COVID-19 spurred a rise in FinTech. Now regulators are catching up.

COVID-19 has accelerated the digitization of everything from education to the workplace to grocery shopping. The financial services industry is no exception to this, with financial technology (fintech) playing a critical role in reducing coronavirus risks associated with exchanging cash, helping micro, small and medium enterprises (MSMEs) and supporting financial inclusion in developing markets during the pandemic and beyond.

However, unlike grocery shopping, financial services tend to be a highly regulated sector where the pace of innovation and change at times outstrips the ability of regulators to keep up. Consequently, FinTech providers often assert the challenges of regulatory uncertainty, with regulators racing to both understand and adapt to new technology-enabled financial services.

COVID-19 is changing that, according to the new “Global FinTech Regulatory Rapid Assessment Study” conducted by the Cambridge Centre for Alternative Finance (CCAF) at the University of Cambridge Judge Business School and the World Bank. The study demonstrates that COVID-19 has moved FinTech up the regulatory agenda, with financial regulators responding with both sector-wide and FinTech-specific measures to harness opportunities and mitigate risks introduced by technology-enabled financial innovation.

The study, which includes responses from 118 central banks and other financial regulatory authorities from 114 jurisdictions around the world, shows a strong increase in the use or offering of many FinTech products and services since the outbreak of the pandemic.

Unsurprisingly, digital payments and remittances feature prominently, with 60% of respondents reporting an increase. Regulators in emerging market and developing economies (EMDEs), and those in markets with more stringent COVID-19 containment and closure measures, are also more likely to have reported an increase in this sector. For example, the Central Bank of Kenya reports that more than 1.6 million additional customers are now using mobile money channels.

Regulators are taking notice. In emerging market and developing economies, almost two-thirds of regulators see FinTech as an increased priority. Over half of regulators in advanced economies state that FinTech has remained a high priority.

Regulators have also observed FinTech supporting COVID-19 relief efforts through digital payments, the delivery of government relief and stimulus funding, and support in healthcare applications. For example, in Jordan, the central bank utilized digital payments to help limit the spread of infection.

Financial regulators see rising risks in the FinTech market in light of COVID-19, particularly concerning cybersecurity and operational risks, as well as consumer protection issues such as fraud and scams.

COVID-19 has also caused internal challenges for regulators in their approach to FinTech. The introduction of social distancing and lockdown measures, together with restricted access to information and technology, has made supervisory activities such as on-site inspections of FinTech providers difficult or impossible.

Limited and delayed data on the rapidly evolving FinTech market also makes targeted regulatory measures and policy interventions more difficult and complicated. Given the cross-cutting and global nature of many FinTech activities, coordination among both domestic and international regulators is both essential and more challenging during the pandemic.

More than a third of surveyed regulators, 37%, say they have taken at least one regulatory measure specifically targeting FinTech sectors or activities. The most salient measures, especially in emerging markets, were directed at digital payments and remittances, such as removing transaction fees and raising transaction thresholds. Examples include regulators in Ghana, Kenya, Lesotho, Liberia, Rwanda, Uganda and Zambia permitting increased transaction and balance limits for mobile money.

Regulatory responses that were not specifically targeted at FinTech may have implications for the sector. Prominent measures taken include those in relation to anti-money laundering (AML) and digital identity, economic relief schemes, business continuity planning and measures to enhance cybersecurity.

For example, in markets including Egypt, Ghana, Pakistan and Russia, central banks took measures to relax account-opening measures, allowing accounts to be opened remotely and digitally. In India, the central bank has undertaken measures to improve awareness of fraud in digital payments. In a number of markets in Sub-Saharan Africa, regulators have implemented additional requirements to protect consumers in the insurance market.

In addition, innovative regulatory initiatives created before COVID-19 are becoming more prominent. Some of these “regulatory innovation initiatives” include regulatory sandboxes, innovation offices, and RegTech/SupTech initiatives, which leverage technology to enhance and improve compliance monitoring or supervisory activities.

Regulators from emerging market and developing economies are more likely to have developed new initiatives or expedited planned initiatives. Not a single surveyed regulator indicated that they had cancelled a regulatory innovation initiative as a result of the global pandemic. Respondents in markets with more stringent COVID-19 measures are twice as likely to have accelerated RegTech/SupTech initiatives.

So how then can regulators be supported to overcome the challenges of COVID-19?

Skills development and technical support are important, through providing the necessary capacity to help advance the understanding of FinTech and the digitization of regulatory processes, practices and infrastructure. This will, in turn, support the enabling and appropriate regulatory approach needed to ensure positive advancements in FinTech during COVID-19 and beyond.