By Fady Abdel-Nour, Global Head of M&A and Investments, PayU

Over the course of the last six months, the payments industry has been lauded as one of the most impressive in its agility responding to Covid-19. Consumers and merchants have flocked online and safety has been a significant driver of the move to digital as entire countries discourage the use of cash – but what of financial and data security?

As digital payments adoption accelerates, there’s no time to waste. The pressure is on for governments and regulators to not only ensure security keeps pace with new consumer demand, but to look ahead and clear the road for future innovation.

Acceleration in digital payments

At PayU, we operate in 20 markets across the globe. Since the start of the pandemic, every single one of these markets has seen a seismic shift in consumer habits. In Poland, for example, the number of new onboarded e-shops was three times higher between March and May than in previous months. And in Colombia, e-commerce activity was 282% higher than pre-lockdown levels. Some merchants across our markets saw year-on-year revenue growth of a staggering 500-1000% during April and May.

New merchants are seeing this potential, moving online to increase their customer base and keep economies ticking. But with great innovation comes corresponding regulations. How can regulators keep up?

Innovation vs. regulation: an incompatible duo?

New ideas and technologies are undeniably critical to ensure services keep up with consumer behaviour. However, for this to happen safely, there needs to be collaboration between our industry’s innovators and regulators. Progress requires us to challenge and expand existing boundaries, holding our shared goal in mind.

Important as this concept is, it is by no means revolutionary. The widely pedalled narrative that innovators and regulators are at loggerheads is, quite frankly, outdated. It is not true that innovation in financial services has to disrupt existing systems and infrastructure. We have already seen countless examples of regulators working with the fintech ecosystem to enable and support innovation.

Across the emerging markets that PayU operates in, innovation initiatives are in place to educate entrepreneurs on the regulatory environment in which they operate. In Brazil, the central bank has established a sandbox, the Laboratory of Financial and Technological Innovation, to help fintech startups work more closely with regulators and government and accelerate the development of their ideas. The aim is to create a more efficient financial system, increase financial inclusion and reduce the cost of credit through better regulation. As the country rolls out Open Banking, acknowledging fintech’s potential to drive better socio-economic inclusion is incredibly encouraging.

It would be remiss of me not to mention The Monetary Authority of Singapore (MAS) here. To date, it has excelled in driving positive change by ensuring new players and services can operate within regulatory constraints. If they are unable to do so, the MAS reviews its framework and, where appropriate, adjusts it to safely progress innovation rather than stifle it. In 2019, for example, it issued five new digital bank licenses. Later in the year, it launched the Sandbox Express to help create a faster option for testing innovative financial services in the market.

The open-minded and collaborative approach of these regulatory models marks the future of financial regulation to me. The world is changing quickly and the parameters that keep us secure have to adapt and morph more than ever before. The job is not simple, but it can boost innovation and build a safe and sustainable financial environment, where pioneers are empowered to set the pace for change.

Consumer demand is only one side of the (digital) coin

The other trend creating complexity for regulators is the move towards embedded finance and Big Tech’s involvement in this.

Broadly, embedded finance means that fintech services are expanding beyond the walls of banks and becoming part of other business models rather than a standalone entity. This is a challenge in itself, as regulators will need to be vigilant to ensure that payments, credit and other financial services remain secure and customers are protected.

Across Europe, the US, Latin America, Asia and Africa, governments have also been grappling with how to regulate Big Tech. Facebook, for example, has launched ‘Facebook Financial’ to pursue opportunities in digital payments and e-commerce. Similarly, regulators in Brazil and India have been trying to navigate WhatsApp’s attempts to establish its new payments feature in both markets. These features were suspended by Brazil’s central bank and have been in testing in India for over two years.

The good news is that regulators are paying attention. The pushback we’re seeing is not simply aversion to change, but industry experts exploring how these developments can keep consumer needs at the heart and enhance the current payment ecosystem. New business models and new players are important to keeping us all at the top of our game.

Regulating a changing financial ecosystem

We’re in a truly remarkable age, where the role of regulation is being tested again and again. I believe that regulators have a more vital role to play than ever. Covid-19 has been a powerful catalyst in the financial sector and there is some positive change to be harnessed from the disruption.

If navigated shrewdly, regulators will succeed in capitalising on new trends to retain their core purpose: to ensure the safety and security of the customer and support positive change. The whole industry will need to work together closely to build a regulatory framework that is fertile for innovation and allows us to realise the enormous potential of payments in this new decade. So, what are we waiting for?