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This edition of In conversation with is done in collaboration with Fintech Connect Asia, which was held from October 11th - 13th in Singapore.

Thank you everyone for joining us for another In Conversation With, in collaboration with FinTech Connect. We’re happy to have Jean Pesme here with us. Jean is the global director of finance for the World Bank and we are really excited to have this conversation with him. Jean, thanks for taking the time. Just to start off, why don't you give us a brief introduction of yourself and the work that you do at the World Bank.

Thank you very much for the invitation, it's really a pleasure to participate in this discussion. My name is Jean. I'm the global director for finance at the World Bank. My team and I work on the global engagements of the Bank, which involve working with the standard setting bodies, the Financial Stability Board, Cross-border Payments Program, , the Basel committee, the Financial Action Task Force (FTAF) on integrity issues etc. Our role is to represent the Bank and engage in the development of global standards so that development issues and emerging market challenges are considered.

The financial sector assessment program, which is a joint diagnostic tool with the IMF, is another important component of our work. This is important to ensure that the global community and each country put in place mechanisms that will facilitate and secure the stability and resilience of the financial system, while also supporting households, firms etc. Our work also involves thinking of the future. So, what's finance going to look like in three or five years? What are the issues that are going to come up? We discuss the transformation of finance and anticipate what may be the issues now to prepare our client countries. And then finally we work with our colleagues in the region, with all the operational teams in the Bank, on country issues. When it gets cutting edge, technical, and very innovative, then the global team supports those regions and makes sure that we bring to problem-solving the best practices. When we work on innovative ideas we do it with a proper understanding of risks and rewards.

That's great. Thanks Jean. Definitely, I want to get to that future and help countries prepare for the future, but I want to look at the past a little bit first. One of the things you mentioned was financial stability and that's obviously been a key part of the financial ecosystem over the past few years as we've dealt with this pandemic. How has the nature and direction of your work changed as a result of the pandemic?

There have been many changes but let me start with stability. For once we have a global crisis that is not coming from the financial sector but where the financial sector has been part of the solution. I think we should not forget the extent to which financial sector entities supported the economy. A significant amount of liquidity was provided by the central banks at that time. In addition, since many of the tools used were inherited from the great financial crisis, they went much further.  

Liquidity support ensures that the system is working and that there are no tensions, and that's an important part. Another area of concern was that many firms struggled to survive because there was no economic activity. Unlike the Global Financial Crisis, when liquidity supported firms to absorb the shock, and they were okay, during the pandemic, despite the support, the economy still contracted. As support is lifted, there is concern about the potential failures of larger corporations, resulting in tension on bank balance sheets.

Another new element that we observed during the pandemic and since then is the increase in exposure of banks to the Sovereign (the State) in developing countries. So, we are really concerned about stability vulnerabilities in our client countries and in the banking sector. Part of our work has been to assist in the design of the support measures – you want to support but you don't want to create problems for the future. How to do it in a way that creates balance and consistency is important. Then, how to withdraw the support and do it in a way that minimizes the risk? Many countries that have done it and are doing very well. We also engage with countries and advice them on forbearance measures because otherwise, you are creating opacity and vulnerability in the system. These issues are an important part of our research this year.

A lot of that is related to managing corporate credit risk in the system, financial sector, sovereign, and household sectors, making sure that we exit properly. So, part of it is the work with the regulators, but my team is also working on insolvency – how do we ensure a proper insolvency regime for the country so that they can address any vulnerability with the corporates.  

The other part of the work has been digital finance which has sped up and exploded thanks to the pandemic; I think it's transformational and we really need to realize how much has happened. The World Bank issued its latest Findex numbers in June. There has since been a significant improvement in access to finance and the evidence shows that a lot of that is linked to digital finance.

We need to sustain those efforts and continue to push the digital finance agenda to close the inclusion gap. This is where the team has been working. So, lots of opportunities, and lots of risks to continue to manage. We are not yet out of the woods and given what's happening in the global economy, the stability of risk remains and then we need to go back to important agendas like climate, finance.

That's a really good overview – thanks Jean. Looking at the progress made during the pandemic, do you feel that the global financial industry is in better shape than it was five years ago?

As you know, there were lots of concerns at the start of the pandemic about what may happen in the financial sector. And I think the regulators are saying that the tough reforms that were put in place after the great financial crisis have proven to have been right. Because of the capital adequacy of the banking sector, regulators and central banks were able to use tools effectively and expand them. I think overall we are in better shape. We also have many more new players There is also an increasing recognition that these come with potentially huge opportunities also some risk. And we may come to that discussion on e-money, crypto assets, etc.

But I think there has been an acceleration. Finance is a means to an end. The development of the digital economy more generally without the proper financial system to support, is not going to work. Because everyone has moved much more digital than in the past. The ability of finance to support is important. There are important vulnerabilities. We tend to think about vulnerabilities in the banking sector. There are vulnerabilities outside of the banking sector as well and you just look at the news quite a bit is happening now. But overall, the financial sector has shown its ability to be resilient but also to bring innovation and support the real economy.

At FinTech Connect you'll be talking on a panel around CBDCs, many people have said, ‘this is the answer to financial inclusion.’ And if you look at the implementation of the ECNY in China, the fact that you can do offline transactions, and the fact that there's a card associated with the transactions, that might be true in certain cases. What is your take on CBDCs and their role in financial inclusion? And maybe you can comment on what governments need to do to get CBDCs right to accomplish this.

The first thing to remember is that only very few countries in the world have active CBDC. There is a lot of discussion on CBDC and an increasing number of central banks and public authorities are considering CBDC, having pilots looking at design issues, and testing. There is a lot of technical innovation behind that. But only two countries as of today have fully fleshed CBDCs issued.

The first element is to nuance a little bit of where we are. Now I think all the work that is done by authorities in many central banks on what could be done domestically and cross-border on CBDC is really important. Also, it's really raising fundamental questions on the role of money, the role of the central bank, and public money versus private money. So, we come back to some fundamentals, it's not just a technical and an IT or tech discussion.

Our view is that CBDC is not the silver bullet to addressing the financial inclusion issue. Our focus is more on helping countries go through a kind of framework, pros, and cons, what are the elements to consider, and then optimizing opportunities, and reducing risks. But we don't think that CBDC can suddenly resolve all the financial inclusion issues. And even if you think about CBDC, we need to make an impact, you have wholesale CBDC and retail CBDC. Wholesale, I think has a lot of potential. A lot of countries are now saying that they would consider it, and a lot are also much more careful about retail. And then in the retail design issue, the central bank goes directly to the client, or is this intermediated by the financial system? If you don't go through the financial system, then you have a significant risk of disintermediation, which could go against another objective of financing the real economy. So, at the moment, this shows where we are in considering the pros and cons, helping countries think it through, but also emphasizing that there are real opportunities, and we need to look at that.

The flip side of this conversation then of course is crypto. Increasingly we're looking at organizations that are thinking about using crypto for humanitarian aid and other kinds of last-mile delivery solutions to address a lot of the challenges that cash in an envelope presents. When you look at the role of crypto in both financially included and excluded individuals, what do you see as the future within the financial industry?

The first thing before going directly to your question is to impact a little bit on what we are talking about. You have e-money, which is electronic money that is provided also by banks, by new players. I mean you see the big tech beginning to do that, et cetera, which is a bit different from crypto. Then you have crypto and a Bitcoin and others and then you have stable bitcoins and then you have digital currency. So sometimes all of that is a bit confusing. That makes the discussion very difficult because we may not always understand exactly what we are talking about. It is also important to focus on what is your end objective. As an example, improving the payment system is very important, but there are many ways to do that without going to crypto at all.

Faster payments, use of e-money, new e-wallets give merchants more choice, and you can deliver on all of that with the proper regulation facilitating the entry of new players without going to crypto. Our concern on crypto is that now it's more of a speculative asset. Then you need informed investors in our client countries; the general public is not an informed investor and then you have issues of consumer protection, potential fraud, and abuse of the system. That's why we don't think that crypto is actually the proper tool as a means of payment for many. We would rather go with the fast payment element, and we need to be careful also about making sure that users completely understand the risk. And that's why for the moment we look at it a bit more as a speculative asset. Now as you've seen global bodies are looking at crypto much more than in the past.

The FSB for instance is looking at that and is moving from ‘let's monitor’ to the ‘risks that are appearing including stability risk.’ So, we need to be a bit careful. This is an on-going discussion, and again, what's really is being fact-based, understanding the underlying technology, and underlying financial services and then making sure that people take informed decisions.

Regulators, in general, are crucial for enabling innovation and change positively and negatively. What do you feel in your opinion, are they getting right and where could they improve?

The speech that Ravi Menon, the Director of the Monetary Authority of Singapore, gave on crypto is really, really good, really interesting. And I really encourage people to read and listen because, in addition to laying out what is the stance of MAS on crypto, it's also extremely didactic and pedagogical. What are we talking about? And make sure that everybody understands what's behind and what is the financial risk. So, on your question, I think there is a spectrum. You go to regulators that are extremely open and facilitate innovation. But then there is an element of understanding risk categories and you have some that are probably too conservative and where we would want them to open the market a little bit. So, I think when you see the evolution over the last five years, fostering innovation and creating space is much more present than used to be the case.

Now the job of the regulator and supervisor is to think about risk. They tend to be a little conservative. We have much more evidence that there is huge benefit including financial inclusion facilitating the economy and that the risk is manageable. For the ones who tend to be a bit conservative, in our policy discussion, we are trying to push them to be more open and help new players. I think there are two fundamental issues, one is to provide the proper legal framework and recognition of these new technologies. Second, facilitate the entry of new players. Technologically, we tend to say fintech is about new entrants, about disruptors, fintech is also the new way to provide classical services including buying incumbents. But you want to ensure that there is competition and that there is innovation.

Opening the market and making sure that these non-bank service providers are able to access the payment system is usually the first step before the provision of savings, provision of credit. That issue of new players and differentiating regulation is really important. Another part of the discussion is how to offer direct access to payment services, and how the payment infrastructure to this new player is important for reducing costs, improving competition, and facilitating innovation. In May this year we published a report called the Future of Finance. It’s about the transformation of finance and trying to go the full spectrum. What are the issues, supervision, and regulation? What is the issue of competition? There is a significant issue on data and privacy with some of them very new to the financial sector. I think this is the part where it's a kind of ecosystem that needs to be built.

But our message in the report was that there is scope for innovation as we have all these mechanisms to create a safe space for innovation. I think these are all the elements where there's much more to be done and get inspired by those regulators that have learned and tested, but also those that failed. So yes, open-eyed innovation possibly brings new players into the system and helps focus more on services, and less on institutions.

If we focus a little bit on the Asia Pacific, where do you see the key opportunities and challenges within the region both for the work that you're doing at the World Bank and just in general for the industry?

It's a big region, so the situation is quite diverse from one country to the other. And also, you have major global and regional players where the evolution of the financial system is obviously going to have an influence and impact on the rest. So, I would say a couple of things:

Stability remains an important element. It's important that countries continue to have a strong stability system but also crisis preparedness. And there are a couple of countries where there is ongoing work on stability issues or addressing problem banks etc. And it's really important to continue to do that and make sure that the instruments are in place but also are being used when this is needed. The second element is financial inclusion, so lots of improvement. I think you made a very interesting comment on Findex '14, '17, and from now. Huge improvement in the previous run but a lot of focus on this improvement in a couple of countries.

And what we are seeing with the new numbers is that closing the gap on financial inclusion now is brought by a greater number of countries. India and China used to drive the global element, now we see other countries hence an improvement. So, I think that we need to continue to improve and focus on the gender gap. There is a significant issue with the gender gap and our sense is that one of the demands there is to increase the volume. That means the issue of government-to-people payment is really fundamental because once you have volume then you create an economy that makes sense, merchants will come in. So now the systems are in place, but we need to raise the tide for them. Another element which is very important in Asia, is that the region requires long-term finance. A lot of work needs to be done to diversify the system so that it is not over-reliant on banking, and private capital is mobilized.  And then climate change, this is a region very exposed to the climate. The financial sector angle of climate is important. And actually, we see a lot of the Asian countries that are very active in the global discussion. So balancing of the short term and medium to long term is very important. We see a lot of countries moving in this direction. We continue to support the development of their financial systems and  their stability.

What keeps you up at night? What worries you about the current situation with the financial system?

I think what worries me now is the level of vulnerabilities in the financial system. And it's not just COVID-related but lots of things are happening at the moment that creates new risks or that may make existing vulnerabilities a bit sharper than they were. So, I think there is still that element of concern that requires a lot of monitoring. That also requires making sure that each country has in place what is needed. We see when you have a systemic financial crisis in a country, we see how much devastation that brings. Look at Sri Lanka now, exiting the situation is very difficult, and the social and poverty impact is huge. So that's one of the things that keeps me awake at night.

The second element that is keeping me awake at night is really financial inclusion and digital finance; the potential is large and there are a lot of things to be done.

The level of innovation in emerging markets and developing countries is huge, sometimes more than in advanced economies. This is a really exciting element. The financial sector is being transformed, so that's really inspiring. It's keeping me inspired versus keeping me at night concerned. And then the last but not the least element is that our finance can continue to contribute to the global public good. Climate is a brilliant example but look the needs of the world and developing countries in terms of investments are huge, and public finance is not going to solve that. So how to channel and mobilize private capital for all these objectives is really important. You said climate mitigation, Asia has an important role to play. Resilience is also super important and these are things on which we need to work even more.

Thinking ahead five years from now when we're back for FinTech Connect in 2027, what do you think will have surprised us about the development of the financial industry?

I think we are currently in the middle of a tech revolution.  So I really expect a transformation there. I mean where were we five years ago in terms of using digital finance and where are we today, I expect a lot of changes in that aspect. I hope we would have solved some of the really challenging issues such as cross-border payments. It's sometimes a bit forgotten, but once again a very important subset. So, in a globalized economy, your ability to pay cross-border is essential. And I mean as you know, there is a big roadmap on that. I hope that in five years we would have seen really significant changes and things would have improved from a development perspective, reducing the cost of remittance thanks to a more effective cross-border payment that can have a huge impact on families in developing countries.

 I also think it is extremely important to pay attention to privacy, and data protection in the context of finance. We don't want to overplay, we don't want to fragment the system, but I think that's something on which I would expect that we would need to get to the next level. There are all these new players with very different angles on competition. But I think in order to maintain the trust in the system, we need to work on that collectively.  

That's a great way to tie things off. Jean, thank you so much for your time. Looking forward to seeing you at FinTech Connect here in a couple of weeks on the panel with the CBDCs. Again, this has been In Conversation With, with Kapronasia. Thanks again, Jean, really appreciated having you here.

Thank you very much.