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Waking Up to the Fintech Hangover

The Monetary Authority of Singapore has made a big push for innovation in financial technology – now the regulator is warning about the risks inside the fintech fanfare it has helped create.

The Monetary Authority of Singapore has pushed for financial technology innovation more aggressively — and sooner — than regulators in other countries. It may be time to tone down the cheerleading.

Beginning in 2015, with its S$225 million (about $167 million) Financial Sector Technology and Innovation initiative, MAS established the city-state as a global research and development hub. Basking in the glow of its commercial success, MAS has taken a front-row seat to the risks fintech poses to financial stability globally.

More than 400 fintech enterprises, along with more than 30 innovation centers and research labs of multinational companies, have set up shop in the country, MAS managing director Ravi Menon said in a November 14 speech at the second annual Singapore FinTech Festival. The multiday event was attended by 25,000 people from 100 nations. Menon said the central bank has signed 16 cooperation and information-sharing agreements with government authorities globally, including the U.K.’s Financial Conduct Authority, which, like MAS, operates a “sandbox” where start-ups can experiment with a minimum of red tape.

MAS, which commands a 100,000-square-foot financial district building in Singapore as a collaborative workspace, joined in November the Massachusetts Institute of Technology Media Lab to explore such frontiers as cryptocurrencies and quantum computing. The central bank has also started a S$27 million artificial intelligence and data analytics grant to cofund as much as 50 percent of project costs for Singapore-based financial firms, according to a November 15 statement from MAS.

The rationale, as stated by Menon at the festival: “If Singapore is to maintain its position as one of the top financial centers in the world, it must embrace fintech — maximizing its benefits, minimizing its risks.”

Oh yes, risks. For all the fanfare, MAS remains a watchdog, with systemic, supervisory, and surveillance responsibilities. That means “being alert to potential risks, while taking care not to stifle innovation,” Menon said, before adding, “Easier said than done!”

If that amounts to a tempering of fintech-festival-type exuberance, then Menon is in tune with a message from the Financial Stability Board, based in Basel, Switzerland. The international advisory group, chaired by Bank of England governor Mark Carney, said in a June report on fintech that managing operational risks from third-party service providers, such as cloud computing companies, was a top priority. Cybersecurity and monitoring macrofinancial risks, including the growth of funding on fintech lending platforms, were also high on its list of priorities.

In November the FSB followed up with a report on how the rise in artificial intelligence, or AI, and machine learning may benefit — or threaten — financial stability. While the organization recognizes in the report that technology can help process information in credit decisions, financial markets, and insurance contracts more efficiently, it also pointed to risks that could emerge beyond the scrutiny of watchdogs.

“Network effects and scalability of new technologies may in the future give rise to third-party dependencies,” the FSB said. “This could in turn lead to the emergence of new systemically important players that could fall outside the regulatory perimeter.”

The International Organization of Securities Commissions addressed similar concerns in a February report, saying fintech innovations are disintermediating certain regulated activities.

Equity crowdfunding companies are assisting with share placements online, disintermediating stock exchanges and underwriters, IOSCO said. Peer-to-peer lending platforms are disintermediating banks, and robo-advisers, with their automated investment advice, are replacing work traditionally done by professionals at wealth management firms, according to the report.

Encouraging open dialogue on fintech, regulation, and systemic stability, the U.S. Treasury Department’s Office of Financial Research recently cohosted a two-day conference on November 30 and December 1 with the University of Maryland and the Federal Reserve Bank of Cleveland. Earlier in November the OFR held a fintech event at the University of Michigan.

“Innovation is inherently disruptive,” Michael Barr, the dean of the University of Michigan’s Gerald R. Ford School of Public Policy and a former deputy assistant Treasury secretary, said during the November 16–17 conference cohosted with the OFR. Regulators constantly struggle to “get a perfect balance,” he said, as they seek to avoid “either locking in the dinosaurs or unleashing risks that are too high for society.”

Federal Reserve governor Lael Brainard doesn’t want the positive side of regulation to be overlooked. Speaking in April at Northwestern University, she said that regulation enables “consumers to trust their banks to secure their funds and maintain the integrity of their transactions.” Brainard had some words of caution when it came to fintech, though.

“While ‘run fast and break things’ may be a popular mantra in the technology field, it is ill suited to an arena where a serious breach could undermine confidence in the payments system,” she said.

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