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FINANCIAL institutions are free to test out certain digital innovations without the approval of the regulator, but are responsible for some inevitable risks behind such services.
The Monetary Authority of Singapore (MAS) on Monday outlined its regulatory approach towards innovations by banks, as traditional lenders up their game in the arena given the heat from new service standards introduced by financial technology (fintech) firms in recent years.
Managing director of MAS, Ravi Menon, said in supporting Singapore's innovation drive - billed as Singapore's Smart Nation vision - that there will be priority placed on strengthening cybersecurity, but that MAS will allow the industry to develop new digital services with "smart regulation".
MAS will commit S$225 million in funding over the next five years, with the money available to financial institutions to build their research and development strengths in this area. This comes as Mr Menon argued that after a few "false starts", technology will transform banking services. "There is reason to believe that this time is different: that technology will indeed transform financial services in a way that has not happened before. It has much to do with the concept of mobility," he said at the Global Technology Law Conference.
He noted that as more financial services are delivered over the Internet, the frequency, scale and complexity of cyber attacks on financial institutions have increased globally, and that banks must be aware of threats and better security solutions ahead.
But financial institutions can introduce certain digital products and services without seeking MAS's endorsement, as long as they have done their due diligence, Mr Menon said. For example, banks that offer fingerprint authentication for checks on account balance did not need MAS's approval. "In matters of innovation, time to market is critical," said Mr Menon, noting that banks can do more to make payments swift, simple and secure.
Financial institutions' board and management are responsible in ensuring that risks of new innovations are well identified and managed, he said. "They should avoid second-guessing MAS by taking an overly conservative stance that might nip innovation in the bud," said Mr Menon, referring to banks' compliance staff. "But the financial institution must offer its own assessment of the risks in what it proposes to do and take ownership for its decisions. It cannot rely on MAS to do its due diligence."
If a bank is unclear if a new digital service runs afoul of regulatory requirements, it is free to play in the "sandbox", in which "consequences of failure can be contained", said Mr Menon. MAS is also open to developing common technology infrastructure with the industry.
MAS is not seeking a zero-risk regime, said Mr Menon, noting that the regulator is prepared for "some failures" along the way, as part of the learning process. "If things do go wrong with an innovative product or service, and there will no doubt be some failures, the financial institution will need to review its implementation and draw lessons. MAS will examine the facts to assess if there is any systemic or deeper issue that needs to be addressed, and determine if any action needs to be taken."
Pranav Seth, head of E-Business, global consumer financial services, OCBC Bank, said: "Given the rapid changes within fintech and the constantly evolving digital habits of our customers, there are no hard and fast rules that can be defined for sure. What is critical, notable and appreciated in the speech is the progressive and forward-looking regulatory philosophy on managing innovation."
MAS will also engage fintechs "more actively", noting that the innovation drive must go beyond the financial industry, said Mr Menon.
Markus Gnirck, co-founder of fintech innovation programme Startupbootcamp FinTech, said that MAS's official partnership on the programme - the first for a regulator - shows how much MAS has been involved in fintech developments. This also comes amid the view that fintech startups are purely a threat to banks, said Rohith Murthy, managing director of financial comparison site SingSaver.com.sg, adding that MAS can play a big role in encouraging collaboration between these two communities.
Similarly, a DBS spokeswoman said, while banks have a lot of data, more robust architecture, and hold customers' trust, fintechs are generally more nimble and can introduce fresh perspectives on how banking can be conducted. DBS's work with its partners on hackathons and experiments on mobile banking, data analytics and technology such as blockchain, has helped to hone a more digital mindset across the bank, she said.
Janet Young, head of group channels and digitalisation, UOB, noted that MAS's approach will work even better with continuous dialogue to share ideas.