Financial regulators may have to collaborate on a global scale to police the increasingly fuzzy legal border in the fintech era, according to a new International Monetary Fund (IMF) discussion note.
The IMF paper, titled ‘Fintech and Financial Services: Initial Considerations’, says with new technology breaching traditional nation-state boundaries “international cooperation is essential to ensure effective regulation”.
“At present, there is little consistency in regulatory approaches across jurisdictions. This may undermine regulation at the national level and create incentives for regulatory arbitrage,” the IMF paper says. “Greater harmonization between national regulatory frameworks would help level the playing field and facilitate the adoption of these technologies on a global scale.”
The IMF is “well placed” to facilitate global oversight of fintech, the paper says.
Intended to spark debate rather than outline official IMF policy, the note says regulators will also have to focus on underlying business practices as opposed to entity labels.
“Licensing regimes will need to be redesigned to bring new types of service providers within the regulatory perimeter where appropriate,” the paper says. “More fundamentally, the ‘unbundling’ and migration of services from intermediaries to networks may require regulators to rely less on entity-based regulation and more on activity-based regulation.”
Furthermore, the IMF discussion note says the regulatory border should remain “flexible” to prevent “arbitrage between the unregulated and regulated perimeter”.
Financial sector regulators will also have to get down and dirty with the data to effectively police fintech players, the paper says, with “self-governance” and “regtech” (or regulatory technology) offering only partial solutions.
“Regulators will need to ensure that algorithms are designed and operate in a manner that does not expose consumers or the financial system to undue risk,” the IMF note says. “…But effective regulation that would allow the authorities to verify the robustness of the underlying technologies… would require a significant commitment of public resources to build the necessary expertise within the regulatory community.
“It is not clear whether this would be possible.”
Regardless of the regulatory challenges posed by fintech the “benefits of the technology for user choice, cost, and access are sizable”, the paper says.
In particular, the IMF note says fintech shows immediate promise to “improve cross-border payments by offering better and cheaper services, and lowering the cost of compliance with anti-money laundering”.
The IMF cites statistics showing cross-border transfers constitute about “40 percent of global payments revenues, and generated US$300 billion in global revenues in 2015”.
According to the paper, the average cross-border payment of between US$15,000-20,000 generated fees of US$30-40 per transaction.