March 2025
Participants of the “Navigating the regulatory maze: Balancing innovation and compliance for digital banks” roundtable at the Insights Forum 2024, held at the Singapore FinTech Festival, included a mix of regulators and digital banks. They explored the question of balancing innovation with the need for safeguards and compliance in digital banking, as well as how regulators and digital banks can encourage innovation whilst managing risks in the financial sector.
The discussion between digital banks and regulators covered four main themes:
There are challenges in fostering collaboration between traditional banks and digital banks, particularly due to competition concerns. Central banks are seen as key players in driving collaboration through regulatory frameworks and foundational infrastructure. The Philippines, for example, has introduced a digital banking framework to increase competition and encourage new players to enter the market. This allows traditional players to feel confident that new players are properly regulated and have oversight. Regulators acknowledged efforts to foster innovation through a FinTech innovation regulatory framework and proportionality in regulation. Many regulators around the world are aiming to take similar steps.
As stated by a participant, “We visit innovation hubs within the country and engage the innovators from there, educating them on regulatory requirements but also getting feedback from them on how that would influence what we do as a regulator.”
Discussants emphasised the importance of educating consumers on digital financial services, ensuring they understand how to use these services safely and benefit from them. Efforts should be made to measure the impact of digital financial inclusion through initiatives like financial health indices.
Tyme, a digital bank in South Africa, has initiated physical outreach efforts with consumers who may lack full access and understanding of digital banking. As part of its efforts, the bank set up kiosks across the country where consumers can set up a digital banking account and speak to ambassadors on-site about issues or concerns they may have. With this, the bank has been successful in its growth and expansion, since it now has over 10 million users and has approximately US$400 million in deposits in just under 6 years.
Improved financial literacy will encourage more consumers to choose digital banking as they are more confident of using digital financial services to their advantage, leading to growth in the industry.
A strong governance framework is essential for managing personal data in the digital ecosystem. This involves clear policies on data ownership, protection, and usage, particularly when it comes to consumer data.
Data is the key to SME finance and assessing creditworthiness. Banks need innovative ways to collect data, including transaction history, retail partnerships, and digital payments. Digital banking can serve even the poorest segments; for example, AI and alternative data are reshaping SME lending. By analysing consumer behaviour and non-traditional data sources, financial institutions can better assess SME creditworthiness.
However, a robust data framework is essential to enable the use of AI and digital banking models so that banks can be innovative in their strategies to collect, analyse, and use data responsibly and effectively. As such, it is important for regulators to create frameworks on data sharing that will allow data to be shared between stakeholders in a responsible way. This can be done through the establishment of open banking frameworks by regulators, which will foster collaboration between traditional and digital banks and allow consumers to consent to sharing financial data with digital banks and other third-party providers.
Financial institutions must ensure that products and services are suitable for consumers, aligning with the principles of appropriateness to avoid harm. Financial literacy and consumer protection should be embedded in the operational practices of banks and fintechs.
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