BANKS SHAKE HANDS WITH FINTECH (Part 3): Solutions

The cooperation between Banks and Fintech benefits both sides and helps competent authorities manage more effectively, contributing to national financial stability. In the previous two periods, based on the research results, one of the weaknesses of the banks is the lack of flexibility in applying modern technology, leading to high transaction costs and failure to meet increasing customers’ demand. Meanwhile, Fintech has the advantage of innovation and the ability to apply technology flexibly and effectively, helping to reduce transaction costs and improve customer experience. However, one of the significant challenges Fintech companies have to deal with is building customer trust in terms of security and safety or customer networks.

The cooperation between Banks and Fintech has brought positive effects to the two sides. It is the basis for promoting many effective and explosive digital payment solutions, helping the parties to take advantage of the partners' strengths and overcome difficulties. The cooperation relationship between the Banks - Fintech is considered a premise for improving access to financial - banking services, bringing benefits to both sides, and simultaneously helping the competent authorities effectively manage the banking system in stabilizing national finances.

Some proposed solutions to promote effective cooperation of the two sides include:

Secure payment system

The promotion of Banks - Fintech cooperation and financial inclusion will lead to an increase in the scale, expansion of the scope and number of payment transactions. Thus, ensuring the stable operation of the national payment system is a matter of necessity. In which, infrastructure investment and system monitoring and management are two of the most critical issues. For effective control and supervision, the State Bank of Vietnam (SBV) needs to adhere to and stick to the principles of monitoring the payment system, including Transparency and consistency in supervision criteria; Pursue and comply with the common international standards for supervision of payment systems such as the rigid standards for the Principles for Financial Market Infrastructures (PFMIs) in 2012 issued by the Committee on Payment and Settlement Systems (CPSS) or the rules governing the securities trading settlement system issued by the International Organization of Securities Commissions (IOSCO); Ensure close coordination and quick response between the SBV and relevant agencies and between central banks of countries.

In addition, for the supervision of international payment transactions, the general principles must be ensured when participating in the global payment system: notify member banks when detecting or forecasting large fluctuations to their local currency; The SBV is primarily responsible for its payment system; Periodically evaluate to adjust the national payment system in line with the entire international payment system; Close coordination among members in the global payment system; Quickly identify threats to the system and warn members.

In these activities, the SBV is the agency that plays the leading role and, at the same time, closely coordinates with the State management agencies to carry out the national financial supervision.

Ensuring safety and stability of the banking system

According to the assessment of the risk absorption capacity of the Vietnamese financial system, the banking system’s stability is still an area that needs attention for improvement. It is even more necessary when promoting Banks - Fintech cooperation in providing financial and banking products widely in the economy.

Suppose banking operations in general and commercial banks' payment activities are strictly inspected, controlled, and supervised by the SBV by international and national standards. In that case, Fintech companies providing financial services also need to be monitored similarly. Currently, the supervision of Fintech's activities is under the Ministry of Planning and Investment and related ministries but not under the direct supervision control from the SBV. However, to supervise the payment system of the state budget in general and the payment sources of organizations and individuals through Fintechs, the State Bank cannot unilaterally implement without the supervision mechanism and policy as for other commercial banks. And it is necessary to have a policy to supervise non-cash payments via Fintech by the Government, assigning relevant ministries, branches, and the State Bank to implement.

Additionally, to accomplish the goal of balancing the national foreign debt repayment obligation with the export of goods and services, minimizing the risk to the federal financial security, and maintaining the national credit rating, the government must have policies that encourage Fintech development.

Although most Fintechs participate in the cashless payment system for the financial and banking sectors, they also provide other financial services such as capital mobilization or peer-to-peer lending. Thus, if the channel of capital mobilization through Fintech can be promoted and the risk of this mobilized capital controlled for depositors, they can focus more idle money on the people to participate in the capital supply process for depositors, organizations, and individuals that need capital. To do so, the State must have the policy to reduce risks for depositors by requiring them to buy deposit insurance and imposing a multiplier (maximum loanable deposit ratio) on Fintech if they provide banking and financial services alone.

Completing the legal corridor to promote the Banking - Fintech relationship

Although the benefits of bank-fintech collaboration are undeniable, banks and state agencies have faced numerous challenges, including banking information security issues, customer information security, network security, and requirements to meet consumers' high expectations. They also have to find a common denominator between safe and effective management, promoting innovation, and increasing competitiveness.

Many Fintechs have been very active in collaborating with banks to provide services to niche market segments.

The fact shows that the legal framework for the banking - Fintech cooperation process is still very primitive; clear regulations on the operating model, legal status, conditions for establishment and operation of Fintech companies have not yet been established. Therefore, the development and synchronous implementation of policies to promote Fintech development such as tax exemption and reduction policies; policies to support access to capital sources, create an environment for Fintech investment, and cooperate with traditional financial institutions - banks are essential. The SBV needs to develop mechanisms, policies and promulgate management regulations to create a favorable environment for innovation, apply the achievements of the industrial revolution 4.0 to banking activities, and support the development of the banking sector with the appropriate Fintech ecosystem development in Vietnam. Therefore, it can be said that completing the legal corridor is an essential premise to promote Banking-Fintech cooperation in many aspects in the coming time.

For the regulations on Know Your Customer (KYC): Commercial banks now identify customers who first transact with banks and deposits (directly at the counter), loans, international payments. All customers must sign the documents with a wet-ink signature. Although Fintech also approaches and provides currency business services, customers can perform identification by electronic signature or encryption (eKYC) instead of wet-ink signature (KYC) as for banks. So, when the bank combines with a Fintech company, will the KYC regulations change or not? Will apply according to eKYC of Fintech or KYC of banks. The SBV itself cannot give binding rules on the safety of Fintech because it is not the governing body to manage these companies. Still, for consistency in management, the Government needs to direct for the cooperation between relevant ministries. In addition, the Government has now digitized to identify citizens by integrating information about citizen identification, social insurance, health insurance, and household registration. Therefore, it is also advisable to digitize the bank's customer identification through e-identification and replace KYC with eKYC like Fintech companies.

For safety regulation: Commercial banks operate with the international regulatory system and the central bank of each country to ensure the system's safety. However, rules on ensuring system safety for Fintech activities are much looser. Therefore, for the economy to be better able to withstand the shock of financial risks when Fintech provides financial services, the Government also needs to compare the safety regulations of banks to apply. For example, rules on required reserve ratio, mandatory deposit insurance purchase regulations, minimum capital adequacy ratio. Likewise, when Fintech combines with banks to provide Fintech products and services through banks, financial service provision activities need to comply with the regulations of the banking system.

Currently, there are still many regulations to protect consumers of financial products provided by Fintech. For example, many Fintech companies have recently mobilized customers' deposits in a multi-level model for fraud, taking advantage of this loophole. In addition, a series of Fintech companies that have defaulted and are unable to pay depositors in recent times have shown the need for detailed regulations on safety and ensuring the rights of consumers in this particular financial sector.

It is necessary to have a standard data center to exploit the strengths of the banking system, Fintechs, and promote the efficiency of the Bank-Fintech combination, but still ensure national financial security.

Prioritize development of information infrastructure

On the one hand, a standard database center effectively exploits information sources, on the other hand, it makes information sources transparent to avoid risks due to information asymmetry for the Banks – Fintech when choosing partners and financial and monetary cooperation. For the standard data center to have a reliable and rich data source, when developing a project to establish a typical data center (in addition to the current CIC customer credit data), it is also necessary to issue an open data standard. Information from the available data center will create a level playing field for banks in accessing 4.0 digital technology through self-development of digitization systems or cooperation with Fintechs while still ensuring national financial security.

Promote diversification of areas of cooperation

To meet customers' increasingly diverse needs and high expectations, banks and Fintech need to continue to promote cooperation to provide more diversified services and products. Banks and Fintechs need to have an open mind, thereby building an appropriate business strategy, aiming for beneficial cooperation, creating strength for the service market, improving competitiveness for economic development. However, banks need to ensure that customer data is provided to Fintech companies, monitor data sources, and have strict policies to protect customer information.

On the Fintech side, customer information security must also be a top priority. Ensuring information security is the basis for the parties to strengthen their reputation and trust with customers, the foundation for the parties to continue cooperation in diverse fields, and limit cyber security problems, enhancing the quality of risk management and contributing to national financial stability.

Read the full research paper "Banking 4.0: Banking-Fintech Coordination in National Financial Stability", see details here.

Author team: Dr. Hoang Hai Yen, Dr. Nguyen Thi Hong Nhung, MSc. Nguyen Thi Thuy Duong (Ho Chi Minh City University of Economics) & MSc. Vu Bich Ngoc, MSc. Tran Hoang Truc Linh (Ho Chi Minh City Open University).

It is an article in the series that shares research and applied knowledge from UEH, cordially invites readers to watch the DIGITAL ECONOMIC Knowledge Newsletter 5, "Sustainable financial practices at enterprises: Pushing strengthen digital transformation and raise consumer awareness”.

News, photos: Team of authors, Department of Marketing and Communication.