Last month, as part of our latest community meeting, I sat down with Alliance for Innovative Regulation (AIR) CEO Jo Ann Barefoot and Executive Director David Ehrich to chat about regulation in the digital payments space. AIR’s mission is to help the financial regulatory system digitize and modernize to drive financial inclusion and fair financial practices. Jo Ann and David’s extensive experience in the space make them the perfect candidates to dive into the details of what’s happening on the regulatory side. Read on for key excerpts from our discussion, and watch the entire conversation here.

You’ve noted a need for change to financial regulation systems. What are the limitations of the systems in place today?

JB: The system we have today was created in the analog age. Everything that’s done by bank regulators was designed on paper, decades ago, even centuries ago. Through the years, we’ve automated a lot of it, but the basic design is still analog-era. As we come into the digital era, we can do better than that. We can make things better, cheaper and faster.

The main limitation is that regulators today are using limited information. They’re using samples of information to try to understand what a big pool of data might tell them, and they’re using lagging information. They rely on reports that often come in quarterly or even annually. Additionally, regulators get information in a non-digital form that’s very difficult to work with. These limitations are intensified by the exponential acceleration of technology. We’re trying to help regulators digitize and speed up, get better information in real-time.

What countries have shown the most innovation in the regulatory space? What projects are worth emulating?

DE: The Financial Conduct Authority in the UK has been a real leader in this concept of regulatory innovation. They have been pioneering this for the last five years. One of the projects they have been working on that is really interesting is digital regulatory reporting. They’ve asked this question: what would digital reporting look like if regulators actually issued requirements in code? You could issue a regulation reporting requirement in code, and then the covered institutions can take that code and integrate it into their process and report against it.

JB: Another powerhouse of innovation has been Singapore. I was a judge this year in a G20 TechSprint, which had three use cases gathered from regulators around the world. One of them was on regulatory reporting, and there’s a formidable project underway to try to completely transform regulatory reporting with techniques like this. The Bank for International Settlements is incubating the G20 solutions in their lab with the Monetary Authority of Singapore.

DE: We see a huge opportunity for regulators in emerging markets, where, in some cases, they are not hampered by the same legacy systems as some of the more mature markets. What we’re hoping to see are opportunities where emerging markets can leapfrog the technology constraints of the more mature markets. That is something that we’ll be working toward over the next couple of years.

Shifting focus, let’s talk about the open source model. What should we do to help regulators become proponents of open source as a way of removing fragmentation in the marketplace, but also to increase fraud and anti-money-laundering controls compliance?

DE: It is a technology whose time has come, there’s no question about it, yet there is a certain hesitancy on the side of regulators. They’re still learning what open source means. When they hear the term open source, they often think, “if it’s open, it’s not secure.” And so, helping regulators move up that learning curve is necessary. That’s one end of the spectrum. At the other end of the spectrum, you have regulators like the Consumer Financial Protection Bureau (CFPB), which was created on an open source platform from its very beginning.

So, there is a broad range of regulatory approaches toward open source, and it’s an area where we feel very passionately. We’re very excited about the open source work that you’re doing in the Mojaloop Foundation because this is another one of those conversations whose time has come. We’re a little bit ahead of the tidal wave here. But when regulators develop a level of comfort with open source technology, and when they understand how valuable it will be to lower costs and transmit technology tools across jurisdictions in a very cost-effective way, we think they’ll see that this is the future of regulatory technology.

Meanwhile, we at AIR are collaborating with the Fintech Open Source Foundation, FINOS, building a Special Interest Group (SIG) and regulatory open source repository in Github. We encourage everyone to get involved.

Do you have any wrap-up thoughts? Some words of encouragement for the Mojaloop community?

JB: I will say that you’re trying to work on the hardest things. Financial inclusion has been an elusive goal forever, and you’re making real strides on that. But, you have to bring the regulators to the table, that’s crucial to really make this work well. Think about regulators. I’m a former regulator, and I think the regulators have the hardest job. I have no criticisms of them, but you’re trying to do all the things that are hardest for them. And having said that, I am so optimistic. I think you’re going to see change coming faster than you think if you really bring them in and help them understand the good that can be realized from what you’re doing. They do want to learn, they want to innovate, they want to move faster. And so, you’re at the right place at the right time with a really important effort.

Mojaloop is reliant on its community of open source supporters, contributors, evangelists, developers, and others to make our work possible and help achieve the Foundation’s mission of providing universal financial inclusion to all. Learn more  about how you can get involved in the community and make an impact, and follow us on Twitter, LinkedIn and Facebook to stay up to date.

About the Author

Paula Hunter, Executive Director, Mojaloop Foundation

Paula Hunter manages the day-to-day affairs of the Mojaloop Foundation, with responsibility for strategic planning and direction, membership development, budgeting, evangelism for the Foundation and its mission and outreach to strategic partners.