Six Tips for Policy on Disruptive Digital Financial Inclusion
This blog is available in Mandarin on the World Bank Voices blog.
Digital technologies are changing the financial inclusion landscape worldwide by revolutionizing access to finance, connecting hundreds of millions to formal financial services for the first time. Financial market regulators, supervisors and overseers are racing to keep pace with these developments, many of which are happening first in emerging market and developing economies, and working to mitigate consumer and other risks.
In Tanzania, mobile money – financial services offered through competing yet interoperable mobile networks – allows poor households to transfer money, pay bills, save in small amounts and access credit and insurance. In China, the explosive growth of digital finance has broadened access to basic financial services outside of the traditional banking sector.
At the 26-27 October Third Conference on Standard-Setting Bodies and Innovative Financial Inclusion in Basel, representatives from standard-setting bodies (SSBs) and other policy makers underlined the benefits of such trends, as well as the need to strike the right balance between encouraging financial innovations and protecting the soundness and integrity of financial systems, and the interests of the new digital financial consumers.
Some key themes emerged:
Digital is different. The product may look similar, but the game has changed. Such technology-driven change is inevitable, and so is the need for new kinds of collaboration. For the policy-making audience, the factors that distinguish digital financial service models from traditional financial service delivery flow from the different risks and benefits associated with them. Approaches to regulation, supervision and payment systems as well as broader market oversight must adapt. The new and shifting risks call for collaboration across a broad range of public actors, at both the country level and the global level. The nature of the innovation also calls for new ways of working with private actors.
Get in the sandbox, and learn by doing! Can we move from enforcement to providing guidance in advance? The rapid growth of financial technology firms – commonly referred to as FinTech – and other new providers and the speed of innovation exacerbate the challenges regulators and supervisors face in remaining sufficiently well-informed to provide timely guidance. Regulatory approaches that allow for testing innovations in a controlled environment can help supervisors to understand the disruption and to foster (or at least not stifle) responsible innovation in the market. Close engagement with innovators could have great benefits for supervisors not only to improve their understanding of market innovations, but also to develop tools that enhance regulatory and supervisory effectiveness.
Trust cannot be just a name on a bank. Digital financial inclusion calls for new thinking on the linkages between consumer protection and financial stability and what that implies for consumer trust. This requires that policy makers re-evaluate the systemic importance of financial consumer protection as digital finance rapidly expands to reach massive numbers of customers. Policy makers also need to re-examine key aspects of traditional approaches to financial consumer protection.
Crowdfunding is a frontier topic, and SSBs and country-level policy makers are waking up to its importance. Crowdfunding and other forms of alternative finance are here to stay, and some of these platforms are reaching lower-income customers who are using them to both lend and borrow. Meanwhile, best practices for regulation and supervision are emerging more slowly than the innovations – this is not surprising, given countries’ widely differing market development, structure and existing regulation.
It’s all about data! The risk of identity fraud undermining consumer protection and the integrity of the financial system is increasing in proportion to the growing number of parties handling the personal data of customers. Financial and data protection regulators must collaborate to better understand the risks facing customers and providers, and explore new technologies that can protect them. In particular, alternative and cost-effective Know Your Customer processes – so-called KYC utilities – should be analyzed by SSBs and supervisors.
At the frontier of the digital financial inclusion revolution, there’s power in peer learning. In fact, the marketplace is evolving so rapidly that learning from peers in the field is the only type of learning that is available. There is further need to build the capacity of policy makers to respond to the disruption brought about by innovations. This includes sharing lessons from countries on the frontlines, such as Tanzania and China, to inform other countries and the work of the SSBs.