Benjamin E Diokno: Inclusion and digital transformation - a
collaborative approach to regulating fintech
Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central
bank of the Philippines), at the Finance Executives Breakfast Roundtable, Manila, 11 October
2019.
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Good morning, ladies and gentlemen. It is always a pleasure to engage with key stakeholders of
the finance industry as it gives us the opportunity to advance the BSP's advocacies.
In fact, today's theme of "Collaborative Approach to Regulating Fintech" is exactly how we
envision the landscape of overseeing the increasingly disruptive, yet, vibrant narrative of Fintech
developments.
Over the past couple of years, innovative solutions through technological advancements have
transformed the delivery of financial services by offering alternative and far convenient ways of
executing financial transactions.
It has empowered the unbanked and underbanked to participate in the economy through easier
access to financial services.
Indeed, FinTech players are moving ahead of the curve by developing solutions that aim to
expand delivery channels and trim unnecessary processes towards providing greater efficiency
and convenience for customers.
We, at the BSP, emphasize our support for such endeavors. We view innovators as enablers of
financial services that help us boost our financial inclusion agenda.
The number of FinTech players in the Philippines have gradually been growing in the past three
years with most, or around 75% of the total providing payments, alternative financing, and
remittance services.
2018, in particular, has been a key period for blockchain and virtual currencie.
There has been an increasing amount of BSP Supervised Financial Institutions that have
leveraged on FinTech to support their business strategies and manage day-to-day business
processes.
This prompted us to craft appropriate regulations to safeguard public interest while fully
recognizing that these technological innovations can contribute to a more inclusive and safe
financial ecosystem.
Our approach to regulating FinTechs is shaped by three principles,
(a) first, we ensure that regulation is risk-based, proportionate and fair,
(b) second, we maintain active multi-stakeholder collaboration,
(c) and lastly, we ensure that innovations must work for the benefit of consumers, especially
the most vulnerable ones.
Guided by these principles, came the rise of our three-lane FinTech roadmap that is crafted to
nurture a regulatory environment that allows innovations to flourish, yet still mindful that risks
must be effectively managed and that the financial system remains safe and sound.
The first lane refers to Collaborative Engagements. The continuing collaboration with industry
players and other financial regulators represents a "whole-of-government approach", ensuring
policy consistency and minimizing, if not fully preventing, regulatory arbitrage.
With this in mind, the BSP openly engages with fintech players and innovators through a flexible
"test and learn" environment or the "regulatory sandbox" that enables us to fully understand
emerging business models while assessing attendant risks.
I will not dwell on specifics but generally, the framework consists of five important steps
commencing from the enabling stance adopted by the BSP during initial engagement with the
applicant, guided and clear rules for implementation, until continuing monitoring of matured
services.
With such an approach, we are able to timely employ risk-mitigating actions and craft appropriate
policies revolving around consumers' welfare and protection and secure financial system.
The middle lane refers to our Capacity Building initiatives.
In 2018, we established a dedicated Financial Technology Subsector (FTSS) to institutionalize
the operational and cyber-resilience of the financial system.
Under FTSS is the Technology Risk and Innovation Supervision Department (TRISD), which is
primarily responsible for conducting onsite and offsite IT supervision of regulated entities, as well
as maintaining a comprehensive and flexible regulatory framework relating to IT supervision.
TRISD is also in charge of cybersecurity surveillance and promoting digital or FinTech innovation
through BSP's regulatory sandbox.
Equally important is the Payment Systems Oversight Department (PSOD) which is mainly
responsible for the payments oversight, licensing and policy development for a safe, efficient and
reliable national payment system. It espouses on the use of technology as enabler of innovation
in payment systems and is the lead in enforcing a holistic payment oversight framework,
including the National Retail Payment System.
We are also in the midst of implementing solutions that make use of artificial intelligence and
machine learning for regulatory and supervisory processes. These RegTech and SupTech tools
aim to augment areas of risk management, regulatory reporting, consumer complaint oversight
and regulatory compliance automation.
This includes a chatbot, an automated complaint-handling system which uses predictive
analytics to address consumer concerns and an API that automates the collection, processing,
and analysis of data from supervised institutions. Supervised entities that cannot immediately
migrate to the API-based reporting can use the FI portal in submission of their reports.
All of these are aimed at streamlining our manual-intensive processes, thereby enhancing the
timeliness and quality of our risk-based decision-making and financial system supervision.
The third and final lane refers to Commensurate Regulations.
Consistent with the supervisory objectives of the BSP, we apply the same approach to FinTech
by considering the soundness of the individual institution, the landscape of the financial system,
and the risk peculiarities in individual operations.
This ensures that we promote a level playing field for the new entrants and that we will not
hamper the innovation with unwarranted and excessive compliance requirements.
Some of our recent key issuances include:
(a) Circular No. 1022 which updated rules for validating client identity by accepting the PhilSys ID
and allowing the use of technology-aided know-your-customer processes to capture and record
personal customer data as well as conduct virtualized face-to-face contact or interview.
(b) Circular No. 1033 on the streamlined the process of securing licenses to engage in Electronic
Payments and Financial Services, doing away with the tedious approval process of requiring
conditional and final approval.
(c) Circular No. 1039 on the simplified the documentary or registration requirements for Money
Service Businesses and pawnshops operators.
Finally, in accordance with the BSP's authority under Republic Act No. 11127 or the National
Payment Systems Act to oversee payment systems in the Philippines, the BSP issued Circular
1049 to provide for a streamlined registration that aims to facilitate and encourage compliance of
all concerned entities, particularly those previously unregulated non-financial institutions
unfamiliar with regulatory compliance.
Soon, a new Manual of Regulations for Payment Systems (MORPS) will be prepared to
consolidate all relevant BSP issuances. The manual will be a product of extensive consultations
among private and public stakeholders in the payments industry. It will also be part of the
phased-in implementation of the NPSA that prioritizes the creation of a baseline inventory of all
OPS.
We also have the National Retail Payment System (NRPS) which leverages on the principles of
interoperability, inclusiveness and "coopetition".
The NRPS, and the payment ecosystem that is envisioned to arise from it, is positioned to be a
platform for FinTech innovations where industry players can utilize FinTech solutions and provide
services within an organized, commercially-viable and efficient retail payment system.
Notwithstanding all of these developments, we recognize that the FinTech narrative goes beyond
just the BSP. In fact, more pioneering solutions are cutting across regimes of different regulators
of the financial sector.
This is why in the 3rd quarter of last year, the Financial Sector Forum, composed of four financial
regulators in the country, namely the Securities and Exchange Commission (SEC), the
Insurance Commission (IC), the Philippine Deposit Insurance Corporation (PDIC) and the BSP,
formed a FinTech Committee aimed at harmonizing regulatory responses to FinTech innovation
in the financial sector.
Among the priority agenda that the FSF-Fintech Committee undertook was identifying the
numerous Fintech use cases and the scope of authorities of each regulators. Through clear
understanding and increased collaboration, financial regulators can quickly anticipate changes,
assess technological trends across different sectors, and optimize the potential of digital
innovations to provide more convenient, and efficient financial services.
The cross-cutting nature of FinTech developments has also magnified the importance of shifting
to activity-based regulations. Likewise, I am pleased to share that the FSF-Fintech Committee is
in the initial stages of crafting a Cooperative Oversight Framework which will institutionalize our
collaboration and clarify regulations to all supervised and would be supervised entities.
But again ladies and gentlemen, we are just one side of this financial equation and we need your
support in striking the balance of ensuring that regulatory and supervisory frameworks are in tune
with emerging trends and developments.
We hope that you can actively help us shape this narrative into something that is desirable, safe,
sustainable, inclusive and rewarding for all stakeholders, most especially the Filipino people.
As we move forward in this collaboration, I hope that we all keep the benefit of the Filipino people
in mind.
Thank you for the opportunity and I am looking forward to engaging conversations with all of you.
Needless to say that the BSP, as your partner in promoting financial innovation and inclusion, will
remain dedicated and committed in supporting beneficial FinTech innovations through an
enabling policy and regulatory environment.
Thank you and I wish everyone a fruitful conference.