What’s next for how governments use fintech?
In what areas are central government departments exploring the possibilities of using fintech solutions? What obstacles lie in the way? Global Government Fintech organised a webinar with panellists from the German, UK and Spanish governments to find out
Government authorities are increasingly interested in procuring and embedding fintech solutions into their operations to improve what they do.
The trend is driven by factors including the growing appetite for digital delivery of government services; the evolution and proliferation of fintech solutions available; and, in some quarters at least, increasing awareness among public servants of those solutions.
As examples, Belgium’s tax authority and the UK’s Cabinet Office have engaged a fintech company (Quantexa) to help tackle fraud; UK government procurement agency the Crown Commercial Service has set up a ‘Debt Resolution Services’ supplier roster that aims to increase the use of fintech solutions in areas such as data aggregation; and, also in the UK, HM Revenue & Customs has blazed a trail globally by engaging a fintech company (Ecospend) to enable the department to receive payments via open banking.
But government use of fintech remains an emerging area, with a mismatch between the ability and speed with which governments are either willing or able to on-board fintech solutions and the smörgåsbord of solutions available.
With 2022 drawing to a close, Global Government Fintech held a discussion on 17 November to ask: ‘Fintech and the future: where is the greatest potential for central governments’ use of fintech solutions?’.
The conversation, which featured panellists from the German, UK and Spanish governments, took stock of administrations’ engagement with fintech solutions to date, explored barriers to take-up and identified areas seen as having greatest promise.
‘There’s still work to do’
Doris Dietze, head of digital finance, payment services and cybersecurity in Germany’s Federal Ministry of Finance, began by outlining government initiatives to foster what she described as a “lively fintech ecosystem” in Europe’s largest economy.
These include a Digital Finance Forum (effectively an advisory board to the ministry that involves representatives from established businesses as well as fintech firms); a ‘Start-Up Strategy’ (released in July); a ‘Future Financing Act’ (whose first draft was published this month); and, importantly given Germany’s 16 federal states, regional initiatives such as fintech hubs.
Dietze also summarised the broader context of the federal administration boosting its investment in digital technologies and skills. “We do see that we need a different approach to how government and government agencies want to provide services to the greater public,” she said. “There’s a lot already done, however there’s still work to do, and things that could be improved.”
The finance ministry has set up an ‘Innovation Hub’; ‘digital fellowships’ to improve tech-related knowledge (“because if governments want to use fintech solutions they have to be aware of what they’re using, how it functions and how it could be implemented in traditional services”); and has ‘digital agents’ (advocates) across all policy areas.
“If you put these two things together – a lively fintech ecosystem and the way governments or agencies innovate more or train to innovate – there’s potential for fintech solutions in government,” Dietze said.
So, Germany’s government is seeking to nurture what could be seen as pre-requisites for a government to procure fintech solutions. “In theory, there are a lot of possibilities,” Dietze said. “But in practice, it gets a bit more complex.”
‘Framework, restrictions and regulations’
Dietze specified areas including blockchain and digital identity (ID) as among the fintech-relevant areas with greatest interest for government, as well as payment initiation (a payment method made possible by open banking) and artificial intelligence (AI). The latter, she said, “can play a huge role” helping regulators in both anti-money laundering (AML) and combatting the financing of terrorism (CFT).
Some areas, of course, overlap and are not necessarily labelled as ‘fintech’. “Digital identities… is not a pure fintech solution”, she pointed out.
So, what are the obstacles to adoption? Dietze began by mentioning “frameworks, restrictions and regulations, which make it a bit more complex compared to private-to-private co-operation”.
Challenges have also arisen internally as to the extent to which it is necessary to buy in fintech solutions, explore public-private partnerships (with fintechs) or whether “government itself should provide [the] technical solution[s]”, she said.
Read more: Getting into gear: governments get organised for fintech
Other considerations include scrutiny from the Federal Court of Auditors and parliamentarians over value-for-money, as well as public procurement rules. “One of the criteria in procurement law, for example, is that a company we co-operate with [needs to have] a sound and reliable company structure,” she explained. “This is normally the case for every traditional big company, however there could be the case that if you have a fast-growing small company, you somehow have to estimate whether the service you are buying in will not only be reliable for one year, but also for the next 10 years.”
Dietze rounded off her opening remarks by stating that governments have much to learn from fintechs, “especially when it comes to the question [of] how to innovate and how to be more digital”. But also that the opposite is the case, particularly in respect of companies needing to “bear in mind that [solutions] have to work for everyone, be reliable and fit for the population as a whole”.
‘Rich portfolio of fintech capabilities’
A UK perspective was provided by Chris Dix, who joined the Cabinet Office earlier this year as chief technology officer for security vetting. Having previously working in a technology role at the BBC, he described many applications of fintech and “challenges around” fintech as being “pretty generic, certainly across public-sector organisations”.
“There’s clearly a rich portfolio of fintech capabilities, which opens up a broad set of innovation opportunities for government,” he said, citing areas including mobile banking payments and blockchain.
Data sits at the heart of many fintech applications, he pointed out, describing the number of “data points that we have” as growing by the day. This presents a challenge but also opportunity in terms of how government “manages and uses that data effectively, rather than just storing it”, he said.
It is crucial to ensure data is being “treated appropriately”, he emphasised. “There are companies that probably share the right ethical thoughts in terms of how we will use data in the right way, some others maybe not as much because it’s a different business model for them. So, there’s some real considerations there,” he continued.
He then made a broader point: that consideration of fintech solutions, and the benefits they can bring, is significantly more than (just) a technology discussion, with “managing the impact of applying fintech” also very important. Turning to technology, he said, should trigger fundamental questions about workers’ future roles and also how organisations “maintain a certain level” of knowledge.
Value-for-money imperative
Dix’s own fintech-related areas of interest include hyper-automation (automating everything that can be automated), biometrics (automated recognition of individuals by means of unique physical characteristics) and open banking. Hyper-automation, he said, helps deliver services such as chatboxes (instant messaging), which can help replace “repetitive, low-value, high-volume tasks”, improve citizen experiences and “generate new capacity”.
He also mentioned the importance of generating good ‘feedback loops’ when applying deep learning (a subset of machine learning), as well as his interest in federated learning (a further machine learning technique) and whether this is “really available at scale” and “truly understood”.
He then evolved his point about the importance of focusing on outcomes when exploring the use of fintech solutions. “It’s very easy to dress something up and make it shiny but actually, what outcomes does it bring us?,” he asked rhetorically. “The question for me is: how do we validate these offerings against security and privacy, as examples of two dimensions of measuring maturity and relevance.”
Dix ended his opening remarks by making the same point as Dietze in that while the “huge landscape of enabling innovation” offers many opportunities for government, there is a need to ensure that choices “demonstrate good value for public money” and adhere to procurement rules.
“There’s not really an off-the-shelf ‘big win’ in a lot of these [fintech opportunities],” he said. “So, I think in government it is really good for us to observe, work within the market, within academia, identify the right technologies… and sift through [private sector solutions] using quite a robust framework to make sure we’re making the right choices for the right reasons, and not just because it’s maybe the shiniest of things out there.”
Regulation is the priority
Andrés Barragán, director of the Technical and Financial Analysis Office in Spain’s Public Treasury (part of the Ministry of Economic Affairs and Digital Transformation), described central government’s consideration and use of fintech solutions as presenting a “huge challenge” but also a “very important” opportunity.
“We’re very interested in introducing [fintech solutions] and we know the number of advantages that we can get from these technologies,” he said. “We have to keep up with technology because otherwise we will lose [the potential to capitalise on] what the private sector is doing, and the technology that people are demanding, and there are many areas in which some fintech solutions are very well appreciated.”
But first regulation is essential for the use of fintech solutions in the private sector and – then – in the public sector. “This means at least two steps for regulation,” he explained.
With Spain being (as Germany is) a European Union member state, laws developed in Brussels are important. Barragán referenced the EU’s Regulation on Markets in Crypto Assets (MiCA) and Digital Operational Resilience Act (DORA). But Spain’s authorities can, of course, take their own actions to license projects: for example, a Spanish fintech regulatory sandbox has been created, welcoming its first cohort of projects last year (further sandboxes for sectors including transport have since been created).
Regulatory handbrakes aside, the surge in availability of digital data, including financial data, has created largely untapped possibilities for policymaking and policy delivery, Barragán said – echoing one of Dix’s observations.
“Governments have a lot of data and we actually make very little use of that data, not only in terms of payments, taxes or spending, but also when we design policy – and this is probably where data is most valuable for us: trying to understand what society is doing, how money is being spent,” he said, adding that while lawmakers need to ensure regulation keeps pace with technological developments, data- and technology-driven analysis can also help inform law-making.
Fintech at the tech frontier
Barragán also mentioned the challenge of defining fintech. He said, for example, that the Public Treasury has introduced “a lot of technologies to digitalise processes” that would not necessarily be fintech solutions; and also that many fintech-related solutions sit beyond fintech’s payments heartland in areas such as AI, cloud computing and digital ID.
But nonetheless, fintech has growing saliency and companies “pushing” their solutions have growing visibility. While digital identity is “not a financial solution from the administration’s point of view”, Barragán said that fintech companies often lead the way in terms of innovation in this particular area.
He went on to highlight two specific areas – AML and blockchain – where Spain’s public administration is “beginning to collaborate [and] introduce these technologies”.
Read more: Shifting sands: governments strive to drive fintech growth
In terms of AML, he said that although the administration had not yet introduced a fintech solution, it had taken the step of outsourcing “exploration and interpretation” of data.
In respect of blockchain he referred to Spain’s multi-sector public-permissioned blockchain platform Alastria. This sees the Public Treasury, Bank of Spain (central bank) and other public authorities collaborating with the private sector. “It is a very important experience – not something [that] is actually [yet] communicating in terms of financial transactions, but we [now] understand the technology,” he said.
Improving interactions
One shared challenge for government authorities and those providing fintech services is how they interact. Whereas big corporations are typically well plugged in to government opportunities, start-ups can struggle – an issue that, of course, affects outsourcing in general.
“You want to be able to interact with smaller businesses, to be able to help enhance their products, and bring good value back into the market,” said Dix. “But sometimes start-ups cannot be as agile as we need them to be,” he continued. “Sometimes there’s a huge amount of work for them to meet the prerequisites for a government organisation to be able to use technology in a certain way. And sometimes that can just be too much.”
But mechanisms exist to try and support smaller businesses, Dix said, adding that big organisations can also sometimes lack agility as “their direction of travel is their direction of travel”.
But it is easy to imagine fintech providers finding the challenge of navigating government – let alone spotting opportunities – as bewildering.
“I think governments probably need to explain very clearly what services they need and for what services, in which area, they could think of using fintechs,” said Dietze.
“I sometimes get the impression that from the outside, especially for the private sector, that it’s not always easy to understand how governments really function when they provide services, and what restraints we are in,” she added.
‘Greatest risk is not doing anything’
Overall the governments represented during the discussion were united in their positivity around fintech’s possibilities.
“It is very clear that there are a broad set of opportunities, technologies and suppliers,” concluded Dix. “Technology maturity is clearly going to vary, as is the agility of fintech suppliers,” he continued. “A shared set of principles across government would be useful to help with adoption. I think we need to create the right conditions for fintech to thrive in government – but not [first] by choosing technology, it’s defining the problem that we’re trying to solve.”
“There are many opportunities,” reflected Barragán. “The greatest risk is not doing anything. We need to learn that this technology, it will come. These fintech solutions [are] probably the right answer to some challenges for citizens, for governments. That’s the reason why we need to collaborate and we’re very open to do so.”
Given the rate at which technology progresses, it will always be a case of governments battling to keep up. But the webinar’s three contributors offered a great deal for fintech fans to cheer as the sector strives to achieve uptake of its solutions.
To find out more, you can watch the full Fintech and the future: where is the greatest potential for central governments’ use of fintech solutions? webinar on our dedicated event page. The webinar was hosted by Global Government Fintech – the sister title of Global Government Forum – on 17 November 2022.
About Ian Hall
Ian is editor of Global Government Fintech a sister publication to Global Government Forum. Ian also writes for media including City AM and #DisruptionBanking. He is former UK director for the pan-European media network Euractiv (2011-2018), editor of Public Affairs News (2007-2011) and news editor of PR Week (2000-2007). He was shortlisted for ‘Editor of the Year’ at the British Society of Magazine Editors (BSME) Awards in 2010. He began his career in Bulgaria at English-language weekly the Sofia Echo. Ian has an MA in Urban and Regional Change in Europe and a BA in Economics, both from Durham University.
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