Innovations follow regulations

In the age of AI, the question of regulation looms large. In the rapidly advancing world of artificial intelligence (AI) and fintech, we urgently ask: should innovation come before regulation or is it the other way around?

As Commissioner Rogelio Quevedo of the Securities and Exchange Commission (SEC) shared at the Manila Tech Summit: “It should be technology that leads regulation.”

His view reiterates a vital principle for emerging technologies: innovation must drive regulation, not vice versa. I have seen firsthand how innovation often outpaces regulatory frameworks in this industry. This is common not only in the Philippines but is a global phenomenon as governments struggle to keep pace with the rapid developments in AI, digital finance and blockchain, among many other emerging technologies.

This is due to many factors, such as outdated technology, legacy systems, rigid frameworks and poor digital infrastructure.

However, the danger lies in allowing regulation to stifle innovation rather than guide it. Limits must not constrict us. We can push boundaries.

Take the evolution of mobile technology in the late 1990s as an example. Commissioner Quevedo, who was part of Smart Communications during that transformative era, recounted how regulators were initially slow to adapt to the new wave of mobile communications.

The lesson was clear: had regulation been enforced too rigidly, it might have hindered the growth of mobile telecoms in the country, which today is the backbone of our digital economy.

Similarly, AI is the next transformative force that will shape the future of various sectors, including fintech. AI’s potential to drive efficiency, innovation and financial inclusion is undeniable.

However, regulators should facilitate and guide this innovation, ensuring that AI is used responsibly and ethically to prevent misuse and abuse. At the same time, we should not place rigid constraints on its growth and development.

In our industry, we often encounter this tension between innovation and regulation. Whether launching a new digital banking platform or integrating blockchain solutions into traditional banking infrastructure, the question always arises: how will regulators respond?

In many cases, our approach within Fintech Alliance.Ph has been to engage regulators early, working with them from the get-go and helping them understand the technology before setting rules and regulations. It would be a shame to limit AI’s potential, especially at this ripe time for its blossoming.

AI models are being used to detect unusual transaction patterns for fraud prevention. By analyzing vast amounts of data in real-time, these systems can flag potentially fraudulent activities before they escalate. AI also enhances credit risk assessment by analyzing non-traditional data, such as social media activity, transaction history and online behavior, to offer credit to previously underserved customers.

Furthermore, AI is revolutionizing the customer satisfaction experience. Financial institutions are deploying AI-powered chatbots to provide 24/7 customer support.

These bots can handle basic queries and even provide personalized financial advice, improving customer loyalty and reducing operational costs. AI algorithms fine-tune personalized financial recommendations for investments, savings and offers based on user behavior and preferences. These examples prove that AI is not just a tool for innovation but a vital addition to fintech companies’ workflows. It can help us deliver faster, safer and more efficient customer service.

The balance between innovation and regulation is delicate. Over-regulation can stifle creativity and hinder the adoption of transformative technologies like AI.

On the other hand, poor regulation can lead to risks that threaten financial stability and consumer protection. The European Union (EU) has already made global progress with its AI law, setting a precedent for how governments might regulate this technology.

In March, the European Parliament passed the landmark AI Act, creating the world’s first comprehensive framework for AI regulation. This legislation adopts a risk-based approach, categorizing AI systems into four risk levels: unacceptable, high, medium and low. High-risk systems will face stricter requirements before entering the EU market. The Act’s provisions will be gradually implemented over the next few years, with complete implementation expected by 2027.

The AI Act sets a global standard for AI governance, supported by national agencies and an AI office within the European Commission, fully backed by the public sector and government.

The legislation targets unethical, manipulative or deceptive AI practices, including exploiting vulnerabilities, biometric categorization, social scoring and specific uses of real-time biometric identification in public spaces.

We can take a different approach in the Philippines: fostering innovation while gradually building a regulatory framework that adapts to technological advancements.

Our law should prioritize transparency and accountability. It should be consumer-centric legislation that safeguards individuals, their data and their rights while promoting ethical AI development within the country.

The Philippine fintech ecosystem is crucial in this balancing act. By allowing innovation to lead, regulators can observe the real-life impacts of this life-changing technology and create informed, balanced regulations that protect consumers without hindering technological growth. This approach is imperative for advancing financial inclusion in the Philippines, where dynamic and flexible solutions are needed to reach underserved populations quickly.

By working closely with regulators, we can ensure that innovation flourishes as necessary safeguards are developed in parallel. Innovation must blaze the trail, with regulation guiding its path, paving the road to a more inclusive and digitally empowered future.

Lito Villanueva is the Philippines’ leading thought leader in inclusive digital finance. As EVP and Chief Innovation and Inclusion Officer at RCBC, he has led award-winning digital initiatives at scale. He is also the founding chairman of Fintech Alliance PH, overseeing 95 percent of the nation’s digital retail financial transactions. He is the first global chairman of the South Africa-based Alliance of Digital Finance Associations and a co-founder of the Asia FinTech Alliance.