data
“R2A is thoughtfully conceived around our real challenges and needs as a central bank, particularly in leveraging technology for our work and how we interface with our supervised entities." said the Amando M. Tetangco, Jr., Governor of the BSP. “Not only will it make crucial processes more efficient but also better informed with the ability to process large data sets in a most timely manner. It is a privilege to count ourselves among the R2A partners. There is real global potential for financial authorities to, not just be more effective or efficient, but cutting-edge.”
R2A is a new initiative supported by the Bill & Melinda Gates Foundation, Omidyar Network and the U.S. Agency for International Development, which is managed by BFA and fiscally sponsored by Rockefeller Philanthropy Advisors. Visit www.r2accelerator.org to learn more about the challenges and solutions in the pipeline.
“Building financial authorities’ capacity is urgent,” said Simone di Castri, R2A project director. “They need to keep pace with the fast growth of the digital financial sector and massive amounts of data to analyze. The kinds of solutions that are informed and tested through the R2A prototypes empower those authorities to drive the growth of a thriving financial ecosystem with consumers that are much better off.”
R2A is the first initiative of its kind that seeks to bring a culture of technology and data science directly to central banks, other supervisors and policymakers to transform their institutional capacity and practices. By laying the groundwork for a global RegTech marketplace, RegTech for Regulators Accelerator is the start of an industry-wide movement toward smart and original approaches to supervision and policy analysis.
The announcement was made at the Meridian International Center as part of its Digital Finance Future series in partnership with the Bill & Melinda Gates Foundation.
Imagine the following scenario:
Filipino customers faced with issues while using financial services, file complaints about the providers or agents of those financial services via SMS, Viber or web portal, which then get processed automatically. Through a chatbot available on different channels and devices, the central bank learns from customers and provides redress via an automated complaints platform when service providers are unresponsive or fail to provide a satisfactory response. The chatbot escalates certain complaints to the central bank (Bangko Sentral ng Pilipinas or “BSP”) and redirects others to the financial providers, as appropriate. By automating complaints and reducing paperwork, financial authorities can now identify key risks earlier, better focus their supervisory efforts, and strengthen the analytical capacity of their staff to improve accountability and embed the customer’s voice in the policymaking process.
An automated, modern user interface is only one example of the possible applications of RegTech (regulatory technology) to financial supervision and policymaking. While the chatbot from the above scenario does not yet exist, it is no longer a distant reality. Technology is quickly enabling regulators to transform how they operate. Today, Filipino customers can only engage with the BSP via fax, phone, email or by visiting a BSP office. After receiving these complaints, BSP staff process and file everything manually, including the approximately 70 percent of complaints that are redirected to financial providers. This is often neither safe nor efficient. But tomorrow’s customers and financial authorities will be able to leverage technology to engage in a real-time, two-way conversation to quickly obtain information and resolve problems. This can hugely benefit consumers, regulators and financial institutions alike.
A MARKET SHIFT IS AFOOT
The rapid growth of digital financial services innovation and the massive amount of data generated require us to rethink and modernize traditional regulatory and supervisory approaches. Moreover, the scope and complexity of financial authority mandates in emerging markets have critically expanded in the past two decades. In addition to their traditional mandate to preserve financial stability and maintain financial integrity, enhancing consumer protection and achieving financial inclusion have become higher priorities. Given their expanded mandate coupled with the imperative to enable ongoing innovation – whether by creating sandboxes for FinTech or building conducive regulatory frameworks for e-money – the need to focus on building financial authorities’ capacity is urgent.
KEEPING PACE WITH THE DATA REVOLUTION
To better engage with changing markets and plan for growth given their resource constraints, financial authorities have worked to implement proportional, risk-based approaches (RBA) to both regulation and supervision.* However, embracing these new approaches has proven challenging for emerging-market financial authorities. These authorities need to become more effective at capturing and analyzing data to build an evidence base for informed and timely decision-making, targeted supervision and to decode innovation and understand consumers’ experience and needs.
Financial authorities need new tools for data collection and analysis to keep pace with market growth and innovation. These tools could help build the sector’s knowledge base, facilitate market oversight and develop evidence to shape policies. Tools that help gather consumer-sourced data could provide deeper insight into consumer needs and highlight appropriate actions for financial authorities.
THE NEXT GENERATION OF TOOLS AND TECHNIQUES
The RegTech for Regulators Accelerator (R2A) partners with leading financial sector authorities to pioneer the next generation of tools and techniques for market supervision and policy analysis. Financial marketplaces are quickly and increasingly becoming more complex, and R2A provides a structured approach to help regulators strengthen their capacities by accelerating their innovation capabilities.
Launched in October 2016, R2A is partnering with a select set of leading financial authorities in Ghana, Mexico and the Philippines to develop and test next-generation RegTech prototypes. R2A is developing a pipeline of proposed solutions and building relationships with innovators (software developers, tech startups, etc.) to design and test promising solutions.
We believe the future of financial supervision and policymaking lies in using technology and data to improve the speed, quality and comprehensiveness of information in support of targeted, risk-based decision-making. We also believe that R2A will enable financial authorities to reimagine how they operate, with a clear view toward cultivating the market for digital financial services while better addressing customer needs.
- Proportional regulation is aimed at balancing risks and benefits against costs of regulation and supervision to the regulator, the supervisor and to the regulated and supervised institutions. For instance, over-regulation increases both supervisory and compliance costs, can discourage market entry and inhibit innovative business models from scaling, while under-regulation can threaten financial sector stability and integrity, and expose consumers to undue risk. Similarly, the risk-based approach (RBA) has been implemented to adopt supervisory measures that effectively mitigate the risks that are specific to individual products, channels, typologies of customers, financial institutions or sectors.
Simone di Castri is director of policy and ecosystem development at BFA; Matt Homer leads USAID’s digital finance team’s policy and partnerships activities as well as its financial inclusion investments in India; Rosita Najmi is a program officer at the Bill and Melinda Gates Foundation; and Kabir Kumar is director of policy and ecosystem building at Omidyar Network.
Enabling the FinTech transformation: Revolution, Restoration or Reformation?
Speech by Mark Carney
Governor of the Bank of England
16 June 2016
Claire Sunderland Hay has recently joined R2A as one of our project advisors. Recently, she discussed with us what Bank of England (BoE), is doing with their accelerators. Read BoE governor Mark Carney, advocate for and endorse the bank's accelerator, an example of similar initiatives to R2A are taking place in developed markets.