Thank you AFI for your continued efforts to promote policies and regulation that drive financial inclusion. Your recent report on the role of regulators in creating enabling fintech ecosystems highlights a number of factors that have been instrumental in TymeBank South Africa reaching 1.2 million customers within our first year of operation. More importantly, this has already contributed to an increase in competition in the South African retail banking industry, much to the benefit of customers. Four of the five banks in the incumbent oligopoly in South Africa have reduced their fees and added product features to compete with TymeBank.
We highlight below a few of the key factors that have been particularly important for us, and will be equally important for other digital financial service providers in emerging markets:
1. Regulators as innovation facilitators
Regulators approach innovation differently in their respective jurisdictions – sandboxes, innovation hubs, incubators, accelerators, ‘test and learn’ approaches and beyond, but their goal is the same – to actively facilitate innovation and new thinking. This shift of regulators playing a pure policing role to that of ‘innovation promoter’ extends beyond any one type of technology or solution, as this enables a more collaborative and open dialogue with better outcomes for all – regulators, financial service providers and most importantly customers. The UK’s Financial Conduct Authority has been a leader in promoting innovation via its Innovate initiative, supporting almost 700 firms since it was launched in 2014. Regulators in a number of other countries have followed, with countries such as India, Vietnam, Malaysia and Sierra Leone explicitly promoting financial inclusion through, for example, their regulatory sandbox initiatives. Our regulator in South Africa, the Prudential Authority of the South African Reserve Bank, has been open to engaging with us from the start – willing to advise and learn alongside our team. Many of the examples below stem from their embrace of innovation.
The mindset shift of regulators to innovation promoter must be coupled with enabling regulations to transform innovation into viable solutions, such as those which the AFI had mentioned in the recent report. TymeBank’s ability to open fully functional, fully KYCed accounts in 3-5 minutes, using only a thumbprint, is reliant on such enabling regulation, as well as the existence of a national biometric database. When coupled with risk-based KYC regulations, the recent technological advancements are leading to significant financial inclusion gains as innovative fintechs are able to lower the cost of signing up customers, while also removing the barriers that low-income customers face when trying to open accounts (such as distance and documentation constraints). In India, for example, the biometric ID (Aadhaar) has already been used in over 7.8 billion eKYC transactions. The Reserve Bank of India has gone further, recently approving a Video based Customer Identification Process (V-CIP) for remote onboarding by banks and other regulated entities. This new process aims to promote the use of digital technology and will be treated the same as face-to-face identification processes from a regulatory perspective. While India is at the forefront of eKYC developments, it is by no means alone – other developing countries working to leverage eKYC include Bangladesh, Kenya, Pakistan, Tanzania, and the Philippines.
3. Open Banking
Traditionally the issuers of accounts have not been best placed to provide innovative services to drive usage. We agree with you that Open Banking will be an effective instrument for fintechs, digital banks and other third parties to provide more personalized and lower-cost products to consumers, and we believe that this will play a big role in driving transformational inclusion and innovation in banking. Paytm in India, WeChat Pay in China, mobile money players like MTN and Safaricom, and even banks like ICICI have realized the business opportunity and voluntarily opened their APIs in recent years in data, and payments, as well as for more frontier services like identity verification, KYC, account opening and loan origination, to name a few.
In some markets, regulators have taken a more active role in promoting open banking. To start, both the UK’s Open Banking and the EU’s PSDII regulations have mandated open banking to improve customer choice. In 2018, the Hong Kong Monetary Authority (HKMA) communicated a voluntary roadmap for all banks to start opening different types of APIs. Similarly, Singapore has not mandated open banking, but has been proactive with the Association of Banks in Singapore, in collaboration with industry and the Monetary Authority of Singapore (MAS), introducing its comprehensive “Finance-as-a-Service: API Playbook” in 2016. The playbook covers a range of factors related to implementing open APIs including selecting and categorizing APIs, API governance, API security, API standards and API design principles.
MAS has gone even further. Together with the IFC, the ASEAN Bankers Association (ABA) and now AMTD, Mastercard, Experian and the Bank of New York Mellon, it created the ASEAN Financial Innovation Network (AFIN) which launched the API Exchange (APIX), “the world’s first cross-border, open architecture API marketplace and sandbox platform for collaboration between FinTechs and financial institutions in which participants can integrate and test solutions with each other via a cloud-based architecture”. APIs have been around for a while, but forward-thinking regulators, banks, fintechs and others are now working together to realize the potential of APIs to create inclusive and innovative financial ecosystems that are better able to meet the needs of customers – and players such as Tyme are benefiting.
AFI’s report strongly supports interoperability that lets suitably qualified new players seamlessly connect with existing players and their customers to enable competition and increase efficiency, as well as enhance the value of accounts and wallets for customers, especially relative to cash. Countries are realizing the benefits of well implemented real-time interoperability. India’s real time interoperable payment system, Unified Payments Interface (UPI), has “created a cheaper, safer, more efficient alternative to cash”, and in so doing experienced phenomenal take up. In December 2019, there were over 1.3 billion UPI transactions, up 111% from December 2018. This achievement is even more impressive considering the system was only piloted in April 2016.
Going forward, the next area of challenge in interoperability will be to address deeper competitive barriers set up by incumbent banks in markets. One example in South Africa is the law and regulations that limit switching debit orders. Currently, moving a debit order from a third-party player requires the participation of both the incumbent bank as well as the debit order beneficiary. Currently, the friction for making changes is too high and serves as a disincentive for customers to switch banks. As interoperability becomes commonplace, competition will increase, and market players will be incentivised to deliver greater value to customers in order to retain them.
5. Cloud computing
The report highlights cloud computing as one of the areas the AFI network is exploring with potential to advance financial inclusion. Cloud is also called out in AFI’s 2018 ‘Fintech for Financial Inclusion Accord’. We could not agree more, and we would even say that cloud computing offers the underlying foundation for the future of banking. In South Africa, our regulator openly engaged with us on the use of cloud computing. We were therefore able to understand their concerns, explain how we mitigate against the related risks, and agree on ways of working that gave them (and us) the desired level of comfort without losing the momentous scalability, security, agility and cost efficiency gains on offer for us and our customers through the use of cloud.
We believe it is an imperative for providers and regulators to now build the necessary skills to operate safely and inclusively within this new environment. Regulators that understand the benefits and risks of cloud, are better able to guide financial service providers as to the restrictions or obligations that might arise in relation to the use of cloud, thereby giving providers much needed certainty. In Singapore, MAS’ Fintech Infrastructure Office, responsible for, among other things, regulations related to cloud, is indeed a prime example of the emphasis that leading regulators are putting on the use of cloud in banking. In addition, the European Banking Authority published “Recommendations on outsourcing to cloud service providers” in 2018, covering topics such as reporting obligations, access and audit rights (including for the supervising authority), security of the data and systems, and contingency plans and exit strategies. This is a good example of a risk-based approach to regulation with different requirements depending on the materiality of the activities being outsourced to cloud providers.
As outlined in AFI’s report, there is a lot more that regulators can do to create enabling fintech ecosystems. Above is our attempt to highlight a few critical issues for regulators. We fully expect our views on these to evolve as we continue to learn. We welcome your views on these and other critical areas we may have missed.