Firm up digital banking rules, regulators urged

With digital banks gaining momentum worldwide, particularly in developing countries, the Alliance for Financial Inclusion (AFI) called on regulators to craft licensing regimes that would address inherent concerns in the business while harnessing opportunities from this nascent segment.

The Malaysia-based AFI has member institutions, including the Bangko Sentral ng Pilipinas (BSP), from more than 90 developing countries where most of the world’s unbanked reside.

AFI said in a 34-page policy paper that digital banks have arisen amid an explosion of a wide range of new players, services and business models driven by technological innovations.

Digital banks are completely abandoning branch networks to provide customers with a range of services equivalent to that of their traditional peers, AFI said.

“While the operational model of digital banks provides opportunities to deepen financial inclusion, it also presents some inherent regulatory concerns,” the group added.

AFI recommends that, when laying down a licensing system specific for digital banks, regulators demand that new digital banks have model business plans that engender financial inclusion goals; have management and board members with strong technological and financial skills; have clearly defined operational and IT risk management strategies, especially regarding outsourced services; and provide an exit plan that minimizes harm to customers should the new venture fail.

Further, the AFI noted as a regulatory concern the ownership structure of digital banks which allows for so-called “Big Tech” firms and other large nonfinancial companies to be controlling shareholders.

“There should be a clear demarcation between the nonfinancial activities of these shareholders and those of the digital banks to avoid uncompetitive practices, data privacy weaknesses, and approaches to market share growth and the deployment of new products unsuitable for financial institutions,” AFI said.

Considering that cybersecurity risks are inherent in digital banks, players must be encouraged to integrate digital financial literacy programs into their services.

A digital bank offers financial products and services that are processed end-to-end through a digital platform or electronic channels with no physical branch, subbranch or branch-lite unit offering financial products and services.

So far, the BSP has issued licenses to six entities to operate as digital banks. Overseas Filipino Bank and Tonik Bank had converted previous licenses and are expected to begin operations within this month.