FinTech developments and implications for RBNZ regulatory responsibilities
This page contains information on FinTech developments and implications for RBNZ regulatory responsibilities from the November 2017 Financial Stability Report.
‘FinTech’ refers to technological innovations that may have a material impact on business models, processes and products in financial services. Such innovations have not been unusual historically, but the pace and scope of change has been particularly striking over recent years. Recent developments have begun to attract the attention of international bodies including the Financial Stability Board, the IMF and the Basel Committee on Banking Supervision, and many national regulators.1
The current FinTech wave has the potential to significantly change the structure of the financial sector and the nature of payments mechanisms over the medium term. The changes may result in new risks to the stability of the financial system, but may also improve efficiency.
The Reserve Bank has recently undertaken research to gain a better understanding of the implications of FinTech for the Reserve Bank’s regulatory responsibilities. The findings of this research are mainly qualitative rather than quantitative. This is because there are few good measures of the scale of FinTech activity, and data availability is limited in New Zealand. Some of the most important FinTech developments are:2
- distributed ledger technology including blockchain;
- digital currency including crypto-currency;
- application programming interfaces (‘APIs’);
- ‘big data’ and artificial intelligence; and
- digital platforms for peer-to-peer (‘P2P’) activities.
FinTech may enable the unbundling of services provided by existing financial service providers, with more nimble start-ups or large nonfinancial new entrants potentially capturing market share. Unbundling could lead to some fragmentation of the financial system and weaker profitability for incumbents. This poses some risks to the Reserve Bank’s soundness objective, but in the long run a less concentrated financial system may also be more resilient and more efficient. The risks to existing firms are likely those associated with any period of rapid change, notably strategic and operational risk: the risk of poor strategic choices in dealing with new competitors or embarking on new business models, and the risk of poor implementation of major changes that may be needed. It is very difficult to predict if and when such risks may crystallise, but the Reserve Bank does not see FinTech leading to any material increase in prudential risk in the short term.
FinTech developments are likely to improve the financial system’s ability to innovate and meet customer needs, as well as provide financial services at lower cost. Existing firms can be expected to respond to the competitive challenges and enhance their existing services through new digital platforms. The Reserve Bank welcomes these potential efficiency benefits.
In a number of jurisdictions, government agencies and regulators are actively facilitating FinTech development. In some jurisdictions, a concessionary regulatory environment (a ‘sandbox’) is being provided, and some authorities are playing a support role (an ‘incubator’) for new entrants. Some are also enabling ‘open banking’, whereby changes in legal or other frameworks enable a bank customer to give third parties (such as banking app providers) access to data that the bank holds on the customer.
In New Zealand, initiatives to actively promote FinTech would most naturally fall to other bodies responsible for financial product regulation, competition and innovation. These include the Ministry of Business, Innovation and Employment (MBIE) and the Financial Markets Authority (FMA). MBIE has stated that it is currently monitoring how open banking evolves in other jurisdictions before deciding whether any comparable government intervention is warranted in New Zealand.3 The FMA has said that it wants to see innovation in financial services encouraged where it improves the scope or quality of these services.4 The FMA aims to be flexible and open in response to innovative new businesses, and so far has not seen a need to put in place a formal ‘sandbox’ regime to achieve that.
The Reserve Bank seeks to ensure that its prudential regimes do not hinder new digital innovations in financial services from flourishing in New Zealand, and more generally believes that New Zealand’s current financial market regulatory settings support innovation and industry-based solutions.
Looking ahead, the Reserve Bank will need to monitor how FinTech may change the dynamics in the financial sector, in order to identify how the risks faced by regulated firms are evolving. Over time, such developments may require a change in the Reserve Bank’s supervisory approach and a change in the types of entities or activities that are captured within the perimeter of prudential regulation. At the same time, the Reserve Bank is coordinating with other agencies to ensure that New Zealand provides an environment that does not hinder digital innovation, provided that the innovators operate safely and observe relevant regulations.
1 See, for example: ‘Financial Stability Implications from FinTech’, Financial Stability Board, June 2017; ‘Fintech and Financial Services: Initial Considerations’, IMF Staff Discussion Note, June 2017; and ‘Sound Practices: Implication of fintech developments for banks and bank supervisors’, Basel Committee Consultative Document, August 2017.