Digitalization and financial services innovation
in the Italian G20 Presidency Agenda
Speech by Alessandra Perrazzelli
Deputy Governor of Deputy Governor of the Bank of Italy
Singapore FinTech Festival 2020 - Economic Summit, 7 December 2020
Thank you for inviting me to speak at this very important event. The Italian G20
Presidency officially took off on December 1. Three keywords embody the overarching
priority themes of the Presidency: People, Planet, and Prosperity. These 'three Ps' will
inspire the agenda of the G20 Finance Track work streams led by Finance Ministers
and Central Bank Governors. We must aim to foster a transformative recovery from the
pandemic to a more inclusive and sustainable economy and society, levering on new
technologies and digitalization, to bring a brighter future for all. The Italian Presidency
will bring a renewed focus on green and sustainable finance issues (which also figure
in the agenda of this event), in particular with initiatives aimed at promoting better
quality data and a broader and more comparable climate-related financial disclosure.
As to digitalization and financial services innovation - the main theme of this Singapore
Festival - taking over from Governor Alkholifey, I confirm that these will continue to be
important cross-cutting issues in the G20 Finance Track workprogram also under the
Italian Presidency.
As a first example, following up on the G20 Action Plan developed under the Saudi
Presidency for sustaining the recovery after the pandemic, the Italian Presidency will
promote a discussion in the G20 on the role of new technologies and digital transformation
as drivers of productivity gains which can lead to more inclusive and resilient growth. A
priority will be to define a menu of policy options providing evidence on best practices
for supporting the digital transformation and generating productivity returns.
A second example concerns digitalization applied to infrastructure. The Italian
Presidency considers a priority to continue to work on the InfraTech Agenda endorsed
under the Saudi Presidency, by focusing on best practices for delivering high-quality and
high-impact technological solutions enabling infrastructure resilience, and for addressing
disparities between urban and rural areas to reach universal access to connectivity
networks.
A third example refers to the G20 work stream on financial inclusion. The shift
towards digital financial services, further accelerated by the pandemic, has created
new opportunities but also new challenges. Leveraging on better and more advanced
technology, we must work to ensure that benefits are widely shared, by improving financial
access for underserved and vulnerable groups, and small and medium enterprises, and
to avoid that the increased use of digital means might be a source of exclusion for
some categories, due to the lack of digital infrastructure or digital skills. Under the Italian
Presidency, the Global Partnership for Financial Inclusion will identify the gaps in digital
financial inclusion, uncovered by the crisis, and explore viable solutions to address them,
by looking at the state of development and accessibility of digital infrastructure, the
degree of financial and digital literacy, the adequacy of the regulatory and supervisory
framework.
Digitalization and financial services innovation also set the stage for some key
priorities identified by the Italian Presidency for the work on financial regulation,
coordinated by the FSB in collaboration with the Standard Setting Bodies. As the pandemic
has increased the use of digital financial services and remote work tools, an important
objective is to promote safety and resilience of the financial system by strengthening
cybersecurity in the financial sector. Following up on the Cyber Incident Recovery and
Response (CIRR) toolkit developed by the FSB under the Saudi Presidency, the Italian
Presidency will focus on cooperating to achieve greater harmonisation in specific areas
such as reporting of cyber incidents.
The Italian Presidency is also engaged to achieve more efficient and secure cross-
border payment systems, building upon the Roadmap for enhancing cross-border
payment arrangements and infrastructures developed under the Saudi Presidency and
facilitating the achievement of its 2021 committed deliverables. Related to this, we
will continue the review of regulatory, supervisory and oversight challenges of global
stablecoins and of remaining financial stability concerns. Let me briefly recall the recent
developments and arguments underlying the G20 objective to improve cross-border
payments and the Italian Presidency commitment to take it forward in 2021.
The pandemic has led to a sharp acceleration in the spread of digital payment
instruments in many countries of the world. For example, in the second quarter of this
year the number of mobile payments transactions processed by Chinese banks increased
by 25 per cent with respect to the same period of 2019. In the US, survey evidence
suggests that nearly one in five respondents plan to increase the use of mobile payments
due to COVID-19. In the euro area, around 40 per cent of consumers have decided to
reduce the use of cash for their daily shopping since March, partly because of the fear
of being infected by the virus via banknotes or proximity to the cashier. In Italy, the use
of payment cards rose and the use of cash decreased even over the summer, when the
risk of infection was low and social distancing measures were very limited. These trends
suggest that the change in consumer habits towards an increasing use of digital payment
instruments, which started well before this crisis, will continue in the years to come,
potentially at a faster pace than what we have observed before.
Recent advances in technology and innovation, such as distributed ledger
technologies (DLT) and multilateral platforms, create the potential for new payment
infrastructures and instruments for cross-border payments. DLT, in particular, could
represent a break with the way in which payment infrastructures have traditionally
worked, i.e. a model in which information is centralized at a single trusted entity. In
fact, DLTs enable operators to record a chain of transactions and exchange messages
to initiate transactions directly and in one online register, the distributed ledger, which
is shared by all users. This could reduce the costs of accessing payment infrastructures,
fostering competition and cheaper payment services for all.
In sum, technological innovation and the potentially long-lasting effects of pandemic
on our behaviour may have profound consequences for the way we will pay and transact
in the future, even in the near future. The FSB Roadmap to enhance global cross-border
payments is a complex multiannual project, spanning 19 areas of intervention (the
socalled "building blocks") grouped in five "focus areas" dealing with regulatory and
infrastructural aspects, with the objective of achieving an improvement of international
payments in terms of cost, speed, transparency and accessibility. Actions to be completed
by end-2021 have already been committed while the milestones envisaged beyond 2021
are more indicative and can be adjusted as needed. The Roadmap builds on important
early actions, such as a "tech sprint" on harmonising payment standards implementation
as well as steps on applying AML/CFT standards consistently and comprehensively. It also
includes early analyses on emerging developments particularly in innovations such as
new multilateral platforms, stablecoins, central bank digital currencies, which the Italian
Presidency has identified as more sensitive areas that would deserve a broader and more
in-depth discussion in the G20 setting.
In this context, so-called "stablecoins" have the ambition to facilitate payments,
especially cross-border retail ones. Given the central role of payment services in promoting
financial inclusion1, the potential benefits from the diffusion of stablecoins could be
significant for the 1.7 billion people globally who are still unbanked or underserved
with respect to financial services. At the same time, the payment network of a global
stablecoin could have a disruptive impact on monetary sovereignty and be a source of
financial instability.
Thus, the spread of stablecoins will require close scrutiny and adequate regulatory
initiatives at the global level to safeguard the stability of the payment and the financial
systems and sustain economic growth. In addition to the potential threats to the financial
stability and the monetary sovereignty, so-called stablecoins raise delicate questions
regarding IT risks, personal data processing and management, privacy, the correct
functioning of the payment system and the transmission of monetary policy. There are
also the risks of tax evasion, money laundering and the financing of terrorism, which may
have profound consequences for wealth inequality, peace and well-being of our civil
society. The cross-border nature of these issues makes international coordination and
information sharing essential to address effectively these risks.
The Financial Stability Board has recently published ten recommendations to
promote a coordinated and effective regulation, supervision and oversight of so-called
global stablecoins. These recommendations, which are the outcome of the discussion
among FSB member authorities, highlight the importance of regulation, supervision and
oversight that is proportionate to the risks, and stress the value of flexible, efficient,
inclusive, and multi-sectoral cross-border cooperation, coordination, and information
sharing arrangements among authorities that take into account the evolving nature of
stablecoins arrangements and the risks they may pose over time.
Many jurisdictions are preparing to create new regulatory frameworks or adapting
existing ones to the potential diffusion of so-called stablecoins. Examples include the
public consultation by the Monetary Authority of Singapore for the revision of its Payment
Services Act, the Swiss FINMA stablecoin guidelines, the regulatory proposal "Market in
crypto-assets" by the European Commission and the Interpretive Letter clarifying banks'
responsibilities in providing services to stablecoin issuers, published by the US Office of
the Comptroller of the Currency (OCC).
The application of technologies such as blockchain or DLT could also have an impact
on the way central banking is carried out. Currently, many central banks across the globe
are considering whether to introduce a new digital form of central bank money (Central
Bank Digital Currency - CBDC). However, there is a number of options in the way central
banks can structure a CBDC, each of which brings different risks and opportunities. For
example, the introduction of a wholesale-only CBDC could improve the efficiency and
the risk management of the interbank payment systems but there are no clear evidences
if and how this solution will be more advantageous than current account settlement
systems. Likewise, a retail CBDCs directly available to end-users could provide access to
simple and costless ways of paying, fostering financial inclusion, but at the same time
could have undesired side effects on banks' business models, financial stability and
monetary policies.
We are still at the beginning of the development of CBDCs and further analysis will
be required in order to tackle all key feasibility and operational challenges. In this respect,
the Eurosystem is currently evaluating all possible options for a European CBDC in order
to be ready to introduce, if needed, a "digital Euro". For this purpose, experimentation
activities on possible different design solutions of the digital Euro will be launched shortly
to better understand its technical feasibility as well as its ability to meet the needs of
potential users. A digital Euro will be complementary to cash and to current European
initiatives in the field of retail payments and will be carefully designed having in mind the
potential implications on privacy, safety/security, monetary policies and financial stability.
For the time being, it is hard to predict if CBDC will prove to be a successful payment
instrument and which CBDC solution will prevail in the long run. What is certain, however,
is that in the near future CBDCs will coexist with traditional payment instruments and
that customers will have access to a broader and diversified range of different payment
solutions that could involve traditional cash as well as innovative retail CBDCs.
Against this background, the Italian G20 Presidency will promote work in two main
areas: i) a harmonized implementation of FSB recommendations to address financial
stability risks from so-called stablecoins, and ii) the development of measures necessary
to effectively address other issues, such as such as money laundering and terrorism
financing, data privacy, cyber security, consumer and investor protection and competition.
On these works I have two more specific remarks:
• First, the obstacles to achieving harmonized approaches in regulating stablecoins
across jurisdictions, risks associated with diverging regulatory frameworks and
possible cross-border regulatory gaps need to be clearly identified in order to avoid
a negative impact on financial stability and to limit regulatory arbitrage. Through the
work of the FSB, the Italian Presidency will promote a harmonized implementation
of international standards applicable to stablecoins in national jurisdictions, in
accordance with the FSB Report.
• Second, stablecoins arrangements need to be assessed also against those risks
that could fall outside the mandates of financial authorities. We therefore need
to investigate what kind of measures could be adopted to properly manage AML,
operational and cyber security, consumer protection, market integrity, data privacy
and competition risks. In this respect, the Italian Presidency, in collaboration with
relevant standard setting bodies, such as FATF, CPMI and IOSCO, will support the
completion of the revision of existing standards and principles, and assess the need
for further guidance.
Focusing on the initiatives currently being undertaken at EU level, the European
Commission on 24 September 2020, has adopted a new digital finance strategy and a
new retail payments strategy. The main priorities of the digital finance strategy focus
on removing fragmentation in the Digital Single Market; adapting the EU regulatory
framework to facilitate digital innovation; promoting a data-driven finance and addressing
challenges and risks with digital transformation. The digital finance strategy includes
legislative proposals on crypto-assets and on digital operational resilience (to prevent
and mitigate operational and, more specifically, cyber-risk). It also envisages a medium-
term roadmap including the review and potential amendment of other key areas of the
regulatory framework in order to strengthen the EU internal market and its ability to
compete in the digital financial arena.
This medium-term roadmap tries to address issues such as the interoperability
of digital identities for easing customer on-boarding processes in financial services;
moreover, building on the PSD2 open banking framework, the EC will investigate the
possibility of broadening the scope of data access initiatives to pave the way towards
open finance.
The strategy on retail payments - consistent with the strategy envisaged by the
ECB and the Eurosystem - sets key priorities for retail payments in Europe over the next
four years. Its main objectives are increasing digital and instant payment solutions with
pan-European reach, supporting innovative and competitive retail payments markets,
improving the interoperability of retail payment systems and the efficiency of international
payments.
The European legislator is therefore responding via all these initiatives to the
changes that are affecting the financial market. I refer in the first place to changes to
the market structure: new players are entering the financial market, both agile start-ups
and Big Techs. The regulator here also played a pivotal role: the entrance of new players
was in fact enabled by the new EU regulatory framework on retail payment services (the
Payment Services Directive 2), which transferred ownership of client data from banks to
clients and transformed financial data into a commodity accessible for both financial
and non-financial entities. Thus, both market and regulatory drivers have created a more
competitive landscape that can lower costs and be beneficial for consumers but, at the
same time, poses risks for financial stability, competition and data protection that should
be carefully assessed by legislators and competent authorities.
This evolution is accelerated by the way technology and digitalization are changing
business models and the way services are offered in the financial market. Digital platforms
and technologies such as cloud and APIs (application programming interfaces) allow
the commingling of payment and financial services with services or products from other
sectors, disintermediating banks and other traditional players and transforming them in
"white label" service providers. Crowdfunding and invoice trading platforms are developing
and becoming more competitive in providing funding to the real economy. The increase
of instant lending, also due to the availability of large data sets and the use of AI/ML, will
allow clients to know the outcome of a request in real time and will probably require a
rethinking of traditional business processes and of the role of back offices.
For incumbents, these evolutionary trends will imply a growing pressure on
profitability, the reconsideration of their business models and ever-increasing investments
in R&D and in the adjustment of current IT infrastructures. So far, many traditional players
are coping well with this challenge by not entrenching themselves in defensive positions
but rather opening towards partnerships and collaborations with new Fintech start-ups
and Big Techs (so called "coopetition"). "Coopetition" will be a key strategy for each
player of this new financial scenario in order to leverage on existing strengths and to
develop services and products fit for the new market. Of course, this new cooperative
model will be effective only if an open ecosystem and a level playing field are ensured
for both incumbents and newcomers, so that everyone can access and compete on the
digital platform economy.
In an already transforming technological and business environment, the COVID-19
pandemic came along and forced a rapid and large-scale reorganization of the offering of
services and products. In a short period of time, social distancing and lockdown measures
were introduced and the shift towards digitalization, which was already happening before
the pandemic, received a boost. Social distancing has further stressed the importance of
digitalization in the economy and has driven a rapid increase in the use of digital financial
services and e-commerce. However, to reap the benefits of the growth of digital financial
services in the post-COVID era, it will be necessary to close the digital divide at both
national and international level by ensuring equal access to digital infrastructure as well
as promoting financial and digital literacy. It is only fostering an inclusive financial and
digital environment that we will fully exploit the potentialities of the digital economy to
contribute to the wellbeing and prosperity of society as a whole.
From a market perspective, compared to incumbents, in the aftermath of the
pandemic, Fintech firms may be better placed to react and meet the evolving needs of
customers because they are by nature more agile and can rapidly adapt to a changing
environment by delivering new and tailored solutions. Traditional intermediaries, which
were already managing to find the right balance between innovation and legacy, are now
facing even more difficulties with the pandemic and will need to reset and reposition
themselves against the backdrop of a faster-paced digitalization and of the next economic
recovery.
In this new world, supervisors and regulators will need to adopt policy tools that
allow staying abreast of technological and market developments while overlooking the
evolution of the sector and managing new macro and micro prudential risks. In order to
do so, many jurisdictions have set up new institutional mechanisms called "innovation
facilitators", which include sandboxes and innovation hubs, that are meant to provide
national authorities with new fora for knowledge-sharing with market operators and to
support new firms or incumbents with Fintech-related issues.
In addition, the cross-sectoral and cross-border nature of Fintech innovations will
require different authorities to coordinate within and across countries to deliver holistic
solutions to new phenomena such as AI or stablecoins, which will require a harmonized
global response to prevent loopholes and regulatory arbitrage.
In order to cope with these challenges, the Bank of Italy has recently launched its
Milano Hub initiative, a new form of innovation facilitator that aims to be a link between
authorities, firms and the academia and to foster wide private and public initiatives that
help the transition to digital of the Italian financial system. The Milano Hub is another
step in the journey of the Bank of Italy in the Fintech world, which started in the beginning
of 2017 with the setup of the Bank of Italy's Innovation Hub ('Canale Fintech') and
was followed this year by an internal reallocation of competencies related to financial
innovation that was meant to create a dedicated Fintech unit and to leverage potential
synergies with other Bank of Italy's functions (especially oversight on payment services
and currency circulation).
The hub will leverage on its location in Milan, the main financial center in Italy
with a European and global projection, and will be open to the participation of public
authorities at both national and international level. Cooperation with global hubs such
as the one recently launched by the Monetary Authority of Singapore and the Bank for
International Settlements will be a key element in the future success of initiatives like
Milano Hub and will help fostering the development of global solutions to the challenges
posed by innovations. As an example, we are planning to launch through the Milano
hub, in close collaboration with the BIS Innovation Hub, a new TechSprint initiative which
will take place under the Italian G20 Presidency, following in the footprints of the very
successful exercise conducted under the Saudi G20 Presidency.
In conclusion, in all jurisdictions innovation facilitators will play an important role in
testing the impact of innovation in a closed environment and in encouraging the spread
of responsible innovation in the financial system. Thanks to these new instruments,
policymakers will be able to "cross the river of Fintech by feeling the stones" and to
address one by one regulatory and supervisory concerns raised by new Fintech models.