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Super...Vision: Foresight in the Era of Digitization

Date: 08.29.2017

Place: Makati Shangri-La Hotel, Makati City

Occasion: Fintech Marketplace Sandbox

Speaker: BSP Governor Nestor A. Espenilla, Jr.

Good Morning.  Let me immediately cut to the chase…

I believe we are all in need of super … vision…. 

That might have piqued your interest… (A good jolt following a long weekend)… Allow me to reiterate…

There is a compelling necessity for us at the Bangko Sentral ng Pilipinas…and the banking community…  to have super (meaning - “spectacular and extraordinary”) … vision (meaning,  “foresight”) in the way we do business and deliver on our mandates…  The urgency is brought about by digitization’s swift disruption of the banking and financial landscape.

With that clarification, let us ease into the morning.

I wish to thank the ASEAN Bankers Association represented by its Secretary General Paul Gwee Choon Guan, the Association of Banks in Singapore Director Ong-Ang Ai Boon, and the Bankers Association of the Philippines led by President Nestor V. Tan, for the opportunity to share my thoughts on the BSP’s regulatory approach given technological developments. 

Distinguished members of the banking industry, ladies and gentlemen, good morning.

The Sandbox

Today’s roundtable discussion is titled, “Fintech Marketplace Sandbox”.  There is both sophistication and playfulness in this. 

While the idea of a sandbox conjures the image of children playing, building sandcastles… in computer security, the Sandbox is a mechanism used for testing. Its purpose is to separate the running of untested or unverified programs to prevent the spread of software vulnerabilities. The idea is to have an isolated and defined environment for productive experimentation, while at the same time, shielding the rest of the operating environment from possible risks.

The practical brilliance of the Sandbox model finds application in   regulation.  As early as 2004, the BSP adopted the “test and learn approach.” The framework allows regulated entities to operate innovations in a “live environment” under controlled conditions, and without the immediate burden of complying with rules and requirements usually associated with the activity. 

Why the leniency?…. It is evident that Fintech brings about efficiencies to financial services.  It also has the potential to usher in greater financial inclusion…. The sandbox approach permits innovation to flourish while allowing the BSP to observe and better appreciate attendant risks.  This gives dynamism the space it needs without being hampered by excessive compliance requirements.  It is also good basis for issuing calibrated regulatory responses when needed.

When assessing the risks of an activity, the BSP looks at the activity itself … (and not just at the type of entity involved).  This promotes a level playing field.

This, in essence, demonstrates one of the ways in which the BSP promotes risk-based, proportionate, and fair regulation.  The promotion of risk-based, proportionate and fair regulation is also the first principle in our regulatory approach.

Players Actively Collaborate

The second principle in the BSP’s regulatory approach is the recognition of the need for multi-stakeholder collaboration.

Fintech is borderless and players in digitization are varied and plenty.  Even industry regulators are plenty with oversight over multiple players in multi-layered relationships.  Policy inconsistency, policy conflicts and policy gaps are to be guarded against….  Otherwise, regulatory arbitrage or a failure of oversight might arise….

The best way to ensure this does not happen is through constant engagement with Fintech innovators, financial sector players, and regulatory agencies…. Collaboration and cooperation are also needed to foster deeper understanding of risks, inculcate appreciation for financial inclusion goals, and to gauge market conduct expectations.

An example of collaboration is seen in our sharing of our research on crowd-funding with other regulators through the Financial Sector Forum (FSF).  This addresses cost-cutting concerns.

Another important shared initiative is the National Retail Payment System (NRPS) which requires industry collaboration.  Through the NRPS, we wish to establish a safe, reliable and affordable retail payments system in the country.

I mentioned that Fintech is borderless.  This considered,  BSP is also discussing the possibility of information sharing and the creation of a referral system with regulators from other jurisdictions.  In the pipeline, are proposals that will allow facilitation of entry of potential Fintech players from participating jurisdictions to minimize duplication of efforts and to promote expansion of Fintech innovations.

In this regard, the ASEAN Financial Innovation Network (AFIN) which aims to establish a regional network to address issues besetting financial institutions, Fintech firms and regulators is a welcome development.  The International Finance Corporation (IFC) and the Monetary Authority of Singapore (MAS) have the support of the BSP in this endeavor.

Objective:  Consumer Protection

The BSP’s third and final approach to regulation (in the light of modernization of the financial industry and even otherwise) is to ensure consumer protection.  Always consumer protection.  Always the public interest.

Innovations must work to benefit, and not prejudice consumers.  Transparency, product suitability, security and confidentiality are paramount values in how digital solutions must be designed and deployed.  Regulations are in place for this purpose.

For example,  given that pawnshops and money service businesses play a great role in providing basic financial services to the unbanked, the BSP enhanced existing regulations via Circular No. 938 dated 23 December 2016 and Circular No. 942 dated 20 January 2017 respectively.  These rules ensure that pawnshops and money service providers are properly supervised particularly with respect their compliance with anti-money laundering rules and other internal control measures.

Fintech and Financial Inclusion

We believe that Fintech can strategically be used to widen the net of financial inclusion.  Mobile banking solutions, e-payment options… these lessen the challenges attendant to scarce brick and mortar banking…  especially in an archipelago of more than 7000 islands…
This thrust has to do with what I earlier mentioned about the need to have a superlative vision… 

In the BSP, all officers and employees are required to memorize and take to heart, a mission and a vision.  Our vision is “to be a world-class monetary authority and a catalyst for a globally competitive economy and financial system that delivers a high quality of life for all Filipinos.”  A high quality of life for all Filipinos…. Fintech can play a major role in bringing this about.

With this in mind, we issued Circular No. 940 on 20 January 2017. The Circular allows banks to use third party cash agents as a cost-efficient service delivery channel.  … What does this have to do with Fintech and with financial inclusion?….  Well,  we believe that with cash agents, banks will be able to leverage on innovative digital banking solutions to on-board clients and expand services.  This can benefit even low-income areas commonly thought of as niche and unviable markets.

Another BSP issuance to encourage financial inclusion through Fintech is  Circular No. 950 dated 15 March 2017.   A major pain-point for those serving the low-income segment is their inability to comply with stringent Know Your Customer (KYC) rules.  Through Circular No. 950, covered institutions may now implement reduced KYC rules for low-risk accounts and use technology as a substitute for face-to-face requirements to facilitate customer on-boarding.

Related to this is the BSP’s efforts in working with other Government agencies – the Philippine Statistics Authority, the Department of Finance, the Department of Budget and Management, and Congress to develop a National ID System containing basic information and allowing the use of biometrics, so that more and more of our countrymen would be able to access basic government and financial services.

Balancing Act

Should activities of emerging Fintech market players then be unbridled given its potential to expand financial access for new businesses and MSMEs? 

We believe caution is always necessary…. Take the case of crowd-funding and peer-to-peer lending…. While these industry developments have promise as forms of alternative finance, we are aware that they may also come with risks of investor and consumer abuse.  Constant monitoring is necessary.  Regulatory action will be taken when necessary.

Need for Super Vision

Again, to keep step and to embrace the future, super, extraordinary vision or foresight is a necessity. 

The landscape keeps evolving just as fast as smart phones change operating systems and models! 

In February of this year, we issued Circular No. 944 to regulate entities that use virtual currency as underlying instruments for remittance…. In March, we provided guidelines through Circular No. 949 to our BSFIs to ensure that risks resulting from the use of social media are adequately assessed and managed….  Soon, we will be issuing  regulations focused on information security given technical developments, innovation and dynamic risk profiles considering cyberthreat risks for BSFIs…. We are enhancing our information security framework to consider cybersecurity controls. 

We realize these measures will need constant upgrading given the exponential growth of technology and the possible and probable futures in the industry’s business environment.  For this, super vision is needed.

The banking industry too will need super foresight as more and more customers become highly adapted to the on-line world and the use of digital technologies.  The truth is that  customers expect automated and real-time access to services.

That we are here now - the BSP as regulator and supervisor - with you, banks and financial industry players — engaged in a discussion of emerging trends… on how fast technology is evolving and on what we can do to ensure seamless public service in the light of technological disruption is very welcome.

I believe having extraordinary foresight comes not just from thinking in a linear way — one cannot see “straight into the future”…. changes, concerns, challenges and developments can come from many directions… and a widened perspective is necessary…. This broad and encompassing view can only be developed through consideration of other players’ vantage points.  This is done through constant communication and collaboration, similar to what we endeavor to do today and what I believe we will keep doing.   

This said, I thank you again, the ASEAN Bankers Association, Association of Banks in Singapore and the Bankers Association of the Philippines for the opportunity to keynote this important discussion.  I thank you for your partnership and support to the BSP, its initiatives and purposes.

I wish everyone a productive day ahead.