Analysis
EU Values Foresight
Security
Building Civic Resilience: Challenges and Solutions in Central Europe
12 December 2024
More regulation in fintech and legislatures will hopefully move quickly to plug the security gaps already lingering in products available to the public.
Currently, the financial sector – unlike many others – is very highly regulated and to be able to operate there, most companies need a license which requires government oversight by a regulator, usually in the form of a national bank or another authority that is reviewing the processes that a company utilises.
The most obvious areas of fintech which are important from a security perspective are the financing of terrorism, illegal activities and money laundering. In these areas, there is an EU directive that governs the sector and tries to introduce some safeguards against illegal activity.
Another important part that combines fintech and national security is the misuse of personal data, which can be misappropriated in various ways, from financial scoring to controlling the monetary flows of customers or companies.
The third area of larger concern is the very financial stability of a country; this is a contemporary issue hotly disputed in assemblies and organisations across the continent. Many concerns relate to digital currencies since as we transition to a using these new digital legal tenders, national banks could gain even stronger tools to govern financial stability.
However, the situation becomes murkier when you include private digital currencies like Facebook’s Libra, which could greatly destabilise the financial well-being of a nation.
Lastly, hacking is still considered one of the most intrusive and problematic issues when it comes to financial security. It could lead to instances where money cannot be withdrawn from ATMs, which would create mass panic and social upheaval.
Lack of knowledge
One topic plaguing fintech national security is that politicians and civil servants are not up-to-date with the current advances in technology as well as the inherently conservative nature of the financial sector, which may be resistant to new advances that will disrupt what is currently a well-regulated environment.
In this case, it should be said that regulators will always be a little behind market developments, and perhaps necessarily so. When gaps in regulation occur, the companies can choose to exploit them or help the government and associated NGOs find effective and appropriate methods of oversight.
However, regulators cannot stop fintech activity because they stem from either a global drive or because innovation will always find its way.
A case in point, the Central Bank of Hungary realised that they could not stop the development of the market, and noted that there were some efficiency problems with the incumbent financial sector. The financial supervisor wanted the tech sector to catalyse the digital transformation of all of the incumbents because the final objective of the central bank is, of course, to provide the customers with the modern, affordable, personalised and safe financial services.
The solution for them was an innovation hub where companies, including incumbent institutions, could directly contact the regulator with specific questions and trial fintech products and that lead to the broadening supply of innovative products and services.
Hidden dangers
Where the situation gets more frightening when you combine machine learning, bots and general AI for scoring purposes to get a more complete image of someone’s financial prospects.
How and where this data is stored, especially if the product is not that of an incumbent institution but an independent operator is of great concern to both nations and individuals.
Moreover, what if this information is used for different purposes, such as whether or not a company will provide insurance or, in some countries, even access to public services like transport?
An example closer to home involves the company PPF, which has ties to Russia and China, offering targeted products for those in Czechia.
When someone applies for a loan through PPF, they must agree to the company’s scanning of your mobile phone and all your contacts. The approval of your loan may be determined by the collated information of the social scoring for all those in your digital Rolodex to determine if you are a reliable person or not.
These types of practices could lead to whole communities being left behind and unable to achieve the necessary capital to develop their communities.
Instances like the above highlight the need for more regulation in fintech and legislatures will hopefully move quickly to plug the gaps already lingering in products available to the public.
This is a summary of a discussion with Maria Staszkiewicz (CEO, Czech Fintech Association) and Anikó Szombati (Executive Director, Central Bank of Hungary) at the New Europe 100 Forum 2.0 on 10-11 December 2020, edited by Galan Dall, Editor-at-Large of Visegrad Insight. Find out more about the New Europe 100 network here. For updates, follow us on Facebook, Twitter and LinkedIn.
The interview is part of a project supported by the International Visegrad Fund.
