Enabling innovation with fewer risks through dialogue

Policymakers and investors can gain more by having a dialogue, despite seemingly being constantly at odds

WHEN looking at tech companies, the views of a policymaker and an investor can seem at odds with each other - the former focuses on the stability and protection of the broader system, while the latter is looking at profiting off new products and services.

That difference is amplified in the heavily regulated high-value financial sector. Regulators have crossed the t's and dotted the i's in protecting the wider financial system, but investors do not want to be held back from lucrative opportunities that could be worth billions.

"The investors' view of the world is that if there's consumer demand, it has to be good.," noted Sopnendu Mohanty, chief fintech officer of the Monetary Authority of Singapore (MAS).

"That's been the classic gap between investors and policymakers. What the consumer wants is not necessarily good for the ecosystem as a whole," he added.

For example, the push for growth to meet consumer demand could result in additional risks for the system.

In 2020, consumer lending platform Akulaku faced default issues, which led to its suspension from loan investment platform Mintos in April. There are also other similar tales of other peer-to-peer lending platforms in Indonesia constantly restructuring loans without the consent of lenders to avoid drawing down on their insurance schemes.

With pressure from investors to grow fast, fintech startups are making loans to riskier segments of the population in the bid to continue showing growth. There is also no shortage of funding for these startups - over US$3 billion has been invested into fintechs in Singapore.

Fostering conversations between investors and policymakers - who might be at opposite ends of the spectrum - could yield benefits for both parties. Investors would be able to understand the issues of importance to policymakers, while policymakers can gain greater insight into the types of innovation that pique investors' interest.

"The policymakers can lay out some of the areas they are concerned with for possible future considerations, if they become mainstream. When investors get that information early in the process, they can work with the entrepreneur to design products and services that address future issues if they go mainstream," said Mohanty.

After all, MAS wants to encourage innovation in financial services. In particular, Mohanty said, the central bank would like to see innovation that increases operational efficiency.

He noted that MAS has played supportive roles in the past for some innovative technologies. In 2016, as e-wallets became widely accepted, MAS started consultations on what would become the Payment Services Act. Policymakers shifted towards regulation that is modular, activity-based and facilitative of growth and development in the Singapore payments landscape.

"That's how balance was achieved - it followed the trail of market innovation, and we made a proportional response to the risk the particular service posed," Mohanty said.

He added that balanced regulation supports innovation by not overburdening products or services with regulatory views that are disproportionate to the risk.

But finding this balance is not always easy, especially when a new product changes the design or outcome of an existing regulated process.

Adding to the challenge for policymakers is the increasing speed of innovation, with the time taken for products or services to become mainstream now shorter than before.

Policymakers need to quickly consider the risk a product can create in the market, but no longer have the benefit of time to form an appropriate regulatory position, as profit-driven investors seek a quick product roll-out. This could result in conflict between investors and regulators.

Mohanty nevertheless sees ways for investors and policymakers to meet in the middle, such as having a sandbox to test products and services. MAS launched its regulatory sandbox in 2016, and has since enhanced it with Sandbox Express for quicker testing and Sandbox Plus for better assistance.

"Having a sandbox-based framework allows us to come in early in the process and get an early sense of the regulator's view at the same time as the product is being developed," said Mohanty.

Policymakers and investors might seem like they stand at the opposite ends of the spectrum, but both are similarly looking for innovation. Having a dialogue will help both allocate an optimal amount of capital and resources to innovating specific segments that need more attention than others.

"Our hope is that by working with investors early in the process, we will have efficient capital allocation to areas where we think need innovation," Mohanty said. "That is an optimal outcome for policymakers, investors and entrepreneurs."

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