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Mr. Tanai Khiaonarong, David Humphrey, and Jihad Alwazir

The level and trend in cash use in a country will influence the demand for central bank digital currency (CBDC). While access to digital currency will be more convenient than traveling to an ATM, it only makes CBDC like a bank debit card—not better. Demand for digital currency will thus be weak in countries where cash use is already very low, due to a preference for cash substitutes (cards, electronic money, mobile phone payments). Where cash use is very high, demand should be stronger, due to a lack of cash substitutes. As the demand for CBDC is tied to the current level of cash use, we estimate the level and trend in cash use for 11 countries using four different measures. A tentative forecast of cash use is also made. After showing that declining cash use is largely associated with demographic change, we tie the level of cash use to the likely demand for CBDC in different countries. In this process, we suggest that one measure of cash use is more useful than the others. If cash is important for monetary policy, payment instrument competition, or as an alternative payment instrument in the event of operational problems with privately supplied payment methods, the introduction of CBDC may best be introduced before cash substitutes become so ubiquitous that the viability of CBDC could be in doubt.

Majid Malaika

Based on technical assistance to central banks by the IMF’s Monetary and Capital Markets Department and Information Technology Department, this paper examines fintech and the related area of cybersecurity from the perspective of central bank risk management. The paper draws on findings from the IMF Article IV Database, selected FSAP and country cases, and gives examples of central bank risks related to fintech and cybersecurity. The paper highlights that fintech- and cybersecurity-related risks for central banks should be addressed by operationalizing sound internal risk management by establishing and strengthening an integrated risk management approach throughout the organization, including a dedicated risk management unit, ongoing sensitizing and training of Board members and staff, clear reporting lines, assessing cyber resilience and security posture, and tying risk management into strategic planning.. Given the fast-evolving nature of such risks, central banks could make use of timely and regular inputs from external experts.

Imports increase consumer choices, exert competitive pressures on domestic producers, and facilitate industrial restructuring. In studies of cross-country differences in external performance, imports have drawn considerably less attention than exports, and typically have been assigned a passive role. For example, Allard, et al (2005) found imports to be largely determined by final demand while competitiveness has been playing a minor role. However, the benefits of imports are well known: they increase the supply of goods and services available to meet final demand, enable a national economy to bring forward consumption and investment, offer an enlarged product variety, and facilitate the global division of labor. This chapter looks at the role of imports in restructuring the economies of the five southern euro area (SEA-5) countries—France, Greece, Italy, Portugal, and Spain—and, for the purpose of comparison, the euro area average and Germany.

Globalization is posing major challenges to the southern euro area (SEA-5) countries2—new products of better quality can be an alternative to increase their competitiveness. In this context, the main finding of this chapter is that product quality has not shown a marked improvement over the last decade. This slow progress appears associated with a loss of market share.

Majid Bazarbash, Ms. Kimberly Beaton, Ulric Eriksson, and von Allmen

Can fintech credit fill the credit gap in the consumer and business segments? There are few cross-country studies that explore this question. Focusing on marketplace lending, an important part of fintech credit, we use data for 109 countries from 2015 to 2017 to study the relationship between fintech credit to businesses and consumers and various aspects of financial development. Marketplace lending to consumers grows in countries where financial depth declines highlighting the role of fintech credit in filling the credit gap by traditional lenders. This result is particularly strong in low-income countries. In the business segment, marketplace lending expands where financial efficiency declines. Our findings show that low-income countries take advantage of the fintech credit opportunity in the consumer segment but face important challenges in the business segment.

Luis Herrera, Frederic Lambert, Grey Ramos, and Jose Torres

Despite some improvement since 2011, Latin America and the Caribbean continue to lag behind other regions in terms of financial inclusion. There is no clear evidence that fintech developments have supported greater financial inclusion in LAC, contrary to what has been observed elsewhere in the world. Case studies by national policy experts suggest that barriers to entry in the financial sector, along with a constraining regulatory environment, may have hindered a faster adoption of fintech. However, fintech development seems to have accelerated in the wake of the COVID-19 pandemic and with the support of recent policy initiatives.

Mr. Dong He, Mr. Ross B Leckow, Mr. Vikram Haksar, Tommaso Mancini-Griffoli, Nigel Jenkinson, Ms. Mikari Kashima, Mr. Tanai Khiaonarong, Céline Rochon, and Hervé Tourpe

A new wave of technological innovations, often called “fintech,” is accelerating change in the financial sector. What impact might fintech have on financial services, and how should regulation respond? This paper sets out an economic framework for thinking through the channels by which fintech might provide solutions that respond to consumer needs for trust, security, privacy, and better services, change the competitive landscape, and affect regulation. It combines a broad discussion of trends across financial services with a focus on cross-border payments and especially the impact of distributed ledger technology. Overall, the paper finds that boundaries among different types of service providers are blurring; barriers to entry are changing; and improvements in cross-border payments are likely. It argues that regulatory authorities need to balance carefully efficiency and stability trade-offs in the face of rapid changes, and ensure that trust is maintained in an evolving financial system. It also highlights the importance of international cooperation.

Chikako Baba, Cristina Batog, Enrique Flores, Mr. Borja Gracia, Ms. Izabela Karpowicz, Piotr Kopyrski, Mr. James Roaf, Ms. Anna Shabunina, Rachel van Elkan, Xin Cindy Xu, and Mr. Jörg Decressin

Europe’s high pre-existing level of financial development can partly account for the relatively smaller reach of fintech payment and lending activities compared to some other regions. But fintech activity is growing rapidly. Digital payment schemes are expanding within countries, although cross-border and pan-euro area instruments are not yet widespread, notwithstanding important enabling EU level regulation and the establishment of instant payments by the ECB. Automated lending models are developing but remain limited mainly to unsecured consumer lending. While start-ups are pursuing platform-based approaches under minimal regulation, there is a clear trend for fintech companies to acquire balance sheets and, relatedly, banking licenses as they expand. Meanwhile, competition is pushing many traditional banks to adopt fintech instruments, either in-house or by acquisition, thereby causing them to increasingly resemble balanced sheet-based fintech companies. These developments could improve the efficiency and reach of financial intermediation while also adding to profitability pressures for some banks. Although the COVID-19 pandemic could call into question the viability of platform-based lending fintechs funding models given that investors could face much higher delinquencies, it may also offer growth opportunities to those fintechs that are positioned to take advantage of the ongoing structural shift in demand toward virtual finance.

S.P. Berkmen, K. Beaton, D. Gershenson, J. Arze del Granado, K. Ishi, M. Kim, E. Kopp, M. Rousset, H. Miao, Y. N. Mooi (all IMF), E. Duch (World Bank), D. Pan (IMF), P. Alonso-Gamo (IMF), S.P. Berkmen (IMF), and Ms. Patricia Alonso-Gamo

In Latin America and the Caribbean (LAC), financial technology has been growing rapidly and is on the agenda of many policy makers. Fintech provides opportunities to deepen financial development, competition, innovation, and inclusion in the region but also creates new and only partially understood risks to consumers and the financial system. This paper documents the evolution of fintech in LAC. In particular, the paper focuses on financial development, fintech landscape for domestic and cross border payments and alternative financing, cybersecurity, financial integrity and stability risks, regulatory responses, and considerations for central bank digital currencies.

Ms. Marianne Bechara, Wouter Bossu, Ms. Yan Liu, and Arthur Rossi
Fintech presents unique opportunities for central banks. The rapid changes in technology that are transforming the financial system will allow central banks to enhance the execution of various of their core functions, such as currency issuance and payment systems. But some aspects of fintech pose major challenges. Central banks have always been at the cutting edge of financial technology and innovation. In the past, the invention of the banknote, the processing of payments through debits and credits in book-entry accounts, and the successive transitions of interbank payment systems from the telegraph to internet protocols were all transformative innovations. Today, central banks are facing new and unprecedented challenges: distributed ledger technology, new data analytics (artificial intelligence [AI] and machine learning), and cloud computing, along with a wider spread of mobile access and increased internet speed and bandwidth. The purpose of this note is to discuss the authors’ preliminary views on how, from a legal perspective, central banks can best deal with the impact of fintech on their governance. These preliminary views are based on a review of central banks’ reaction thus far to the challenges posed by fintech to the legal foundations of their governance.