Regulators from around the world have identified cybersecurity as the chief risk to the fintech sector in the wake of the coronavirus pandemic.
Almost four in every five regulators count cyber threats among the top three risks that have increased during the pandemic, according to a new report by the World Bank and the Cambridge Centre for Alternative Finance (CCAF).
Over the course of the pandemic, fintech providers have seen a 15% increase in cybersecurity threats, the report found. But, only 29% of regulators say they have taken any action so far, with more needing to be done to consolidate frameworks and update policy in this area.
By comparison, almost half of regulators have responded to the increasing digitisation of financial services by updating know-your-customer (KYC) and anti-money laundering (AML) regulation, and just as many regulators in advanced economies have acted to secure employment during the crisis as have addressed the increasing cybersecurity risk.
The shift in regulatory activity reflects the new role that has been carved out for digital financial services because of the pandemic, which has acted as a catalyst for digital transformation across all sectors of the economy.
Fintech companies now facilitate a range of everyday activities beyond digital payments – everything from delivering government relief to contact tracing. A survey by digital payments start-up Plaid found that almost three-quarters of Americans now view fintech as the “new normal”.
But, with greater access comes increased risk, and policy must be updated to reflect this, says Mahesh Uttamchandani, manager in the Finance, Competitiveness and Innovation Global Practice at the World Bank.
“As fintech helps bring much needed digital financial services to people without access, we need to be mindful of the attendant risks for some of the world’s most vulnerable populations,” he says. “Cybersecurity, data privacy and consumer financial protection are all important policy areas to be considered in responding to and mitigating potential risks.”
It is not surprising, therefore, that the report by the World Bank and CCAF finds that fintech’s role in cushioning the impact of Covid-19 has accelerated the push to provide adequate oversight.
Regulators are moving fast to ensure that the ubiquity of fintech is not at the expense of financial stability. More than a third of national regulators report taking action to enable the safe growth of the sector. Those in developing economies or emerging markets are the more likely to have pushed fintech up the agenda, reflecting the nascence of their markets.
UK-based regulators have been at the forefront of pioneering innovation in the fintech sector, says Iana Vidal, head of policy and government affairs at fintech industry body Innovate Finance. For policymakers worldwide, emerging tech will help in the fight against cyber threats, she adds.
“Leveraging machine learning and AI, fintech firms can provide key solutions to help mitigate cybersecurity risks, but partnerships across industry and government are vital,” she says. “There is an increasing need to protect customers and businesses, so it is important that we have the correct checks and measures in place as digital adoption continues to accelerate.”
However, the technology used by regulators to oversee financial markets is still in need of an upgrade, according to Nick Cook, director of innovation at the UK’s Financial Conduct Authority. Speaking at the New Statesman’s Virtual Fintech Summit this week, Cook warned that a lack of data standards and poor co-ordination among the ‘regtech’ (regulatory technology) ecosystem exposes financial firms to ‘profound‘ risk of high compliance costs.