Deposit Insurance and Digital Financial Inclusion
06 October 2016
Answering the question “what is a deposit?” is becoming more difficult as digital financial services continue to evolve rapidly.
Policy makers worldwide are increasingly appreciating the expanding role that digital financial services play in reaching financially excluded and underserved customers. Though models vary widely, all have at their heart a low-cost digital financial product—such as e-money issued by a mobile network operator (MNO) or financial institution—that permits customers to make payments, to transfer money, and to store value in small amounts. This value-storage functionality enables the offering of additional services such as digital credit and off-grid electricity on a “pay as you go” basis—services better tailored to the unpredictable cash flow of poor households and microenterprises.
The rapid scaling of digital stored-value products coincides with a sustained interest (initially triggered by the 2008 global financial crisis) in establishing or strengthening deposit insurance systems, and with emerging frameworks that extend deposit insurance coverage to financial products with characteristics similar to deposits in multiple countries. This Brief summarizes issues relevant to deposit insurance arising from emerging digital stored-value products and offers three distinct approaches for countries to consider—depending on their market structure, the nature of the products in question and their providers, and the approach being taken to deposit insurance generally—so as to address legal uncertainties and improve the protection of digital customer funds.
Answering the question “what is a deposit?” is becoming more difficult as digital financial services continue to evolve rapidly, and as unserved and underserved customers use products in new ways. The appearance of electronic wallets, prepaid plastic or virtual cards, online transaction accounts, and other value-storing instruments is making it harder for authorities, providers, and consumers to identify clearly what products are, or should be, considered deposits—and which are “deposit-like” enough to consider insuring.
The wide range of digital stored-value products and differences in design and implementation of deposit insurance systems across jurisdictions make general prescriptions on deposit insurance treatment of digital deposits and deposit-like stored-value products challenging. This said, three general approaches to deposit insurance for digital stored-value products merit policy maker consideration: (i) the exclusion approach, whereby such products are explicitly excluded from deposit insurance coverage, although other measures to protect customers’ stored value are adopted; (ii) the direct approach, whereby such products are directly insured by a deposit insurer and their providers must be or must become members of the deposit insurance system; and (iii) the pass-through approach, whereby deposit insurance coverage “passes through” a custodial account at a depository institution that is a deposit insurance member and holds customer funds from deposit-like stored-value products, to the individual customer of the digital product provider (although this provider is not a deposit insurance member). This Brief also explores implementation challenges for each of these approaches and suggests topics for further work to improve protection of digital customer funds.