FinTech initiatives to enhance efficacy of financial system

Central Bank of Kuwait (CBK) is mulling several initiatives aimed at completely revamping and upgrading the IT infrastructure, as well as policies, processes and procedures of financial systems in Kuwait to bring them in line with global best practices, and to make them more efficient, convenient and safe for all stakeholders.

One major initiative, slated to be rolled out in two phases in 2019 and 2020, is the Kuwait National Payment System (KNPS), a strategic mega project being developed by CBK in collaboration with local banks and payment gateways. The KNPS covers various initiatives, including the Government Electronic Banking System (GEBS), which is expected to dramatically improve efficiency by executing all government transactions online. The GEBS is projected to replace the paper-based processes currently in place with an online automated cycle that is both immediate and accurate. This system is currently being phased into all government bodies.

Other schemes that come under KNPS purview include Wages Protection System, Digital Currency, and Automated Clearing House. Each initiative is designed to enhance the stability and efficiency of the financial system, and build the necessary infrastructure to address future needs. In addition to e-wallets, the Digital Currency initiative is of particular interest to the general public, as it prepares the infrastructure needed for a Central Bank issued Digital Currency (CBDC) — a digital Kuwaiti Dinar — that will facilitate exchange against tokenized assets.

In case CBK decides to issue a Digital Dinar, it will be among only a handful of countries around the world that have implemented CBDC. In the United Arab Emirates, Dubai is already known to be toying with the idea of an encrypted digital currency called emCash, citing its faster processing, improved delivery time, less complexity and lower costs, as reasons for its implementation. Singapore is also reported to be experimenting with a CBDC under Project Ubin, as a tokenized form of its Singapore Dollar.

Rapid developments in digital technology now provide ever-faster access to information, enabling us to communicate, access news and entertainment, socialize, shop and perform myriad other online tasks effortlessly and quickly from our mobile devices. The pace of digital developments and the speed of its adoption by the public is becoming a significant driver of change in Kuwait, impacting and transforming every sector of economy. In the financial sector, innovative financial technologies (FinTech) are creating developments and disruptions that are leading to paradigm shifts in how financial institutions and platforms operate and interact.

With over 60 FinTech firms operating in Kuwait and more being added every month, including e-commerce platforms, online shopping and food delivery apps, the financial technology sector is becoming a transformative force driven by the demands of society. But the potential risks and inherent challenges in these developments have raised concerns and highlighted the need for vigilant monitoring and management of FinTech, so as avoid or mitigate risks to consumers, the economy and broader society.

The Governor of Central Bank of Kuwait (CBK), Dr. Mohammad Al-Hashel attempted to assuage some of these concerns, while delivering his keynote address to the Global Informatics Forum, which was held last week at Gulf University of Science and Technology (GUST). In his address titled, ‘Steering FinTech for a Prosperous Society’, Al-Hashel said the Central Bank along with other stakeholders would ensure that the digital transformation would be aligned with the ultimate objective of ensuring inclusive and sustainable prosperity.

“FinTech is revolutionizing the ways in which we spend, save, invest and lend. We realize that we cannot slow technological advance, nor would we want to. We welcome change, and we choose to steer technological innovation in the right direction towards our objective of providing inclusive sustainable prosperity,” said the governor. He added that the CBK would like to strike the right balance between enabling innovation and providing a friction-less financial experience, while ensuring the stability of the larger financial system.

In an increasingly interconnected financial system, “we need to ensure that our IT infrastructure is robust and secure enough to avoid exposure to operational risks, technical glitches and other unforeseen technical issues. The trans-jurisdictional nature of FinTech operations also means we need to ensure our operations are in compliance with international standards, policies and procedures,” said Al-Hashel.

Detailing some of the dynamic and proactive approaches taken by CBK to facilitate the growth of FinTech, while protecting the funds and data of customers, the governor pointed out that the bank continues “to adopt latest relevant and useful innovations, and share experiences with other regulators to develop our framework, which fits the needs of our society.” He also added that CBK holds discussions with financial institutions and fintech firms prior to the release of any new regulation so as to receive their input and ensure it benefits all parties and safeguards sustainable growth.

He cited the regulations introduced by CBK in September for electronic payments (E-payments), which he said were taken to support innovative local FinTech platforms, while providing a safe and secure ecosystem that covers all stakeholders, including consumers, retailers, payment channels and financial institutions.

According to the new e-payment guidelines, all service providers, including companies and institutions, will have to register on the CBK electronic payment system within 12 months. They will also have to ensure their e-payment processes are in line with regulations laid down by the bank. While banks would be automatically listed as service providers, other institutions will have to apply for registration. This will bring all e-payment methods under the purview of CBK, and ensure its operations are in conformation to stipulated regulations.

Globally, e-payments are steadily usurping the traditional role of cash in transactions; in Kuwait, growing customer demand for safe online payments is fueling the roll out of innovative e-payment forms such as contact-less cards and mobile wallet payments. According to a recent report, the value of online transactions in Kuwait grew 16 percent from US$1.09 billion in 2014 to $1.26 billion in 2015.

The report, published by Payfort, the international online payment gateway owned by Amazon, shows that the largest chunk of online payments in Kuwait was in e-commerce transactions, which accounted for $680 million, followed by airline ticket purchases ($430m), travel ($150m) and entertainment ($2.7m). The report expects online payments to more than double to $2.8 billion by 2020.

The depth of mobile penetration and the wide adoption of digital technologies in Kuwait has encouraged CBK to push through innovative FinTech schemes, such as the recent launch of its Regulatory Sandbox Framework. The milder regulatory environment in the Sandbox avoids stifling innovation while providing startups and entrepreneurs with a safe space to experiment innovative products and services, without impairing the safety and soundness of the financial and banking sector. The Sandbox enables entrepreneurs to partner with CBK and submit ideas that will be secure, useful and beneficial to society.

Concluding his speech at GUST, the governor said, “We believe that when regulators work hand in hand with all stakeholders to serve society, financial innovation can be responsibly steered towards our aim of promoting inclusive sustainable prosperity for all.”