Could you please tell us what drew you to fintech and regtech? Please let us know what kind of personal and professional journey you had along the way that led you to become such an important voice of the industry.
I’ve spent my whole career working with financial regulation -- as a US bank regulator, a staff expert for the US Congress, and in the private sector. I’ve focused mainly on regulatory efforts to promote consumer protection and financial inclusion. Several years ago, I spent two years at Harvard University as a senior fellow, researching financial innovation. One day I had an epiphany -- that fintech innovation has the potential to solve many, and maybe even most, of the problems we try to address through regulation, especially for financial consumers. And then in the next moment, I also realised that this potential would never be realised unless these new innovations are wisely regulated. As a former bank regulator myself, I knew this would be challenging because regulators are generally not designed to keep up with rapidly changing technology. Accordingly, I founded AIR, the Alliance for Innovative Regulation, to help solve that problem. We work to catalyse and guide conversion of the financial regulatory system to digitally-native form, in order to foster fair finance.
Being named an advocate of “regulation innovation” has a nice ring to it. Can you explain how did you manage to make your voice heard and what kind of work does that require? How are new technologies transforming financial regulation?
The new technologies transforming financial regulation are the same trends that are transforming everything else, from streaming entertainment to genetic engineering to driverless vehicles. At the heart of all of these shifts is the explosion of digital data - the conversion of information into digital form. Once information is digitised, it can be easily collected, reported, aggregated, disaggregated, and, crucially, analysed with powerful new tools like artificial intelligence and machine learning. In regulation, this can enable breakthrough techniques. One is giving regulators access to real-time regulatory reporting and to full data, as opposed to today’s model of periodic reports and reliance on small samples of information. This can be invaluable in a situation like this pandemic, where regulators need to stay on top of highly volatile trends in the economy.
Another example is to equip regulators to monitor “big data” through AI, in order to spot emerging risks or anomalous behaviour that could indicate, say, insider trading in securities markets. Innovation can also massively drive down regulatory and compliance costs, making financial services more affordable for all. I wrote a series of papers on these issues in connection with my Harvard research.
Digitisation can also help regulators keep pace with fast-changing technology in areas like cryptocurrency and assets.
As to how we make our voice audible as a small organisation in a vast, complex ecosystem, AIR is a nonprofit that has high credibility with regulators, policymakers and industry, because we cultivate and connect them all. My background as a bank regulator also helps me understand the regulators’ challenges, which are tremendous. We focus on bringing people together across their “silos,” especially in connecting the regulatory and technology worlds that often barely touch. We convene dialogue. We have a global podcast show, Barefoot Innovation. We also put out an important paper last year, our Regtech Manifesto. We are requesting comments and receiving input from all over the world.
One of our best tools for magnifying impact is to hold regulatory “TechSprints” -- essentially hackathons -- to help develop and prove out high-tech regulatory solutions. We have held high-impact sprints on financial crime, including one for detecting use of cryptocurrency to purchase child sexual abuse material online. We plan one this year with the UK Financial Conduct Authority and emerging market regulators on Women’s Empowerment in the pandemic. We may do one on green finance.
You were a speaker at Singapore Fintech Festival in December 2020. What are your main takeaways from the event? Please share some key topics and trends for 2021 that really sparked your attention.
The SFF is my favourite financial conference each year. Furthermore, as your readers probably know, Monetary Authority of Singapore MAS is among the top one or two regulatory bodies in the world in driving regulatory innovation and smart regulation of fintech. I missed having the conference live this year in beautiful Singapore, but it was still an amazing gathering. I think some of the highlights are the focus on diversity and financial inclusion, the migration of cryptocurrency into mainstream finance, and the emerging focus on green finance.
Among the key topics discussed during Singapore Fintech Festival, digital identity and financial inclusion were focus points. What does it take to close the gap towards financial inclusion? Who should be involved? How is digital identity an enabler for financial inclusion? Can you answer these in the context of our current lifestyle being affected by the pandemic?
Financial inclusion is one of AIR’s principal goals. As I noted earlier, it’s clear to us that fintech -- and regtech -- can massively expand financial inclusion in numerous ways. On the fintech side, we can close the inclusion gap by continuing to foster the delivery of financial services through mobile channels, which are low-cost and can reach everyone -- unlike traditional brick and mortar branches. Mobile payments accounts can become a base level delivery platform, on which we can add other financial services like lending, investing and insurance. Cryptocurrency can also drive inclusion, especially in places where fiat currencies are volatile or for people who rely on cross-border remittances, which increasingly can cost little or nothing to execute.
Lending inclusion can also be expanded by enabling the use of new kinds of data in credit underwriting to make risk analysis much more granular and accurate.
And, as mentioned before, we can drive financial inclusion just by reducing the costs of regulation and compliance through technology. These costs are very high in the financial sector. Making the industry more efficient will enable it to profitably reach and serve for more people.
Another way to expand inclusion is to use regtech tools that can more easily find noncompliant activity that excludes some people. New data and methods can detect illegal discrimination as well as patterns of scams and predatory activities, helping target scarce human resources to the highest-impact activities. AIR is planning a focus in 2021 on using technology to assure consumer protection in emerging markets with high levels of fintech, recognising that many of these countries can “leapfrog” straight to digitally-native regulatory strategies, for high gains in efficiency and effectiveness.
And yes, a key to financial inclusion is to develop digital identity systems. We can discuss this further in the next questions.
In a white paper introducing Facebook’s initiative, Libra, it is stated “An additional goal of the association is to develop and promote an open identity standard. We believe that decentralized and portable digital identity is a prerequisite to financial inclusion and competition.” What are your thoughts on this? Can you please elaborate?
I think the jury is still out on whether we can and should emphasise open identity standards and decentralized identity. I do think that digital identity is essential and yes, it has to be easily portable. Interestingly, digitising identity is an urgent priority for both the large economies and the emerging ones, for opposite reasons. In many emerging markets, large numbers of people lack identity documents and therefore cannot get access to the financial system. In major economies, in contrast, it has been typical to have everyone receive government issued ID papers or numbers, but these were developed in the analog era and are now often insecure -- the information is widely for sale on the dark web. It is increasingly important to migrate to new identity methods and to make them highly secure.
If Facebook and similar initiatives carve out private identity systems, not related to government-issued ID, there could be great benefits but also challenges, including how to address the risk of money laundering and financial crime becoming harder to detect.
What do you feel is the role of digital identity in reducing gender inequality and advancing women`s digital financial inclusion?
Digital ID is especially crucial for women. It’s common in many countries for government-issued identity papers to go just to the head of household, which is typically a man. This makes it hard for women to establish their own economic relationships, especially with banks. The lack of access has cascading impacts, hampering women in everything from entrepreneurship and rising out of poverty to escaping abusive situations.
Moving on to the emerging markets. How do you see the future of digital identity in this sector and what should be first tackled to ensure success?
The examples we’ve discussed tend to be most important in emerging markets, where analog ID forms may be unreliable or unavailable, especially for women and, in some places, for dis-favoured minority populations. These ID advances can also help with migration shifts. For example, refugees fleeing political oppression, war or natural disaster often face rejection or lengthy detention in the receiving country while they undergo screening on factors like ties to terrorism. If all people have robust digital ID’s in their mobile phones, it can expedite processes of this kind.
As noted above, the digital ID can also help greatly in countering money laundering and financial crimes. It can simplify the work banks must do to meet the Know Your Customer rules screen for allowing anyone to access the banking system by, say, opening a payment account. It can make it easier to accurately identify criminals like traffickers in weapons, drugs, and human beings.
Digital ID raises many challenges as well as opportunities. One is how to protect ID’s from being hacked by criminals or state actors. Another is how to prevent potential abusive surveillance or privacy erosion by governments regarding their own citizens. There is promising work underway on “privacy-enhancing technologies,” or PETs, that use encryption techniques or sharing of partial information, rather than full identity data, to mitigate risks.
Much work lies ahead in this realm but it is one of the most promising arenas of progress in expanding financial inclusion and combating online and financial crime.
About Jo Ann Barefoot
Jo Ann Barefoot is CEO & Founder of AIR - the Alliance for Innovative Regulation and host of the global podcast show Barefoot Innovation. A noted advocate of “regulation innovation,” Jo Ann is Senior Fellow Emerita at the Harvard Kennedy School Center for Business & Government. She has been Deputy Comptroller of the Currency, partner at KPMG, Co-Chairman of Treliant Risk Advisors, and staff member at the US Senate Banking Committee. She’s an angel investor, serves on the board of Oportun, serves on the fintech advisory committee for FINRA, is a member of the Milken Institute USFinTech Advisory Committee, and is a member of the California Blockchain Working Group Advisory Board. Jo Ann chairs the board of directors of FinRegLab, previously chaired the board of the Financial Health Network, and previously served on the CFPB’s Consumer Advisory Board. She was a Cofounder of Hummingbird Regtech.
About Alliance for Innovative Regulation
Every day we send out a free e-mail with the most important headlines of the last 24 hours.
Subscribe now