Speech at ECOSOC Financing for Development Forum
Delivered at ESCAP high-level Side event Transforming finance in Asia-Pacific: The FinTech revolution in New York
Welcome to our panel discussion on “Transforming finance in Asia-Pacific: The FinTech revolution.” This event is co-hosted by UNESCAP and the Governments of Bangladesh, Indonesia and Kazakhstan whose support is valued. Our first regional dialogue was held back in 2014, co-hosted by the government of Indonesia in Jakarta and since we have held several consultative events on the financing for development to discuss priorities for Asia-Pacific and share emerging knowledge.
Over the past few years ESCAP has produced analytical publications on Asia and Pacific financing for development and our research focused on all key sources of financing. Among these, financial inclusion along with strong network of micro, small and medium-sized enterprises, or MSMEs, are critical to sustainable development. Across Asia, MSMEs constitute the largest number of enterprises in any country and play a fundamental role in the creation of decent jobs, the development of entrepreneurial skills, and the diffusion of technological knowledge. Yet people and business face challenges in access to finance and 42 percent of the region’s MSMEs are financially constrained, In the region’s least developed countries, more than half of the MSMEs are financially constrained. In addition, only 60 percent of the adults in Asia and the Pacific have an account in a financial institution, and for women the share is lower at 56 percent.
Frontier technologies are offering new solutions for providing an impetus to financial inclusion. Asia is leading globally the “Fintech” emergence and as we will learn from our experts in the panel they are transforming the way people pay, send money, borrow, lend, and invest.
FinTech solutions include (a) cell phone apps that allow users to execute online transactions, such as bill payments; (b) store credit scoring of consumers and small businesses owners based on big data analytics; and (c) operate online alternative financing platforms such as peer-to-peer (P2P) lending and equity crowdfunding.
The market for alternative finance platforms is growing fast in Asia and the Pacific, from $103 billion in 2015 to $245 billion in 2016. With a market value of $243 billion in 2016, China is the regional leader, followed by Australia ($610 million), Japan ($398 million), and the Republic of Korea ($ 376 million).
Information and communication technology can contribute to financial inclusion and economic development through distributed ledger technologies such as blockchain, which are increasingly being used for financing operations such as settling payments, verifying invoices and enforcing contracts. A well-known application of blockchain technology is Bitcoin, which was designed as a peer-to-peer payment system to be used in online transactions. A unique aspect of Bitcoin and other cryptocurrencies that emerged afterwards is that they allow financial transactions to be accomplished without an intermediary.
Broader usage and acceptance of digital currencies as a payment system call for development of effective consumer protection, regulatory oversight by public authorities of bitcoin and cryptocurrencies transactions, controls to avoid security breaches and illegal activities in digital currency exchanges.
FinTech technologies reliance would enhance with the development of credit scoring based on big data analytics. Besides issues of privacy of information, the process companies use to obtain a credit score need to introduce greater transparency, and accuracy in reporting at this point difficult to judge. In addition, artificial intelligence algorithms to obtain credit scores may inadvertently determine eligibility to loans based on consumers' characteristics such as gender, race, or religious and social affiliations, which may lead to discriminatory lending practices.
There is further need to soundly develop alternative financial platforms like P2P lending. In 2016, China suffered its biggest ever case of financial fraud through the failure of a P2P lending platform named Ezubao, which proved to be a Ponzi Scheme. This case alone caused losses to consumers for RMB 50 billion, or USD 7.6 billion. It is clear, therefore, that regulations need to be further developed and strengthened to take full advantage of the benefits and minimize the costs of both FinTech and the use of blockchain technologies.
In this regard, two main approaches have been employed in the region. On one hand, China, the global and regional industry leader, has prioritized innovation but at the same time has stepped-up regulatory efforts to protect consumers from fraud after a series of high-profile scandals. On the other hand, economies such as Australia; Hong Kong, China; Malaysia; Singapore and Thailand have implemented regulatory sandboxes to allow innovations in limited market segments. This approach allows firms to test new technologies within a pre-defined set of rules or policies, adjusting their technologies for their products and services before launching into the market. The fintech sandboxes, therefore, usefully strike a balance between regulator’s intention to encourage innovation in the fintech industry and the need to maintain financial stability.
In the specific case of cryptocurrencies, regulatory framework need to (a) clarify whether trading profits from trading digital currencies should be subject to capital gains taxes; (b) ensure the enforcement of Know-Your-Customer identification requirements and anti-money laundering laws; and (c) protection against phishing and cyberattacks, given numerous hacking attempts of some Bitcoin exchanges in recent years.
All in all, policy makers and regulators, particularly in developing countries, need guidance on how to develop the FinTech sector in a manner that maximizes its benefits as a catalyst for financial inclusion, while offering customers protection. For that purpose, it will be useful to enhance Public Private Dialogues (PPD) with the private sector, technology companies, researchers, and development partners. Making progress in ensuring that appropriate regulations are in place will be essential to maximize the benefits of fintech and digital currencies to enhance financial inclusion. Less obvious but equally important is also for government to improve financial literacy and to work extensively with stakeholders to consider the potential impact new technologies will have on businesses and people.
Asia and Pacific’s intergovernmental platform for financing for development steered by ESCAP is already disseminating the edge being offered by developments in digital technology and advising on infrastructure needed to tackle pervasive financial exclusion in the region. This event, is one of steps in that direction and count on this to serve as a peer learning opportunities and sharing of knowledge and experiences.