Opening remarks by Francois Groepe,
Deputy Governor of the South African Reserve Bank,
at the Inaugural Intergovernmental Fintech Outreach Workshop
Council for Scientific and Industrial Research, Pretoria
19 April 2018
The fintech phenomenon: five emerging habits
that may influence effective fintech regulation
Introduction
Good morning, ladies and gentlemen.
Welcome to the inaugural Intergovernmental Fintech Outreach Workshop.
"Situations emerge
Let us begin with the words of Joseph Schumpeter: in the process
of creative destruction in which many firms may have to perish that nevertheless would
be able to live on vigorously and usefully if they could weather a particular storm."1
There is no doubt that we are witnessing a wave of disruptive innovation and
Schumpeter's
technology that one can liken to 'creative destruction', one that will leave
no aspect of human endeavour untouched. Financial services in particular are within
or
the eye of the storm of the change as a result of financial technology, 'fintech'. An
elementary Google search on fintech results in no fewer than 35.2 million hits.
Investment in fintech over the last three years is estimated to have been well over
US$300 billion dollars.2
Attention to the emergence of fintech has come from every quarter. There have been
contributions from the World Economic Forum reflecting the potential of distributed
ledger technology across wide-ranging financial services and activities. The
International Monetary Fund has been vocal about the potential impact of
cryptocurrencies. More recently, under the Argentinian presidency, the G203 has
committed to deepening the analysis on how financial inclusion could be achieved
through digital innovations. All of these examples suggest a heightened expectation
of shifts to financial services as a result of fintech.
may be appropriate to attempt to define what fintech is. 'Fintech'
At the outset, it
usually refers to innovative start-ups or underlying technologies such as blockchain,
cloud computing, and machine learning. Founded on an activity-based analysis
conducted by the Financial Stability Board (FSB), the evolving definition of 'fintech' is
that it is neither the fintech firms, nor the start-ups, nor the emerging technologies.
Rather, 'fintech' is the technology-enabled innovation in financial services as a result
of the process of 'creative destruction'. It may lead to new business models and new
configurations within financial services.
The potential of financial technology
The potential of fintech is well described in one of the earliest reports on fintech
commissioned by the UK4 Treasury. This report is useful in that it outlines how
countries can positively position themselves in relation to fintech. A key finding of this
report is that a country could establish a well-functioning fintech ecosystem and
competitively position itself provided that a holistic view is taken that focuses on the
following four core ecosystem attributes: policy, talent, capital and demand.
Policy refers to the following:
(i) regulatory regimes, which includes regulatory support for new entrants and
innovative business models;
(ii) government programmes, including sector-growth initiatives which, in turn,
include efforts to open up the sector, increase competition, attract foreign
fintechs, and improve cyber-resilience; and
(iii) taxation policy, which refers to the introduction of appropriate incentives to
drive greater investment in fintech, but, dare I add, should also include
revisions to the tax code to ensure that profits generated are included in the
taxation net of this nascent sector.
While clear and appropriate fintech policies are important catalysts to innovation,
without talent and capital, fintech is likely to grow at a slower pace.
Talent refers to both the availability of technical, financial sector and entrepreneurial
talent as well as the strengthening of the talent pipeline through immigration policies
and the promotion of fintech in schools and universities with specialist modules,
apprenticeships and sponsored work placements.
Capital refers to access that start-ups and scale-ups should have to seed and growth
capital as well as to public capital markets. The report, for example, lists
investor-focused programmes such as the sponsorship of events for venture capital
funds to meet early-stage fintechs and the creation of a growth capital fund to finance
fintechs.
Last, but not least: although each of the previous factors is necessary for the
emergence of fintech, actual demand relates to the end-client demand across
consumers, corporates and financial institutions. Governments can play a significant
role in promoting the adoption rate of fintech through the modernisation of payment
and supply chain solutions. Although demand is not a prerequisite, without it
innovation in financial services is likely to take off at a slower pace.
This framework lays the foundation for developing fintech, especially at a time when
the demand for cheaper, faster, simpler and more convenient financial services is high.
As policymakers and regulators, we have been acutely aware of the power of
developing ecosystems. I further believe that fintech can play a significant role in
addressing broader public-policy objectives such as financial deepening, increased
competition, and greater efficiency in the provision of financial services. For regulators,
though, the challenge is to balance the benefits that fintech may bring with its potential
risks.
The global and domestic approaches to financial technology
Over the past year, the FSB and the Bank for International Settlements (BIS) have
also analysed fintech and its implications for policy objectives such as greater financial
inclusion and financial stability. Although the BIS concluded that, at present, there are
no compelling risks from emerging fintech innovations, it does highlight that the
assessment of financial stability implications for fintech are challenging due to the
limited availability of data and the fact that many innovations have not yet been tested
through a full financial cycle.
South African policymakers and regulators have been following the developments and
discourse on fintech very closely. Given the global developments, the local innovations
as well as the fast-paced and cross-cutting nature of fintech, we have established an
Intergovernmental Fintech Working Group (IFWG). The IFWG comprises National
Treasury, the Financial Services Board, the Financial Intelligence Centre, and the
South African Reserve Bank. It is anticipated that the National Credit Regulator and
the Competition Commission will join the working group in due course.
Effective coordination between policymakers, central banks, financial supervisors,
regulatory authorities, financial ombudsmen and others, all with responsibilities related
to fintech, is key to ensuring that that policy is coordinated and synchronised in the
financial sector. Regulation has to be harmonised. Given the cross-border nature of
digital services, coordination on a global scale is vital, and the role of bodies such as
the FSB and G20 will be important in this regard.
In South Africa, the Twin Peaks model of financial sector regulation, which is currently
being implemented, aims to put in place a regulatory framework that better responds
to the dynamic nature of the financial sector, including fintech. The model places
emphasis on ensuring consistent, harmonised regulatory approaches to activities in
the financial sector, so that comparable activities face similar regulatory
requirements - regardless of whether the institution performing the activity is a
'traditional' financial institution or a new fintech entrant. This approach is intended to
better keep pace with changes in the sector, including those brought about by
technological innovations. An example is the establishment of the IFWG mentioned
earlier, which is a positive development in driving a coordinated and consistent
approach under the Twin Peaks model.
Given this broad background and context on fintech, and with this coordinated
approach in mind, I would like to turn our attention to this inaugural fintech outreach
established by the IFWG. Why is this outreach important? And what is the IFWG
attempting to achieve through these engagements?
The importance of IFWG outreach
To position this outreach initiative, and to draw out its importance, allow me to
synthesise the findings from three seminal reports. These reports collectively point to
possible best practices related to regulators' efforts on fintech. The reports are:
 Fintech supervisory and regulatory
the FSB's Fintech Issues Group (FIG) report on
issues that merit authorities' attention (published in June 2017);

the Basel Committee on Banking Supervision (BCBS) report on the Implications of
fintech developments for banks and bank supervisors (published in
December 2017); and

the Fintech Action Plan released by the European Commission in March 2018.
These reports highlight five emerging practices that may influence effective fintech
regulation over time. These practices may be important in fostering responsible
innovation, promoting financial stability, and aligning regulators' efforts to achieve a
more inclusive and a more competitive financial system.
Practice 1: focused attention on innovation as a result of technological
advancements and the active review of regulatory regimes
The first best practice is for policymakers and regulators to dedicate attention to fintech
innovations and be supportive of them - or at least to ensure that any barriers to fintech
innovations are limited. This could be achieved through ensuring clear and appropriate
regulatory regimes. The pro-innovation stance is drawn out in each of the reports.
The FIG report suggests that regulators should be agile whenever there is a need to
respond to the fast changes in the fintech space, and they should be quick to
implement or contribute towards a process of reviewing the regulatory perimeter
regularly. The suggestion is to adopt an approach that is technology-agnostic or
neutral, and to focus on financial service activities.
In the BCBS report, it is suggested that while bank supervisors must remain focused
on ensuring the safety and soundness of the banking system, they may wish to
consider ways of executing their mission without unduly hampering beneficial
innovations in the financial industry.
European Union's
In the (EU) Fintech Action Plan, one of the explicit goals is enabling
innovative business models to scale up across the EU region through clear and
consistent licensing requirements. Actions include reviewing regulation on
investment-based and lending-based crowdfunding service providers for business.
The proposal specifically aims to ensure an appropriate and proportionate regulatory
framework, which allows crowdfunding platforms that want to operate cross-border to
do so with a comprehensive 'passporting' regime under unified supervision. Another
action that supports innovation includes a review of the current authorising and
licensing approaches for innovative fintech business models. The European
Commission will set up an expert group to assess whether there are any unjustified
EU's
regulatory obstacles to financial innovation in the financial services regulatory
framework.
Authorities should therefore not merely acknowledge or observe innovation but should
actively review fintech innovations (including those with new business models) with a
view to ensuring proportionate and consistent authorising and licensing regimes. This
practice is driven by an underpinning open philosophy and a flexible approach to
fintech. Speakers and participants who have had experience of this approach in other
jurisdictions will tell us more about the impact of this practice. We will hear how
initiatives in cryptocurrencies, digital identity and digital mobile wallets may benefit
from a pro-innovation philosophy. We will also hear from jurisdictions with Smart
Nation policies about the importance of such national philosophies and policies. Of
course, as authorities, we will need to ensure level playing fields and manage the risk
of regulatory arbitrage. This is why a coordinated multiple regulator approach is so
important.
Practice 2: the creation of innovation facilitators such as hubs and sandboxes
to keep close to emerging developments and foster shared learning
The second practice is the review and creation of structural mechanisms to enable
ongoing market engagements. These include efforts aimed at collecting fintech data,
organising market outreach initiatives, and implementing structures such as innovation
hubs, innovation accelerators and regulatory sandboxes.
Each of the reports strongly encourages shared learning with a diverse set of
private-sector parties. In order to support the benefits of innovation through shared
learning and through greater access to information on developments, authorities
should continue to improve communication channels with the private sector and
should continue sharing their experiences with innovation hubs, innovation
accelerators and regulatory sandboxes, besides other forms of interaction. The reports
suggest that the successes and challenges derived from such approaches may
provide fruitful insights into new emerging regulatory engagement models.
Given the rapid pace of change as well as the emergence of new business models,
I believe that, over time, the second practice that may influence effective regulation is
the establishment of innovation facilitators. We will hear and learn from our colleagues
from the World Bank about the successes and learnings from those that have already
implemented such mechanisms. We are pleased to also have the Monetary Authority
of Singapore with us today; they can share first-hand their experience with their
Innovation Hub, the Looking Glass and related initiatives, such as Project Ubin.
Practice 3: coordination, collaboration and communication between domestic
regulators
We suggest that the third practice relates to coordination and collaboration between
regulators. With the emergence of innovations such as crypto-assets or crypto-tokens,
initial coin offerings and other alternate financial services platforms, there is often a
'grey area' around the relevance and applicability of current regulatory frameworks.
Furthermore, the development of new regulatory regimes, if applicable, requires
coordination between regulators. As noted before, such coordination is important in
ensuring consistent understanding and approaches between regulators.
The importance of this coordination is emphasised in the FIG report. Due to the
growing importance of fintech activities and the interconnections across the financial
system, authorities may wish to develop further their lines of communication. The
BCBS report highlights that fintech developments are expected to raise issues that go
beyond the scope of, for example, prudential supervision, as other public-policy
objectives may also be at stake. This may include objectives such as the safeguarding
of data privacy, cybersecurity, consumer protection, the fostering of competition, and
compliance with anti-money laundering and combating the financing of terrorism
regulations.
I would like to emphasise the importance of harmonised approaches and regulatory
regimes between domestic regulators. The principle that has to be emphasised is that,
as innovations are reviewed and as regulatory frameworks are developed (where
required and appropriate), regulators that are best placed to supervise certain
activities should be given the task to do so. Regulations should be appropriate and
purposeful. Over the next two days, we will hear from you on how important you think
this coordination and collaboration between domestic regulators is and what steps we
can take to further improve such coordination and collaboration.
Practice 4: global cooperation with standard-setting bodies
Turning our attention to the fourth practice, we suggest that continued cooperation
with our international peers and standard setting bodies remains important. In an
environment of financial services that are unconstrained by geographical borders and
globally situated third-party financial services providers such as cloud providers,
continued sharing and coordination is necessary. Three areas that require
international cooperation by authorities are suggested in the FIG report: the monitoring
of macrofinancial risks (such as procyclicality), the mitigating of cyber-risks, and the
managing of operational risks from third-party providers.
In support of this cooperation, the European Commission's report highlights the
importance of the development of standards. Standards for open banking and
application programming interfaces (APIs) as well as standards to limit cyber-threats,
to improve regulatory reporting, and for distributed ledger technologies (where
appropriate) may be areas of priority. Through these engagements, the IFWG would
appreciate your feedback on how important you think this global cooperation is and
the areas where you think we may need to strengthen coordination with regards to
standards development.
Practice 5: building staff capacity through deep knowledge of exponential
technologies
The last practice is about developing deep knowledge structures due to the
fast-evolving innovation landscape. For the first time in the history of humankind, we
have a new form of money: digital money. This type of 'creative destruction' does not
have a single issuer, and it is not the liability of any single entity. Rather, it can appear
in multiple databases at the same time. It cannot be changed except through defined
updating protocols. To understand this, and to apply appropriate regulatory tools to
these innovations, is not a simple matter. Equally, assessing the impact of these
innovations on monetary policy and financial stability is not straightforward.
Technologies such as the Internet, cryptography, blockchain, Big Data and machine
learning are shifting the types of skills and knowledge required to remain relevant in
the Fourth Industrial Revolution. Work that is routine will likely be replaced by robotics
and/or artificial intelligence. Regulators also need to evolve, and new skills will be
required in order to keep pace with market innovations. Making appropriate regulatory
assessments will depend on such refined skills sets. We suggest that the last practice
relates to building deeper knowledge and related skills sets of regulatory staff. Each
of the mentioned reports raises the importance of intentionally building these skills
sets.
Conclusion
In conclusion: in reviewing the emerging regulatory practices deemed best, we have
hopefully motivated, through reflections on three influential reports, why this outreach
event and future market engagements are pivotal. You will notice during this workshop
that the IFWG is pursuing the five practices discussed earlier. In this round, we look
forward to hearing your views on private cryptocurrencies and initial coin offerings. We
welcome a balanced and honest approach to reviewing both risks and benefits.
Learning humbly and openly from other jurisdictions on what works and what does not
work will help us improve our own regulatory approach and regime. These should be
appropriate for our context and conditions. Our society remains divided and
sometimes deprived of important financial services. Financial inclusion is an important
consideration in this Digital Age. Shifts such as open banking and APIs may play a
role in financial deepening. We look forward to hearing how innovation facilitators
could be customised for our unique conditions.
Fintech is no doubt the consequence of disruptive innovation and as such will lead to
the demise of many previously thriving businesses. It offers an immense opportunity
to unlock efficiencies and reduce frictions, and could offer an important boost to our
economy. Fintech can therefore play an important role in making inroads in addressing
the triple challenges of unemployment, poverty and inequality. In order to achieve this,
all of us - whether we are regulators, government or private business - have a vital
role to play to deepen our understanding of this nascent sector and the opportunities
and risks that it presents, and above all to collaborate and coordinate much better,
both domestically and internationally. If we succeed, we would have contributed
towards improving the lives of millions. If we fail, we would have missed a golden
opportunity to make a meaningful difference. Hence, we do not have the luxury of
allowing this workshop to turn out to be yet another 'talk shop'. Too much is at stake.
Please participate actively. We welcome your views, and I would like to assure you
that this outreach workshop is designed in such a manner that your inputs will be
carefully considered by the IFWG leadership. With this thought, let me wish you well
in your deliberations over the next two days.
I would like to conclude with more words from Schumpeter: "Profit is the payment you
get when you take advantage of change." We could adopt this saying and claim that
economic progress is the payment you get when you take advantage of change.
Thank you.