INTERNATIONAL FINANCIAL ARCHITECTURE
FOR STABILITY AND DEVELOPMENT/CRYPTO-ASSETS AND FINTECH

Designing a Governance Framework for
the Global Financial Systems –Regulations and Promotion
Lead author

Naoyuki Iwashita (Kyoto University)
Contributing author

Yoshi Matsuda (PwC Japan)
Submitted on March 14, 2019
Revised on March 27, 2019

Abstract
FinTech is a dynamic segment at the intersection of the financial services
and technology sectors. Innovation and evolution of FinTech arereforming the financial systems.1 FinTech has become an integral part ofthe economic fabric and we have witnessed tremendous upheavals in the
global financial systems. Under the transformation of the currentecosystem, new risks are arising in the eyes of consumers. And thedisruptive trends could exacerbate those risks – managing privacy,
digital identity, cyber security threats are increasingly complex andexpensive. The G20 has a vital role to play in sustaining the trust in the
global financial ecosystems, by incentivizing innovation and maximize
returns for the general public and the future of humanity.
1 See Appendix

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Challenge
FinTech innovation is now also coming from outside the financial services
industry and being driven by a variety of sources including technology
companies, e-retailers, and social media platforms. From a technology
perspective, open-source frameworks, scaled cloud computing, developers ondemand, and smartphone devices are the four key developments which havelowered capital and knowledge-based barriers to entry into the FinTech space.
As a result, the global FinTech market has grown exponentially.2
Innovation and evolution of FinTech are reforming the financial systems in thedigital age. A greater convergence is yet to come but there is also a risk of having
a greater divergence in the eyes of consumers.
● Security and privacy: Cyber security and privacy are top threats to therise of FinTech. FinTech firms are increasingly prime targets forcybercrime attacks. Complexities of managing privacy, digital identity,and detailed customer data can also be expensive hurdles.
● Regulations and governance: Regulations are double-edged sword undera balance between innovation and consumer protection; their role is tosustain “trust” in the system and society for the future of humanity.
Although technological advancement has blurred borders, there are clear
differences between advanced countries on their approaches inregulations for both protecting consumers and promoting innovations.
● Financial inclusion: According to the World Bank, globally, about 1.7
billion adults still remain unbanked, and fifty-six percent of all unbanked
adults are women.3 The statistics show that among the unbanked, womenare more likely than men to be out of the labor force. At the same time,
mobile-led FinTech has enabled 700 million people becoming account2 dealroom.co (2019). “Globally, €43 billion was invested in FinTech in 2018, twice the2017 amount of €21 billion.” https://blog.dealroom.co/global-fintech-investment-doublesto-e43-billion-in-2018/
3 The Word Bank (2017). The Global Findex Database 2017. Measuring Financial Inclusion
and the Fintech Revolution.

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holders between 2011 and 2014, 4 mainly in developing countries.
Historical data proves that financial inclusion is one of the key drivers in
reducing poverty and achieving inclusive economic growth.5

Proposal
G20 should lead on developing principals in policy and regulation to ensure anadequate level of cybersecurity and data privacy while encouraging innovation.
Technology has radically altered risks related to reliability, security andsustainability of the global financial ecosystems. 6 A malicious cyber-attack
could lead to a widespread loss of trust in the financial ecosystems as well as toa profound social instability.7 Cyber threats also remain one of the top concerns
for the Global CEOs8 and 69% of financial services’ CEOs reported that they are
either somewhat or extremely concerned about cyber-threats. 9 Breaches ofsecurity in the financial ecosystem will put billions of dollars at risk and will
shake consumers’ trust in the system. Cybersecurity is, therefore, now a criticalcomponent of financial regulation. Privacy is another critical concern as manysocieties are struggling to balance between protecting privacy and increasing
security. Consumers should not feel their private lives are infringed.
Although we are living in a fractured world with different belief systems, rulesof law, and economic models, and regulators in each jurisdiction enshrine
4 The World Bank (2015). “Massive Drop in Number of Unbanked, says New Report”

http://www.worldbank.org/en/news/press-release/2015/04/15/massive-drop-innumber-of-unbanked-says-new-report
5 The Economist Intelligence Unit (2018). Global Microscope 2018
6 See e.g. PwC (2018). Pulling fraud out of the shadows, Global Economic Crime and Fraud
Survey 2018: “, 14% of survey respondents who said cybercrime was the most disruptive
fraud told us they lost over $US1 million as a result, with 1% indicating they lost over
$US100 million.”
7 World Economic Forum (2019). The Global Risks Report 2019 14th Edition. “In the GRPS
(Global Risks Perception Survey), “massive data fraud and theft” was ranked the number
four global risk by likelihood overa 10-year horizon, with “cyberattacks” at number five.”
8 PwC (2019). 22nd Annual Global CEO Survey. Cyber threats is ranked at top 5 concern
among global CEOs and at the top concern for US CEOs in 2019 survey.
9 PwC (2016). Financial Services Technology 2020 and Beyond: Embracing disruption
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competitiveness in their own statutory objectives, better coordination on
cybersecurity regulation and approach in managing consumer privacy are
critical to promote innovation in the global financial ecosystems and maximize
returns for the general public and the future of humanity.
G20 can promote coordinated efforts in governance and regulatory structures.
Regulations are double-edged sword under a balance between innovation andconsumer protection. Their role is to sustain “trust” in the system and society
for the future of humanity. Although technological advancement has blurredborders, there are clear differences between advanced countries on theirapproaches in regulations for both protecting consumers and promotinginnovations. By collating recent trends in each market and the high-levelcomparisons of differences in governance and regulatory structures in major
markets, G20 can craft and promote coordinated efforts in governance andregulatory structures.
G20 should also actively play a leading role in Identifying and managing risks
in financial stability considering how legal experts and regulators are grapplingwith the rapid growth of FinTech businesses in different markets. Despite thefact that regulations are imperative in protecting consumers and for risk
management purposes, there are arguments that regulations have hampered
innovations in some cases. Big Tech companies and FinTech ventures areencroaching on established markets and not only redefining “Finance” but also
bringing new values and benefits to consumers through their innovations.
However, at the same time, we must pay attention to new risks being broughtwith those innovations, and the roles of financial regulations and policymakers
need to be reviewed from the ground up in a coordinated manner byrecognizing how people are affected – from the local to the regional to the globallevels.
The fragmentation in principals in governance and regulatory structures
between countries results in overlapping and duplicative mandates which canbe costly. G20 should help regulators find their way for streamlining andcoordinating through the tangled web of financial regulations. Other T20 policy

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briefs 10 also propose cohesive approaches among G20 countries to manage
regulations on protecting consumers and promoting innovations.
Fragmentation only increases risks and limits the capacity to respond tochallenges across borders.
G20 should champion and promote a coordinated effort by governments tosupport
improving financial inclusion through bridging technology,
innovation, and policies and regulations for consumer protection, and throughsharing best-practices in building necessary infrastructures, physical, financial,technology, for driving financial inclusion.11 Accompanying T20 policy briefs12
also address the impact and the importance of promoting financial inclusion for
public good.
Nearly a half of the adult population on earth are still unbanked. Financial
inclusion is one of the key drivers in reducing poverty13 and achieving inclusive
and sustainable economic growth.14

10 Ussal Sahbaz. (2019). Forming a cohesive fintech agenda for the G20; Krish Chetty, Jaya

Josie, Ephafrus Mashatola, Babalwa Siswana. (2019). Forming a G20 fintech association

forum to broker international partnerships promoting financial inclusion in developing andemerging economies; Cyn-Young Park, Bo Zhao (2019). Fintech and Distributed Ledger
Technology: Issues and Challenges Beyond Cryptocurrency
11 The Word Bank (2017). The Global Findex Database 2017. Measuring Financial Inclusion

and the Fintech Revolution.
12 Krish Chetty, Jaya Josie, Ephafrus Mashatola, Babalwa Siswana, Kim Kariuki, Shenglin
Ben, Zheren Wang, Edward Brient, Wenwei Li, Man Luo. (2019). Forming a G20 fintech

association forum to broker international partnerships promoting financial inclusion indeveloping and emerging economies; Krish Chetty, Jaya Josie, Babalwa Siswana, Ephafarus

Mashotola, Kim Kariuki, Chernay Johnson, David Saunders, Herman Smit, Shenglin Ben,
Zheren Wang, Edward Brient, Wenwei Li, Man Luo. (2019). Review of Fintech Strategies for

Financial Inclusion in Sub-Saharan Africa.

13 The Word Bank (2017). The Global Findex Database 2017. Measuring Financial Inclusion

and the Fintech Revolution. “A study in Kenya found that access to mobile money services

delivered big benefits, especially for women. It enabled women-headed households toincrease their savings by more than a fifth; allowed 185,000 women to leave farming anddevelop business or retail activities; and helped reduce extreme poverty among womenheaded households by 22 percent.”
14 The Economist Intelligence Unit (2018). Global Microscope 20185

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Adults without an account, 2017
Source: The Global Findex Database 2017. Measuring Financial Inclusion and the Fintech
Revolution.

Over the past 20 years, there has been a four-fold increase in trade and a fivefold increase in financial flows around the globe, and nearly a billion people
have been lifted out of extreme poverty. But these changes have also broughtwith them some difficulties: rising inequality, growing mistrust in business anddiscontent socially and with the political establishment. For these reasons, asystemic transformation is needed so that economic growth delivers better forsociety once more.
The global economy will continue to be defined by a complex and shifting set ofeconomic relationships. Navigating this environment requires increased
sophistication and importance in defining the roles of the traditional financial
institutions, FinTech companies, and Big Tech players in the financial
ecosystem coexisting in the eyes of consumers. Addressing these challenges isgrowing in importance as we consider how to bring about a systemic alignmentof economic growth and social progress at a macro level. G20 can and shouldplay a role in exploring and building goodwill and trust from the governanceand policy mechanism perspectives by protecting consumers and promoting
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innovations for the future of humanity.

References• World Bank Group (2017). The Global Findex Database: Measuring
Financial Inclusion and the Fintech Revolution. Available at:https://globalfindex.worldbank.org/• World Economic Forum (2019). The Global Risks Report 2019. 14th
Edition. Available at:
http://www3.weforum.org/docs/WEF_Global_Risks_Report_2019.pdf• PwC (2018). Global Economic Crime and Fraud Survey 2018 - Pulling
fraud out of the shadows. Available at:https://www.pwc.com/gx/en/forensics/global-economic- crime-andfraud-survey-2018.pdf• PwC (2016). Financial Services Technology 2020 and Beyond:Embracing disruption. Available at:https://www.pwc.com/gx/en/industries/financial-services/publications/financial-services-technology-2020-and-beyondembracing-disruption.html• dealsroom.co (2019). Global fintech investment doubles to €43 billion
in 2018. Available at: https://blog.dealroom.co/global-fintechinvestment-doubles-to-e43- billion-in-2018/• PwC (2019). 22nd Annual Global CEO Survey. Available at:https://www.pwc.com/gx/en/ceo-agenda/ceosurvey/2019/gx.html• The Economist Intelligence Unit (2018). Global Microscope 2018.
Available at: https://www.centerforfinancialinclusion.org/globalmicroscope-20187

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Appendix
FinTech innovation and evolution in phases

Source: PwC analysis
In the Phase 1, FinTech has emerged and attracted a significant amount ofcapital with a combination of impacts from an enabled low cost digital
distribution with technological innovation, policy changes, and an increasing
number of digital-native generation. Venture funding into FinTech surgedthrough 2015. In the Phase 2, venture funding stabilized as FinTech firms
struggled with customer acquisition, regulations, and developing
infrastructure, and the market became crowded rapidly. FinTech firms
therefore pursued and materialized partnerships with traditional players. In
the Phase 3, incumbent players in the financial ecosystem has started to adopt
many of the early disruptive business models and products by FinTech players.
By leveraging emerging technologies, including Artificial Intelligence (AI) andApplication Programming Interfaces (APIs), in both front- and back-end,
traditional players and FinTech firms alike are reforming the financial systems.
In this phase, we expect a new style of competition among various partnerships
with innovations in both technologies and business models.

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From a viewpoint of governance in the financial industry, there are points to be
noted: FinTech companies are not subject to traditional banking regulations.
Even so, we must maintain an economic order and avoid damages toconsumers. It means that we need regulations for FinTech companies to protect
consumers. However, if we restrain FinTech companies under the same
regulations as traditional incumbents, the dynamism of innovation might belost in the process. The balance between regulations and promotion is critical.

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