The integration of technology, finance and services is rapidly changing Asia’s banking landscape, as ownership stakes in banks are taken by big techs and fintech firms and non-bank financial institutions as well as by incumbent banks. Many new entrants are leveraging social media platforms and applying advanced data analytics. The changed landscape opens up opportunities to leapfrog traditional evolutionary processes and thus advance financial inclusion. It also presents regulatory and competition challenges that need to be tackled.
The use of the banking system to borrow lags the increase in bank accounts worldwide. One key reason is the requirement for collateral in conventional bank business loan models in developing, emerging and advanced economies alike. New technology-driven business models exploit the expanding data footprints of individuals and firms to generate information capital and reduce the reliance on collateral when offering loans and other financial services. Data and entities that manage data – in an unbundled banking stack within the regulated banking system – will be at the heart of this transformation.
The growing variety of new entrants to the banking industry that employ data collection techniques poses two challenges for regulators and competition authorities. First, financial regulators need to ensure that regulatory oversight delivers on the inclusion and intermediation-enhancing benefits of digital finance without compromising traditional regulatory goals such as financial stability, adequate competition, consumer protection and market integrity. Second, there is a pressing need for a system of data governance that allows consumers and business to exercise control over their data through the granting and withholding of consent to the use and transfer of their data. Developing a user-friendly granular consent-based data governance system with low transaction costs is a challenge that, when successfully addressed, will promote the development of virtual banking worldwide.
Hong Kong SAR offers one example of an integrated regulatory framework for virtual banks. The licensing and regulatory regime – also applicable to incumbent banks – aims to manage the full spectrum of risks arising from any source, including the ownership structure, without compromising development objectives that often rest on technological innovation. How the framework deals with data is in the early stages of development.
Re-disseminated by The Asian Banker from BIS