During July, the Bank for International Settlements (BIS) released a report recommending a range of mechanisms to improve data gathering concerning FinTech companies. Most people yawned and moved on to more exciting issues, like 5G regulation or the geopolitical struggle between China and the United States.
However, the report provides important forward indicators of policy trajectories. The form, structure, and focus of the planned enhancements to official sector data gathering also provide a roadmap to where FinTech firms can expect to see increased policy engagement over the next 12-18 months.
Policymakers started the year seeking to establish a solid foundation for increased regulatory engagement. As the time series below indicates, the pandemic perhaps predictably took its toll on aggregate activity. The rebound started in May, partly due to the realization that consumers and companies were accelerating their pivot towards contact-less and online payments. Governments intensified the shift by distributing pandemic-related fiscal support through electronic mechanisms where they were available.
In the second half of July alone, policymakers from France, Italy, the United Kingdom, and Japan joined the BIS in releasing research and regulatory proposals regarding both the FinTech and cryptocurrency sectors. Sustained activity at the end of the month, diversified geographically, suggests strongly the depth of policymaker commitment to addressing various regulatory issues associated with non-bank tech-enabled financial intermediation.
But before they formulate new policies, they must first acquire data.
The July BIS report makes clear that policymakers are serious, determined, and thinking concretely about their next steps. They must go fishing for data…in ponds over which they have limited to no jurisdiction.
They started by surveying central banks around the world to identify high priority needs. Financial stability and payments policy (including cryptocurrency policy) emerged as focal points:
The remainder of this post highlights the policy issues implicated by specific data collection priorities.
The BIS report starts from the proposition that lack of internationally comparable statistics (and related definitions) for the fintech sector creates data gaps that must be filled. It does not spell out WHY those data gaps must be filled, much less HOW those gaps can be filled.
The WHY is easy to answer: intermediation through non-bank entities at scale can create financial stability issues while interfering with the transmission of monetary policy. These two public policy priorities provide the foundation for all subsequent rules. It remains an open question HOW policymakers can acquire the data they seek if they do not first have the authority to compel non-public companies to share information with the official sector.
Let’s assess first the four specific types of information needs presented in the BIS Report:
1. Lists of Specific FinTech entities
- particularly peer-to-peer lenders and
- payment services providers.
2. FinTech credit items
- credit scoring
- balance sheet data
3. CryptoAsset Items
- market capitalization
- number of platforms
- flows of funds between cryptocurrency and fiat currency
- trading volumes
- types and number of crypto assets
- number of customers
4. Financial Services Linkages, particularly between banks and BigTech firms. At a minimum, the BIS indicates these linkages generate operational risk (for which banks are required to hold regulatory capital).
Financial regulation readers will recognize the roadmap embedded in the data wish list. Policymakers seek to understand the scale of intermediation underway in the FinTech sector….relative to the traditional banking sector.
— Collecting credit scoring data provides perspective on whether (or not) a central bank’s preferred monetary policy — or a financial regulator’s prudential policies — are being circumvented by intermediation outside the banking sector.
— Collecting various indicators of transaction volumes regarding cryptocurrencies provides policymakers with a sense of scale relative to traditional exchanges and over-the-counter markets.
— Collecting data regarding linkages with the regulated financial sector provides perspective on the extent to which existing regulatory structures may (or may not) remain effective mechanisms to protect shareholders, depositors, and borrowers from unanticipated risk of loss.
Many FinTech companies may bristle at the potential expansion of the regulatory perimeter. Cryptocurrency firms are famously secretive. Many blockchain-based currencies do not even provide insight into the identity of the counterparty. Convincing such firms to deliver data to central banks could be quite a challenge.
Confidentiality is not the sole province of cryptocurrency firms. Most start-up companies may view with concern the request to deliver balance sheet data and flow data regarding transactions with regulated financial institutions. Providing policymakers with the ability to compare the delta between market capitalization and transaction flow data could raise thorny questions about whether a firm is sufficiently capitalized to conduct intermediation activity.
Comparisons with regulated financial firms are inevitable. Pressure to create a level playing field between the disruptors and the established firms seems inevitable.
The BIS report also recommends increased information sharing among regulators, showcasing the approach taken by South Africa as a model. The proposed approach will challenge the current business models for many FinTech firms. The South African model creates an integrated data-sharing arrangement among a range of financial institution regulators that extends far beyond banking regulation. Participants include:
- the Financial Intelligence Unit
- the tax authorities
- finance ministries
- central banks
Many fintech firms currently operate outside the ambit of this oversight structure. Many cryptocurrency firms intend to continue operating outside the ambit of this oversight structure, highlighting the importance of transaction anonymity to their business model. Policymakers have consistently articulated throughout 2020 their intention to increase oversight for fintech and cryptocurrency firms. The first step is data collection.
Before firms in this sector become too concerned, they should focus on a potential silver lining. Financial flows globally and nationally at present — even during the pandemic — are massive. It will take some time for fintech-based intermediation to reach a systemic scale.
The collected data may illustrate concretely that the sector as a whole, or individual segments, do not yet warrant increased regulatory scrutiny. Companies seeking to preserve their momentum and immediate competitive advantage from operating outside the regulatory perimeter may well support more robust statistics. Among other things, better data will enhance competitive analysis. Industry cheerleaders and marketers everywhere will be less enthusiastic, particularly if the data indicate that industry growth and market penetration are less impressive than pundits proclaim.
Whether you support it or dread it, the reality is that central banks are pursuing relentlessly a data-driven approach to policymaking. They will be sourcing their data from a range of mechanisms, including potentially “AI-supported web search” technology. If the information is publicly available, policymakers intend to find it, normalize it, and compare it with the regulated sector. Firms that fight the process may not have much input into which data is collected and, crucially, how it is interpreted.