Financial innovation in the digital age: challenges for regulation and supervision

Abstract

Banks have always managed to make the most of technology to improve their efficiency and the service provided to their customers, but they now face a new wave of innovation with much wider implications for financial services. Despite the acknowledged benefits, developments in technology and their implications on the efficiency, financial stability, consumer protection and integrity of the financial system require a holistic response by regulators and supervisors. This paper aims at analyzing the potential benefits of the digitisation of finance, the new risks that digital infrastructures, business and distribution models and customer solutions may pose, and the expected regulatory and supervisory response. The new digital paradigm presents new risks in terms of cyber security, consumer protection, operational continuity and fraud, among others. These are not fully covered by the traditional supervisory and regulatory approach. Hence there is a need for a renewed regulatory and supervisory framework that fully captures the potential of digital innovation and makes the financial system more resilient against future crises. The response should rest, at least, on four pillars: well-defined policies on the control and management of new technological risks in the financial sector, the launch of innovation hubs, the creation of supervised safe environments for market experimentation (regulatory sandboxes) and the acquisition of new digital skills and a collaborative mindset.