Strengthening digital banking rules, urged regulators

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As digital banks gain traction around the world, especially in developing countries, the Alliance for Financial Inclusion (AFI) has called on regulators to develop licensing regimes that would address concerns inherent in digital banking. business while exploiting the opportunities of this nascent segment.

AFI, based in Malaysia, has member institutions, including 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 brief that digital banks have emerged 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 digital banking business model offers opportunities to deepen financial inclusion, it also has some inherent regulatory concerns,” the group added.

AFI recommends that, when establishing a licensing system specific to digital banks, regulators require that new digital banks have model business plans that generate financial inclusion goals; have management and board members with strong technological and financial skills; have clearly defined operational and IT risk management strategies, in particular with regard to outsourced services; and provide an exit plan that minimizes damage to customers if the new business fails.

In addition, AFI noted as a regulatory concern the ownership structure of digital banks that allows so-called “big tech” companies and other large non-financial corporations to be controlling shareholders.

“There should be a clear line between the non-financial activities of these shareholders and those of digital banks to avoid uncompetitive practices, weaknesses in data privacy 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, actors should 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 without a physical branch, branch or light branch unit offering financial products and services.

So far, BSP has licensed six entities to operate as digital banks. Overseas Filipino Bank and Tonik Bank have converted previous licenses and are expected to start operations this month.

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