The 2018 Bali Fintech Agenda in Practice: The European Market

Fintech, short for financial technology, has become a central component of the banking and finance industries. Innovations in technology permit a host of new financial services in retail, corporate banking, private banking, and insurance. Currently, an estimated 1.7 billion people worldwide have no access to financial services, largely due to a lack of infrastructure. Fintech has the potential to fill this gap by connecting people to online banking infrastructures, and thus presents a business opportunity. The fintech sector is rapidly growing in developed and developing countries, particularly in China, India, the United Kingdom, and Brazil, where fintech adoption rates soar above the 40% mark. Despite the large expansion potential of fintech, international institutions and policymakers are concerned about security risks pertaining to financial technology, including cyber fraud, money laundering, and terrorist financing.

In response to these risks and opportunities, the International Monetary Fund and the World Bank created the Bali Fintech Agenda in 2018, which offers a 12-step regulatory framework that supports but also controls the expansion of fintech. Core values of the Bali Fintech Agenda are the promotion of fintech in all countries, the provision of infrastructure that allows start-ups to enter the market, the continued integrity of national monetary and financial systems, transparent legal regulations for fintech, and international cooperation and information exchange on the subject.

Three of the 12 points of the Bali fintech Agenda demand closer attention in terms of their risk relevance. Points four through six not only promote the growth of fintech but also recommend that state governments strengthen legal control of technological developments in their financial sectors. In point four, the agenda recommends “[fostering] fintech to promote financial inclusion and develop financial markets.” Number five on the agenda states that authorities should “monitor developments closely to deepen understanding of evolving financial systems,” and number six highlights that states should “adopt [a] regulatory framework and supervisory practices for orderly development and stability of the financial system.” In sum, these statements encourage businesses to explore innovations and new opportunities on the market. At the same time, they also invite state governments to mitigate the risks of financial crime and enhance compliance mechanisms.

Fintech can reduce costs for businesses, as they require less reliance on branches and customer service personnel than do traditional financial institutions. Furthermore, fintech expands access to financial services to a broader audience, including low-income consumers or consumers living in remote areas. Another positive development is that fintech can fuel competition and efficiency on the markets. Despite these opportunities, however, fintech poses a risk to the data privacy and capital safety of consumers and investors. Online fraud and theft are two major challenges posed by the adoption of fintech. Therefore, technological protections against hacking and laws against financial crime must be robust.

One way to both foster and control fintech is the regulatory sandbox, a mechanism that allows fintech start-ups to test and improve their business models under the supervision of state authorities. At present, most countries in the European Economic Area have innovation hubs to promote fintech. Several of these countries have also started their own regulatory sandbox programs. States that have already implemented or plan to adopt regulatory sandbox schemes include Denmark, Lithuania, the Netherlands, Poland, the United Kingdom, Norway, Austria, Spain, and Hungary. In 2018, the European Banking Federation also recommended the establishment of a Europe-wide regulatory sandbox in order to facilitate cross-border fintech services.

Regarding compliance, fintech businesses must obey the same laws as other financial companies in the European Union (EU). Directive 2000/31/EC on e-commerce, Directive 2002/65/EC on distance marketing of consumer financial services, Directive 2009/110/EC on electronic money, and Directive 2015/2366 on payment services all apply to fintech companies. One shortcoming of the EU’s fintech laws, however, is that the EU does not provide a clear definition of “big data,” which would allow it to further strengthen regulatory frameworks.

In conclusion, the Bali Fintech Agenda raises awareness on how to approach fintech growth and security in the near future. Managing associated risks is vital in creating a safe environment for consumers and businesses, which is what regulatory sandboxes allow fintech start-ups to do. They pave the way for innovation and ensure that innovations fit into regulatory frameworks. As the fintech market in Europe expands, the adoption of regulatory sandboxes and other items on the Bali Fintech Agenda in more and more European states can therefore be viewed as a positive development.

About the Author

Yasemin Zeisl

Yasemin Zeisl is a Risk Analyst at Global Risk Intelligence. She earned her MSc in International Relations and Affairs from the London School of Economics and Political Science (LSE). She is currently based in Austria. Yasemin is fluent in German and English and possesses advanced Japanese language skills.

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