Efforts by fintech companies will be more effective with the right conditions in which to innovate and the level playing fields on which to compete
By MARK CARNEY / Pic By BLOOMBERG
A new economy requires a new finance. A new finance to serve the digital economy, a new finance to support the major transitions underway across the globe and a new finance to increase the sector’s resilience. A new finance with products that are more cost-effective, better tailored and more inclusive.
The UK’s financial technology (fintech) companies are creating this new finance. But you cannot do it all on your own. Your efforts will be even more effective if you have the right conditions in which to innovate and the level playing fields on which to compete. That’s why a new finance demands a new Bank of England (BoE).
In this spirit, last year at Mansion House, I announced that Huw van Steenis would lead a review of the future of the UK financial system, including recommendations for how the BoE should respond. In two months, Huw will publish his conclusions and the BoE will announce a number of concrete steps to create an environment for a more resilient, effective and efficient financial system.
To preview our general approach, I want to highlight some recent measures the BoE has been taking. The BoE’s strategy is to enable innovation and empower competition, while ensuring monetary and financial
Our levers are the hard and soft infrastructure we control:
• Hard infrastructure, such as the real-time gross settlement (RTGS) system, which lies at the heart of the UK payment system.
• And soft infrastructure, such as our rules, regulations and standards.
To illustrate what this means in practice, consider three examples of how the new BoE can provide a platform for private innovation to serve the digital economy, to finance major transitions and to increase the resilience of the financial system.
Serving the Digital Economy
First, at the heart of the new economy, the very nature of commerce is changing. Last year, one-fifth of all sales in the UK were online. Next year, it will be one-quarter.
The new economy is more inclusive, offering easier routes to market for firms both large and small, and greater access for consumers both near and far. We are entering an age when anyone can produce anything, anywhere and sell everywhere through platforms such as Tmall, Amazon, Shopify and YouTube.
This new digital economy is placing new demands on finance. Consumers and businesses increasingly expect transactions to be settled in real time, checkout to become a historical anomaly and payments across borders to be indistinguishable from those across the street.
In parallel, big data is opening up new opportunities for more competitive, platform-based finance of small and medium enterprises (SMEs). Search and social media data are supplementing traditional metrics to unlock finance for smaller enterprises whose assets are increasingly intangible. This new finance demands a BoE that is as open to new providers as it has been to traditional players.
Here’s one way we are changing our hard infrastructure in response. The BoE is in the middle of an ambitious rebuild of RTGS, which processes over £600 billion (RM3.2 trillion) of payments every day. Until recently, only commercial banks had direct access to it and alternative payment service providers had to route through them. That made sense in the old financial world arranged around a series of hubs and spokes, but it is increasingly anachronistic in the new, distributed finance that is emerging.
So, we are now making it easier for a broad set of firms to plug in and compete with more traditional providers. Responding to demands from fintech providers, the rebuild will provide Application Programming Interface access to read and write payment data.
Financing Major Transitions
My second example of how the BoE is providing a platform for private innovation concerns the financing of major transitions shaping the new economy, such as the rapid rise of emerging economic powers and the evolving response to climate change.
The transition to a low carbon economy, in particular, will require enormous re-allocations of capital and massive investments in infrastructure — on some estimates, as much as US$100 trillion (RM418 trillion) globally over the next decade. Firms that anticipate these developments will be rewarded handsomely; those that fail to adapt will cease to exist. This will have enormous ramifications both for the financial system and for financial stability. That’s why the BoE is transforming our soft infrastructure.
Recognising the need for adequate reporting of climate-related risks and opportunities, four years ago the BoE helped catalyse the private sector-led Task Force on Climate-Related Financial Disclosures (TCFD). The TCFD has now led to a step change in the demand and supply of climate reporting. With over US$100 trillion in assets now demanding TCFD quality disclosures, a market in transition is now being built.
The BoE is also working with central bank and supervisory colleagues from around the world in the Network for Greening the Financial System to improve climate risk management in the core of the global financial system. Our priorities include the development of a small number of high-level climate scenarios that can be used in future system-wide stress tests. Next month, the Prudential Regulation Authority (PRA) will require insurers, as part of market-wide stress tests, to consider how their businesses would be affected in different climate risk scenarios.
By adapting our soft infrastructure in these ways, the BoE will help ensure that the financial system is not only resilient to climate-related risks, but also can take full advantage of the enormous opportunities in a new low carbon economy.
Applying New Tech to Boost Resilience
My final example of how the BoE is building a platform for fintech innovation considers how general purpose technologies, including advanced analytics such as artificial intelligence (AI), can increase the resilience of the financial system.
As much of life moves online, a trail of data is created. Indeed, more data was created in the past two years than in all the years that came before. And this data is creating enormous opportunities for the new finance to serve customers better and to manage risks more effectively.
To those ends, the financial sector is investing heavily in the cloud, machine learning and AI. Banking is already the second-biggest global spender on AI systems (after retail) and is expected to invest a further US$10 billion on AI by 2020. AI-enabled solutions are increasingly important in fraud detection, as well as automated threat intelligence and prevention. As some in the audience are exploring, there is also significant potential in credit assessments, wholesale loan underwriting and trading.
As my colleague James Proudman recently described, such advanced analytics are also likely to lead to changes to the way the BoE conducts supervision.
The PRA promotes safety and soundness based upon forward-loo-king, judgement-based supervision, in which we identify the key risks facing firms and set supervisory strategies to mitigate them. As a process, it can be broken down into three simple steps: 1) Rule-setting and reporting; 2) analysis and monitoring; and 3) setting and communicating a supervisory strategy to mitigate identified risks.
Each of these aspects of supervision is amenable to automation, machine learning or AI to some extent. Consider rule setting and reporting. At over 638,000 words, the “PRA Rulebook” is longer than “War and Peace”. It is also somewhat less interesting and infinitely more complex.
We are currently using advanced analytics to understand the complexity and interconnectedness of the “PRA Rulebook” to identify ways to simplify our rules and to make compliance with them easier for firms.
And to explore ways to make reporting more efficient and effective, we are running a Digital Regulatory Reporting pilot, with the Financial Conduct Authority on machine-readable reporting requirements that firms’ systems could interpret and ultimately automate regulatory data collection.
These initiatives are goods in and of themselves, but they also create the potential to unlock the power of AI in order to improve the quality of our supervision.
Today, new technologies, the new economy and the new finance have the potential to unlock more sustainable and inclusive growth.
Consumers can have greater choice and better targeted services; SMEs can access new credit to grow; banks themselves can become more productive, and the financial system overall can become more resilient.
The new finance must be inclusive, allowing everyone to be better connected, better informed and more empowered
- Mark Carney is the BoE governor. This is an abridged version of his speech, entitled ‘A Platform for Innovation’, at the Innovate Finance Global Summit in London on April 29, 2019.