Fintechs and Central Banks: Frenemies on Regulation

Where do you draw the line between regulation and innovation? Central banks are grappling with this issue in the face of rapidly changing technology, which has the potential to decrease costs and dramatically increase the scope of financial services as well as the number of people accessing banking systems.

By Michael Switow

But if regulators move too fast or are too lenient, or worse, if they move too slowly to introduce appropriate rules, the terrain is ripe for scams. Take the case of Indonesia, which currently lacks laws on personal data protection and peer-to-peer lending.

«There is a real problem with illegal fintech lending right now,» Dino Setiawan, the chief executive of fintech startup Awan Tunai, told participants at Singapore’s Fintech Festival 2019. «Illegal fintech lenders are charging up to 7 percent interest per day. That’s 300 percent per month. Once the app is on your phone, they scrape everything: Your photos and contact lists.»

The lenders then use this private information to enforce collections, often spamming an entire contact list with egregious messages and compromising photos. Personal data and photos have appeared in pop-up ads claiming to offer sexual favors, without a user’s permission, in retaliation for failing to pay debts, according to the «Jakarta Post».

Criminal Gangs

«These are criminal gangs, but the Indonesian police are struggling to put these guys in jail because there really isn’t a law in place. They have to get them through pornography or communication laws. The space for abuse is rife,» Setiawan added.

Licensing the financial sector can be particularly problematic for countries. The tolerance for risk is low – no one wants to see wealth stolen or wiped out – yet existing rules are often not suited for new entrants.

Difficult to Predict

«It’s important that you separate out what should be ‘never events’ and areas where you can tolerate risk,» explained Simon Chesterman, the dean of the faculty of law at the National University of Singapore. «There are areas where you do not want to compromise at all, like confidentiality of customer information and the potential for money laundering,» he added.

One of the challenges when regulating technology is that it can be difficult to predict adverse effects. By the time the consequences are apparent, it is often harder or more expensive to regulate.

Regulatory Sandboxes

To meet this challenge, a handful of countries, including Singapore and Thailand, have created ‹regulatory sandboxes› which allow companies to test new fintech services, without being subject to normal banking rules.

Australia, meanwhile, is in the process of modernizing its decade-old regulatory framework. New rules will be announced next month.

Obscure Terminology

Current regulations were «developed before there were real examples in this space,» said Australian Prudential Regulation Authority’s Melisande Waterford, who added that existing rules are complex and use «obscure terminology.»

«Ultimately our aim is to accommodate innovation and competition and have appropriate consumer protection and system-wide safety built into that,» she explained.

Too Risk-Averse

Striking that balance is difficult. If a government is too risk-averse, innovation will be stifled and the country left behind, NUS’ Chesterman warned.

«If you take the position that you won’t tolerate any risk or don’t want to suffer any kind of reputational damage, all that will do is hold back innovation and leave you behind,» Chesterman added. «You want to be friendly, but not too friendly.»