Widespread use of technology making financial services riskier – BoG warns

The widespread use of technology following the outbreak of the coronavirus pandemic is making financial services riskier, Second Deputy Governor, Bank of Ghana (BoG) Mrs. Elsie Addo Awadzi, has warned.

She stated that increased mobile money and ATM fraud and other cyber and AML/CFT risks could lead to service delivery disruptions and operational and financial losses as well as reputational damage for service providers- while leading to losses for users of these services and a loss of confidence in the financial system.

These could erode gains made in financial stability, financial integrity, and financial inclusion in many countries.

“These developments underscore the need for a coordinated approach to developing an orderly digital financial services ecosystem with innovations to better support the real sector on a sustainable basis. Such a coordinated approach will help various players in the ecosystem – policymakers, regulators, financial services providers, financial technology providers (FinTechs) and so-called BigTechs (such as Amazon, Apple, Google, and Facebook, to name a few) and consumers – to work together to harness the benefits,” she said while speaking at a joint AFW2/MCM virtual regional workshop on the theme “Building Fintech resilience and supervisory capacity in west Africa.”

She however underscored the importance of technology in financial transactions following the pandemic.

Mrs Addo Awadzi stated that the use of technology in the provision of financial services has now become a necessity rather than an option, driven to a large extent by consumer demand and the search for more efficiency and operational continuity by service providers.

The dramatic increase in the use of digital financial services in the midst of the ongoing COVID-19 pandemic demonstrates their importance for promoting business continuity and for expanding access to much-needed financial services, she said.

Technology has indeed become the biggest driver of change in the financial services sector and is fast disrupting traditional models of product and service delivery. With significant investments in technology, financial services providers are providing convenience and efficiency for customers and helping to expand access to finance for underserved and unserved segments of society such as the informal sector, women, youth and other typically underserved groups. Governments are not left out as they pursue digitization of economies, while regulators are increasingly relying on more regulatory and supervisory technology to improve effectiveness, and more and more Central Banks including the Bank of Ghana are exploring the launch of Central Bank Digital Currency to further support the orderly development of the digital financial services landscapes, Mrs Addo Awadzi added.

“In Ghana, the digital financial services space has evolved from the early 2000s when banks began to roll out ATMs and a few web-based services. Over the years, electronic money (famously called mobile money) has emerged and grown exponentially not only in Ghana but in West Africa and across the entire region, paving the way for a wide variety of digital financial services including digital savings, credit, investment, micro insurance, informal sector pension products, and inward international remittance, bill payments, merchant payments, health care, and Government social interventions including Covid-19 relief cash transfers. Today, there are some 17.5 million active mobile money accounts in Ghana with GH¢ 571.8 billion (USD 99.67 billion) in mobile money transactions in 2020 alone, representing 84% growth from the value recorded in 2019, made possible with the help of some 344,000 active mobile money agents as at December 2020.

“The widespread use of technology is also making financial services even riskier. Increased mobile money and ATM fraud and other cyber and AML/CFT risks could lead to service delivery disruptions and operational and financial losses as well as reputational damage for service providers, while leading to losses for users of these services and a loss of confidence in the financial system. These could erode gains made in financial stability, financial integrity, and financial inclusion in many countries.

“These developments underscore the need for a coordinated approach to developing an orderly digital financial services ecosystem with innovations to better support the real sector on a sustainable basis. Such a coordinated approach will help various players in the ecosystem – policymakers, regulators, financial services providers, financial technology providers (FinTechs) and so-called BigTechs (such as Amazon, Apple, Google, and Facebook, to name a few) and consumers – to work together to harness the benefits

of technology for the financial system while keeping risks to financial stability and financial integrity in check. Indeed, this is a key recommendation of the Bali FinTech Agenda launched by the International Monetary Fund and the World Bank in 2018.

“It is against this background that I consider this workshop on the theme, “Building FinTech resilience and supervisory capacity in West Africa”, timely. This workshop aims to provide an opportunity for policymakers, regulators, and other relevant actors within the financial services ecosystem to deliberate on how to create a conducive environment for FinTechs to foster an inclusive and resilient financial services industry within the subregion.

“Regulation and supervision of the digital financial services ecosystem is complex, given the multiple players in that space and the fast pace of technology-driven disruption to traditional models of banking and other financial services. Particularly, regulators all over the world are grappling with the best approaches to effectively regulate and supervise FinTechs in a manner that is consistent with multiple policy objectives (such as financial stability, financial integrity, consumer protection, and effective competition) without stifling the necessary innovation that FinTechs often bring. What is more, the boundaries around permissible activities of FinTechs are fast becoming blurred for example as payment solutions very easily transition into full-fledged financial services.

“Key among policy questions that regulators face globally, is whether to regulate FinTechs under stand-alone regimes from an institutional standpoint or whether to regulate them on a functional basis such that their activities are regulated under existing regimes that regulate banks and other financial services providers, to the extent they provide at least some of the same services such as payments solutions. While some jurisdictions adopt the former approach, others prefer the latter approach to avoid regulatory arbitrage by providing a level playing field between banks and other financial services providers on the one hand and FinTech/BigTech on the other. For now, it seems that many jurisdictions are able to delineate boundaries around what are permissible activities of traditional financial services versus those permitted for FinTechs. As these fine lines become even more blurred with time, regulatory approaches will need to adapt to changing business models in order to remain effective. Whatever the approach, regulatory objectives for regulating FinTech/BigTech need to be clarified, specific risks to financial system stability, operational resilience, financial integrity, fair competition, and consumer protection clearly identified, and suitable regulatory and supervisory tools adopted to help mitigate those risks,” she said.