Australia Rises In Global Alt-Lending Ranks


Australia is now the Asia Pacific region’s second-largest alternative finance market, largely due to a favorable regulatory climate, according to new KPMG analysis.

The Australian market is quickly becoming a hotbed of alternative lending, and new analysis from KPMG suggests it has risen up in the ranks.

According to a new report from KPMG’s Cambridge Centre for Alternative Finance and the Australian Centre for Financial Studies, Australia could now be the Asia Pacific region’s second-largest alternative lending market, close behind China. News reports in the International Business Times on Friday (Sept. 22) said that a survey of 600 online alternative finance firms across the Asia Pacific found that Australia’s market grew 53 percent in the last year alone.

A key driver of that growth is favorable government policies, researchers said, with regulators around the world exploring how to ensure borrower protections without stifling innovation. About two-thirds of survey respondents said Australia’s regulatory climate is appropriate for the alternative lending industry.

While alternative finance remains a small portion of the overall lending market, the report also found that the Asia Pacific region is experiencing significant overall growth in this space.

China, though, is the clear winner, with its AltFin market accounting for 99.2 percent of the total Asia Pacific market, reports said.

The Australian government may be looking to facilitate growth of the alternative finance space, but research released in June suggested the industry has another hurdle to overcome: awareness.

Data from Moula and the research and consulting firm Digital Finance Analytics, outlined in their Disruption Index report, found there is room for the industry to gain traction by increasing visibility among small business borrowers.

“There is still a certain air of skepticism about non-traditional forms of lending,” said DFA Principal Martin North in an interview with Australian Broker at the time. “So, SMEs who need to borrow tend to still go to the normal suspects. They’ll look to the banks or put it on their credit cards.”

He added that this means the alternative finance industry has to work harder to boost awareness and promote education.

“I think the FinTech sector has a terrific opportunity to lend to the SME sector, but they haven’t yet cracked the right level of brand awareness,” North continued. “Perhaps they need to think about how they use online tools, particularly advertising, to re-energize the message that’s out there.”

Fintechs And Banking – Opportunities and Risks

The Bank For International Settlements (BIS) has released a released a consultative document on the implications of fintech for the financial sector. Sound practices: Implications of fintech developments for banks and bank supervisors assesses how technology-driven innovation in financial services, or “fintech”, may affect the banking industry and the activities of supervisors in the near to medium term.

The Basel Committee on Banking Supervision (BCBS) set up a task force to examine Fintech. Their report makes a number of observations about the way Fintechs may disrupt financial services. They also highlight the potential risks which regulators and players will need to consider.

The BCBS notes that, “despite the hype, the large size of investments and the significant number of financial products and services derived from fintech innovations, volumes are currently still low relative to the size of the global financial services sector. That being said, the trend of rising investment and the potential long-term impact of fintech warrant continued focus by both banks and bank supervisors”.

They developed a meta-model showing the range of elements across the financial services value chain where Fintech may play.

They say that “while some market observers estimate that between 10–40% of revenues and 20–60% of retail banking profits are at risk over the next 10 years,  others claim that banks will be able to absorb the new competitors, thereby improving their own efficiency and capabilities”.

Various future potential scenarios are considered, with their specific risks and opportunities. In addition to the banking industry scenarios, three case studies focus on technology developments (big data, distributed ledger technology, and cloud computing) and three on fintech business models (innovative payment services, lending platforms and neo-banks).

Although fintech is only the latest wave of innovation to affect the banking industry, the rapid adoption of enabling technologies and emergence of new business models pose an increasing challenge to incumbent banks in almost all the scenarios considered.

Banking standards and supervisory expectations should be adaptive to new innovations, while maintaining appropriate prudential standards. Against this background, the Committee has identified 10 key observations and related recommendations on the following supervisory issues for consideration by banks and bank supervisors:

  1. the overarching need to ensure safety and soundness and high compliance standards without inhibiting beneficial innovation in the banking sector;
  2. the key risks for banks related to fintech developments, including strategic/profitability risks, operational, cyber and compliance risks;
  3. the implications for banks of the use of innovative enabling technologies;
  4. the implications for banks of the growing use of third parties, via outsourcing and/or partnerships;
  5. cross-sectoral cooperation between supervisors and other relevant authorities;
  6. international cooperation between banking supervisors;
  7. adaptation of the supervisory skillset;
  8. potential opportunities for supervisors to use innovative technologies (“suptech”);
  9. relevance of existing regulatory frameworks for new innovative business models; and
  10. key features of regulatory initiatives set up to facilitate fintech innovation.

Open Banking May Catalyse Digital Disruption

Last week Treasurer Scott Morrison’s media release on the proposal to introduce an open banking regime in Australia was framed around the requirement for banks to be able and willing (with customer agreement) to share product and customer data with third parties.

The timing is interesting given the disruptive rise of FinTechs and the fact there are new entities emerging across the banking value chain. Until recently banks tended to regard their data as a strategic asset (for example not sharing default data) but with positive credit now in force, this is already changing. So this is a logical next step, and should be welcomed.

From our work whit a number of FinTechs we know that access to data is one of the barriers to success, alongside concerns about data security, and identity fraud. Opening the door to data sharing may be laudable, but there are significant technical issues to work through.

If open banking arrives, it would have the potential to increase competition, and perhaps put pressure on bank product pricing, as well as differentiated servicing; but we will see. It may open the door to more automated product switching, as well as better portfolio management and cross-selling. It certainly is another dimension in the wave of digital disruption already in play, which is ultimately being facilitated by the adoption of mobile technologies and devices.

The Turnbull Government has commissioned an independent review to recommend the best approach to implement an Open Banking regime in Australia, with the report due by the end of 2017.

Greater consumer access to their own banking data and data on banking products will allow consumers to seek out products that better suit their circumstances, saving them money and allowing them to better achieve their financial goals. It will also create further opportunities for innovative business models to drive greater competition in banking and contribute to productivity growth.

The review will be ably led by Mr Scott Farrell. Mr Farrell is a Partner at King & Wood Mallesons and has more than 20 years’ experience in financial markets and financial systems law. Mr Farrell has given many years of service to the public and private sector in advising on, and guiding, regulatory and legal change in the financial sector. He has intimate knowledge of the financial technology (FinTech) sector and is a member of the Government’s FinTech Advisory Group.

Mr Farrell will be supported by a secretariat located within Treasury and will draw upon technical expertise from the private sector as required. The review will consult broadly with the banking, consumer advocacy and FinTech sectors and other interested parties in developing the report and recommendations.

The Review terms of reference have been released and an Issues Paper will shortly be made available for interested parties to provide input to the review.

Purpose of the review

The Government will introduce an open banking regime in Australia under which customers will have greater access to and control over their banking data. Open banking will require banks to share product and customer data with customers and third parties with the consent of the customer.

Data sharing will increase price transparency and enable comparison services to accurately assess how much a product would cost a consumer based on their behaviour and recommend the most appropriate products for them.

Open banking will drive competition in financial services by changing the way Australians use, and benefit from, their data. This will deliver increased consumer choice and empower bank customers to seek out banking products that better suit their circumstances.

Terms of reference

  1. The review will make recommendations to the Treasurer on:1.1. The most appropriate model for the operation of open banking in the Australian context clearly setting out the advantages and disadvantages of different data-sharing models.1.2. A regulatory framework under which an open banking regime would operate and the necessary instruments (such as legislation) required to support and enforce a regime.1.3. An implementation framework (including roadmap and timeframe) and the ongoing role for the Government in implementing an open banking regime.
  2. The recommendations will include examination of:2.1. The scope of the banking data sets to be shared (and any existing or potential sector standards), the parties which will be required to share the data sets, and the parties to whom the data sets will be provided.2.2. Existing and potential technical data transfer mechanisms for sharing relevant data (and existing or potential sector standards) including customer consent mechanisms.2.3. The key issues and risks such as customer usability and trust, security of data, liability, privacy safeguard requirements arising from the adoption of potential data transfer mechanisms and the enforcement of customer rights in relation to data sharing.

    2.4. The costs of implementation of an open banking regime and the means by which costs may be imposed on industry including consideration of industry-funded models.

  3. The review will have regard to:3.1. The Productivity Commission’s final report on Data Availability and Use and any government response to that report.3.2. Best practice developments internationally and in other industry sectors.3.3. Competition, fairness, innovation, efficiency, regulatory compliance costs and consumer protection in the financial system.


The review will consult broadly with representatives from the banking, consumer advocacy and financial technology (FinTech) sectors and other interested parties in developing the report and recommendations.

The review will report to the Treasurer by the end of 2017.

BOE Fintech Accelerator Shows Promise

The Bank of England published summaries of the third round of Proofs of Concept (POCs) completed by its FinTech Accelerator. It nicely shows some of the potential innovation applicable to the finance sector.

The FinTech Accelerator was set up a year ago to deploy innovative technologies on issues relevant to the Bank’s mission and operations. Working in partnership with FinTech firms the Bank is seeking to develop new approaches, build its understanding of these new technologies and support development of the sector.

The latest PoCs covered four important areas of the Bank’s work:   analysing large-scale supervisory data sets; executing high-value payments across currencies and borders; identifying and applying cross-cutting legal themes from regulatory enforcement actions; and measuring performance on the Bank’s internal projects portfolio.

Further details on each project can be found in the individual write-ups, but in summary:

  • We worked with Mindbridge Ai, a machine learning and artificial intelligence firm, to explore the analytical value of using artificial intelligence tools to detect anomalies in supervisory data sets. Using a sample set of anonymised reporting data, we found Mindbridge’s user interface to be intuitive, allowing the user to explore a time series of each variable, whilst comparing the results to industry averages. This PoC enabled our internal team of data scientists to compare and contrast their own findings and the underlying algorithms being used, providing a complementary layer to the Bank’s work.
  • In our PoC with Ripple, we looked into how distributed ledger technology (DLT) could be used to model the synchronised movement of two different currencies across two different ledgers, as part of the Bank’s wider research into the future of high-value payments. Although the Bank has already concluded that DLT is not sufficiently mature to support the core RTGS system, the learnings from this exercise with Ripple have reinforced the Bank’s intention to ensure its new RTGS system is compatible with DLT usage in the private sector, and has  highlighted areas where we would like to conduct more exploratory work.
  • We worked with Enforcd, giving a group of staff from our Regulatory Action Division (RAD) access to a cloud-based database of regulatory enforcement actions with supporting commentary and trend analysis. Having easy access to relevant published regulatory enforcement decisions can be an important input to financial firms’ overall compliance programmes. This PoC demonstrated how technology could potentially facilitate compliance and the development of best practice in some key areas of regulation.
  • Lastly we ran a proof of concept with Experimentus, using their ORB tool, to analyse historic Bank of England projects and visualise how they had performed against a range of standard key performance indicators (KPIs). This PoC allowed us to explore whether our existing test data were sufficient to carry out effective KPI reporting, and where further data collection might be needed.

Commenting on these latest POCs, Andrew Hauser, Executive Director for Banking, Payments and Financial Resilience, said:

“We have learnt a great deal through these latest Proofs of Concept, both in terms of what FinTech can do, but in also in terms of how it can help us work, think and communicate differently.  The breadth of topics covered by these projects, and the Accelerator programme as a whole, shows how much central banks potentially have to gain from continued engagement with the sector in delivering their mission of monetary and financial stability.”

The Accelerator invited applications for its fourth round of PoCs in April 2017 and expects to announce the successful firms shortly.

Find out more about the work of the FinTech Accelerator.

Fintechs warn Domain and REA of mortgage ‘challenges

From The Adviser.

Two mortgage fintechs have warned that the REA Group and Domain, as well as customers and brokers, could face ‘challenges’ as a result of the property companies’ forays into mortgages.

Last week, both the REA Group and Domain Group revealed plans to break into mortgage broking, with acquiring a majority stake in mortgage broking franchise business Smartline and entering into a strategic mortgage broking partnership with NAB. Likewise, the Fairfax-owned property classified group announced that it will launch Domain Loan Finder, in partnership with mortgage platform Lendi.

However, Mandeep Sodhi, CEO of online brokerage HashChing, has suggested that the new offerings from Domain and could upset the market.

He said: “[These sites] have traditionally been seen as helpful, independent websites for consumers to research their next dream home or investment property. However, the most recent partnerships by both with mortgage broking platforms has the potential to restrict choice in the market.

“Pushing borrowers to one group of brokers – who may not have access to all the banks and lenders – means they could unwittingly miss out on home loan products that better suit their needs.”

Mr Sodhi added that brokers could be negatively affected, as the two sites had historically been “strong sources for generating leads for aggregators to date” and brokers who aren’t members of the partnered mortgage broking platforms would have to therefore find new lead sources.

Likewise, the founder and CEO of online brokerage uno. has suggested that while the move by Domain and REA’s site is “logical”, the companies could face “challenges” while breaking into the mortgage arena.

Speaking to The Adviser, Vince Turner explained: “These guys have a lot of eyeballs, a big audience, and their traditional line of business in terms of advertising [such as website advertising via cost per click] is now going into the nominal value territory. They are not on the way out yet, but they will be soon.

“So, from Domain or REA’s point of view, they have to think what their transactions are that they can monetise … So, you can see why they want to get into transactional mortgages, that’s the logical part.”

However, Mr Turner warned that breaking into a new industry (i.e. mortgages) is not only challenging from a cultural perspective, but also from a customer buy-in perspective.

He explained: “You could argue that it’s pretty hard to get out of bed in the morning and be a media company [publishing company Fairfax owns Domain] and a financial services company. It’s very different culturally and it’s a very different set of skills, so I think that will be part of the challenge… These things are not natural to them.”

The uno. founder said that his company had partnered with several different companies, but that the thinking was that these partnerships would only be around 10 or 20 per cent of its business.

He said a large part of the difficulty would be getting customer buy-in, as users of the and Domain are not primarily visiting the sites for a mortgage, but for a property listing/rental listing.

“It’s difficult to get a consumer to get onboard with a something that is not what they went to the site for. For example, they are using the sites for real estate, not a mortgage, so it’s challenging to get them onboard with this new side,” Mr Turner said.

“We know it’s challenging because we have been working real estate sites and we operate with other sites that want to bundle mortgages into their consumer experience … [if] the customer didn’t go there for a mortgage, trying to intercept them and say ‘Look at this mortgage over here’, it’s difficult.”

Another obstacle that these sites could face is the customer service side of handling a mortgage, Mr Turner said.

“Consumers who are going to these sites are operating digitally, so convincing them to go through the mortgage process, which needs ‘advice’, is challenging,” he said.

Mr Turner revealed that delivering that support and ‘advice’ had been a challenge for uno. and explained that, although he believes the online brokerage is “leading this space in delivering an advice experience and the support experience digitally”, it had spent the last year trying to solve this conundrum and “still has a long way to go”.

“I think it’s going to be a long road for Domain and REA in getting this to work for them,” he added.

“I think they have the pockets to push it and they have made it a strategic priority (and maybe they will get there in the end), but its not as simple as just bolting on a mortgage broking business. It’s a lot more complicated than that.”

Xpress Super and RateSetter announce integration to boost SMSF access to peer-to-peer lending

From Australian Fintech.

RateSetter, Australia’s largest retail peer-to-peer lender, has today announced a partnership with innovative self-managed super fund (SMSF) administration provider, Xpress Super.

The integration provides investors with direct access to their RateSetter account on the Xpress Super platform, making it easier for SMSF investors to earn attractive returns by lending to creditworthy borrowers via RateSetter’s award-winning platform.

Olivia Long, CEO of Xpress Super, says: ““Two of the key benefits of running an SMSF is the ability to select your own investments as well as invest in financial products not accessible with other superannuation vehicles.  This is exactly what RateSetter allows SMSF trustees to do.”

Since RateSetter was established in Australia in 2014, the company has facilitated more than $130 million in loans through its platform with SMSFs providing the funds for more than 20% of those loans.

Daniel Foggo, CEO of RateSetter Australia, says: “Given the historical low cash rates and uncertainty in property and equity markets, there is a real shift in where SMSFs are looking to invest. With returns of up to 9.2% a year and our exceptional track record both here and in the UK, we expect to see continued growth from SMSF investors seeking stable, attractive returns.

“Until now, investing in consumer and small business credit has been an option only available to a privileged few, including large wholesale investors and the banks.

“By working with partners such as Xpress Super, we’re giving SMSF investors an easy, simple-to-manage option to access this attractive, established asset class.”

Long says that there is a natural fit between RateSetter and Xpress Super. “RateSetter and Xpress Super have a shared belief in the importance of transparency, control and delivering value to investors.

“Xpress Super’s automated, paperless platform gives investors live, up-to-date information, helping them make informed decisions about their superannuation investments and simplifying their year-end accounting, and this service extends to new investment classes, such as peer-to-peer lending.”

Fintech Disruption of Personal Credit Gains Pace

I caught up with Clayton Howes, CEO of MoneyMe to explore in more detail the development of this Fintech which recently announced it had broken the $100m loan barrier (and has steamrolled past $125m since our conversation); all outside the traditional banking network.

Founded in 2013, with a pool of private investors, MoneyMe it is a great example of the innovation enabled by technology, building from the consumer in and leveraging the digital savvy behaviour of target consumers. It highlights why disruption is coming to the finance sector, and why we find the emergence of Fintech’s so significant.

The segment of the market in which they are operating is the $60 billion unsecured consumer finance sector, dominated by players like Latitude. GE Capital sold its local business to a consortium including Varde Partners, KKR and Deutsche Bank at an enterprise value of A$8.2bn, and renamed it Latitude in 2015.

But Clayton highlights the fact that MoneyMe has been set to differentiate, with the clear goal of making finance more easily accessible for young digitally aware millennium consumers. Take the example of a 26-year-old seeking to purchase a second hard car and needing $5,000 for 2 years. He would find the banks are not be interested, as the term and size is too low to be economically sustainable for them. He might put the loan on a credit card, but with a high interest rate, and the risk that credit on the card would be too tempting – many millennials are wary of credit cards. He might go to finance players offering loans at high rates and with limited flexibility.

So the MoneyMe offer is a fixed rate structured loan with standard and predictable repayments, most often paid by monthly direct debt.  Through the online portal, borrowers can make changes to their repayment schedule, for example, delay payment one week and make two the next. Transparency is the watchword.

Behind the scenes, applications are screened and scored using a risk-based pricing model, including using the Equifax score, actuarial algorithms, behaviour patterns, and information from bank statements. The pricing of loans varies based on this extensive data rich analysis, but Clayton said that in many cases the charges will be lower than other providers, and easier to understand. And that’s the point; the core proposition is “What You See IS What You Get”.  Some other finance providers add on various fees and charges, which makes it hard to see what the total costs of borrowing are.

The online “slider” form is intuitive and easy to use, and it recalculates the indicative APR each time. Those with adverse credit will pay more, as expected. Consumers can choose to make repayments weekly, fortnightly or monthly. The application process is also simple and swift.

Interestingly the sweet spot for the business is a $5,000 over two years, but potential borrowers have the capacity to select a smaller loan for a shorted period, so touching on the SACC market, or a larger for longer loan of up to 3 years and $10,000. Should consumer want to borrow again subsequently, they have to apply again.

Default rates are contained, ranging between 2 and 4 per cent, which is significantly below the industry average. They have written more than 100,000 loans already, and growth is accelerating.

The company is also growing fast, with 42 employees, and big plans to expand into other financial products.

As we said recently, MoneyMe is a good example of the innovative new players pressing in on existing lenders with digitally sassy offerings to target market segments. We expect more disruption in the months ahead.

Our surveys underscore the strong demand for finance from niche segments, despite overall personal credit falling according to recent RBA data.

Fintech small business lenders support research survey

New research will aim to establish current trends and best practice in the growing fintech lending market to small and medium-size enterprises (SME).

Fintech small business lenders will be surveyed as part of a collaborative research project by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) with industry organisation FinTech Australia and independent SME finance expert Neil Slonim from

Fintech lenders are an emerging alternative to banks for small business loans, often through seamless and highly automated online application, assessment and decision processes.

Ombudsman Kate Carnell said fintech lenders have potential to fill the gap left by traditional bank lenders in the marketplace, particularly as awareness, trust and confidence in alternative lending grows.

Ms Carnell commended the sector for being proactive to ensure best practice and transparency.

“But with rapid growth in the number of lenders and the variation of fintech products, it becomes more difficult for SMEs to make informed decisions about which products and lenders best suit their circumstances,” Ms Carnell said.

“The survey will collect information from fintech lenders that can shed light on some of these issues.

“Results will be published in a report to identify industry best practice and help SMEs to better understand their fintech borrowing options.

“The survey results will also inform fintech lenders how they can help SMEs by improving the transparency of their lending products and by clearly communicating the rates, costs, terms and conditions of their products.”

FinTech Australia CEO Danielle Szetho said FinTech Australia was pleased to work with the ASBFEO and

“This work will help us to understand how the industry is currently servicing SMEs and steps we might take as an industry to improve the SME community’s awareness and understanding of alternative lending products,” she said.

“What is clear is that banks have not been adequately servicing the SME community’s needs and fintechs have stepped in with new loan products to help fill that gap.

“This is proving to be a very beneficial and cost-effective source of funding for SMEs. This research will help even more SMEs to invest in their growth and benefit from alternative lending products.”

Neil Slonim from said “it is not easy for small business owners to assess whether borrowing from a fintech lender is the best option for them, and if so, which lender they should choose.

“There are around 30 fintech small business lenders now operating and their websites, through which they engage with their customers, all appear to be much the same.

“As a not-for-profit SME advocate we are pleased to be working with the ASBFEO and FinTech Australia to raise understanding and transparency in a sector which is becoming increasingly relevant to small business owners.”

Japan and Australia cooperate on fintech

The Japan Financial Services Agency (‘JFSA’) and Australian Securities and Investments Commission (‘ASIC’) today announced the completion of a framework for co-operation to promote innovation in financial services in Japan and Australia.

This Co-operation Framework recognises the global nature of innovation in financial services. In this environment, this Framework enables the JFSA and ASIC to share information and support the entry of innovative fintech businesses into each other’s markets.

This Framework will help open up an important market for Australian fintechs. The Japanese economy is the third largest in the world, with services – including financial services – accounting for about three quarters of GDP.

In recent years, the JFSA has been actively involved in encouraging fintech through a range of measures including the modification of the legal system to enable financial groups to invest in finance-related IT companies more easily and establishing a legal framework for virtual currency and Open API. This Framework will encourage Japanese fintech start-ups to engage with innovative financial businesses globally.

ASIC Commissioner John Price said, ‘Japan has been a world leader in technology for a long time. As we move into a new era of financial regulation, we look forward to sharing experiences and insights with our colleagues at the JFSA.’

Shunsuke Shirakawa, JFSA Vice Commissioner for International Affairs, said, ‘We are delighted to establish this Co-operation Framework with ASIC. ASIC is one of the leading Fintech regulators that actively promote fintech by taking progressive actions including setup of the Innovation Hub.

‘We believe that this Framework further strengthens our relationship and facilitates our co-operation in further developing our respective markets.’

The Co-operation Framework will enable the JFSA and ASIC to refer innovative fintech businesses to each other for advice and support via ASIC’s Innovation Hub and the JFSA’s FinTech Support Desk.

It also provides a framework for information sharing between the two regulators. This will enable the JFSA and ASIC to keep abreast of regulatory and relevant economic or commercial developments in each other’s jurisdictions, and help to inform domestic regulatory approaches in the context of a rapidly changing global financial environment.

A formal ‘Exchange of Letters’ ceremony between Australian Ambassador to Japan, the Hon Richard Court AC and State Minister of Cabinet Office, Takao Ochi, took place in Tokyo today to seal the Framework.

This Co-operation Framework further underlines the strength and closeness of the broader Australia-Japan trade and investment relationship.


ASIC is focused on the vital role that fintechs are playing in re-fashioning financial services and capital markets. In addition to developing guidance about how these new developments fit into our regulatory framework, in 2015, ASIC launched its Innovation Hub to help fintechs navigate the regulatory framework without compromising investor and financial consumer trust and confidence.

The Innovation Hub provides the opportunity for entrepreneurs to understand how regulation might impact on them. It is also helping ASIC to monitor and understand fintech developments. ASIC collaborates closely with other regulators to understand developments, and to help entrepreneurs expand their target markets into other jurisdictions.

To date, fintech referral and information-sharing agreements have been made with the Monetary Authority of Singapore, the United Kingdom’s Financial Conduct Authority, Ontario Securities Commission and Hong Kong’s Securities and Futures Commission. In addition, information-sharing agreements have been signed with the Capital Markets Authority, Kenya and Otoritas Jasa Keuangan, Indonesia.

Informally, ASIC has also met with numerous international fintech businesses referred to us by industry or trade bodies, including delegations from the United Kingdom and the United States.

Fintech: Capturing the Benefits, Avoiding the Risks

The IMF have published a paper on Fintech.  From artificial intelligence to cryptography, rapid advances in digital technology are transforming the financial services landscape, creating opportunities and challenges for consumers, service providers, and regulators alike. This paper reviews developments in this new wave of technological innovations, often called “fintech,” and assesses their impact on an array of financial services. Given the IMF’s mandate to promote the stability of the international monetary system, it focuses on rapidly changing cross-border payments.

Using an economic framework, the paper discusses how fintech might provide solutions that respond to consumer needs for trust, security, privacy, better services, and change the competitive landscape. The key findings include the following:

  • Boundaries are blurring among intermediaries, markets, and new service providers.
  • Barriers to entry are changing, being lowered in some cases but increased in others, especially if the emergence of large closed networks reduces opportunities for competition.
  • Trust remains essential, even as there is less reliance on traditional financial intermediaries, and more on networks and new types of service providers.
  • Technologies may improve cross-border payments, including by offering better and cheaper services, and lowering the cost of compliance with anti-money laundering and combating the financing of terrorism (AML/CFT) regulation.

Overall, the financial services sector is poised for change. But it is hard to judge whether this will be more evolutionary or revolutionary. Policymaking will need to be nimble, experimental, and cooperative.

When you send an email, it takes one click of the mouse to deliver a message next door or across the planet. Gone are the days of special airmail stationery and colorful stamps to send letters abroad.

International payments are different. Destination still matters. You might use cash to pay for a cup of tea at a local shop, but not to order tea leaves from distant Sri Lanka. Depending on the carrier, the tea leaves might arrive before the seller can access the payment.

All of this may soon change. In a few years, cross-border payments and transactions could become as simple as sending an email.

Financial technology, or Fintech, is already touching consumers and businesses everywhere, from a local merchant seeking a loan, to the family planning for retirement, to the foreign worker sending remittances home.

But can we harness the potential while preparing for the changes? That is the purpose of the paper published today by IMF staff, Fintech and Financial Services: Initial Considerations.

The possibilities of Fintech

What is Fintech precisely? Put simply, it is the collection of new technologies whose applications may affect financial services, including artificial intelligence, big data, biometrics, and distributed ledger technologies such as blockchains.

While we encourage innovation, we also need to ensure new technologies do not become tools for fraud, money laundering and terrorist financing, and that they do not risk unsettling financial stability.

Although technological revolutions are unpredictable, there are steps we can take today to prepare.

The new IMF research looks at the potential impact of innovative technologies on the types of services that financial firms offer, on the structure and interaction among these firms, and on how regulators might respond.

As our paper shows, Fintech offers the promise of faster, cheaper, more transparent and more user-friendly financial services for millions around the world.

The possibilities are exciting.

  • Artificial intelligence combined with big data could automate credit scoring, so that consumers and businesses pay more competitive interest rates on loans.
  • “Smart contracts” could allow investors to sell certain assets when pre-defined market conditions are satisfied, enhancing market efficiency.
  • Armed with mobile phones and distributed ledger technology, individuals around the world could pay each other for goods and services, bypassing banks. Ordering tea leaves from abroad might become as easy as paying for a cup of tea next door.

These opportunities are likely to reshape the financial landscape to some degree but will also bring risks.

Intermediaries, so common to financial services—such as banks, firms specialized in messaging services, and correspondent banks clearing and settling transactions across borders—will face significant competition.

New technologies such as identity and account verification could lower transaction costs and make more information available on counterparties, making middlemen less relevant. Existing intermediaries may be pushed to specialize and outsource well-defined tasks to technology companies, possibly including customer due-diligence.

But we cannot ignore the potential advances in technology that might compromise consumer identities, or create new sources of instability in financial markets as services become increasingly automated.

Rules that will work effectively in this new environment might not look like today’s rules. So, our challenge is clear—how can we effectively build new regulations for a new system?

Regulating without stifling innovation

First, oversight needs to be reimagined. Regulators now focus largely on well-defined entities, such as banks, insurance companies and brokerage firms. They may have to complement this focus with more attention on specific services, regardless of which market participants offers them. Rules would be needed to ensure sufficient consumer safeguards, including privacy protection, and to guard against money laundering and terrorist financing.

Second, international cooperation will be critical, because advances in technology know no borders, and it will be important to keep networks from moving to less regulated jurisdictions. New rules will need to clarify the legal status and ownership of digital tokens and assets.

Finally, regulation should continue to function as an essential safeguard to build trust in the stability and security of the networks and algorithms.

The launch or our paper today is one of the steps in the process of preparing for this new digital revolution. As an organization with a fully global membership, the IMF is uniquely positioned to serve as a platform for discussions among the private and public sectors on the rapidly evolving topic of Fintech.
As our research shows, adapting is not only possible, but it is the only way to ensure that the promise of Fintech is enjoyed by everybody