Tools for Supervisors
While regulators in many developing economies have made substantial progress toward putting in place basic regulatory enablers for inclusive digital financial services (DFS), progress has been slower in building effective risk-based supervision of DFS, due to reasons such as competing priorities, lack of resources and expertise.
This Guide aims to help supervisory authorities in developing countries where DFS is pivotal for financial inclusion. It offers practical guidance on the design and implementation of a risk-based supervisory approach focused on nonbank DFS providers and highlights common implementation challenges.
CGAP's Market Monitoring Toolkit aims to help supervisors identify, understand, and track financial consumer risks, behaviors, and outcomes which allow for more preemptive and forward-looking supervisory work.
Three areas that merit the attention of DFS supervisors are electronic money issuers, data collection, and agent networks.
Supervision of E-Money Issuers
A regulatory window for nonbank e-money issuers (EMIs) is a basic enabler for creating inclusive DFS, but there is no single recipe for their supervision. What is proportional in one country can be disproportionate in another; hence it requires understanding the EMIs’ business and risk profiles. For example, while EMIs take funds from customers, unlike banks, they do not extend credit, which changes their risk profiles. Proportional but effective EMI supervision at the least should cover fund safeguarding, operational and technology risks including cybersecurity, anti-money laundering/combating the financing of terrorism (AML/CFT), and consumer protection.
Data for DFS Supervision
Supervisors face challenges keeping pace with rapid innovation and the widening range of DFS providers. Quality data – reliable, timely, complete, and readily accessible data— are crucial for proportional and effective DFS supervision in this fast-changing environment. Supervisors must define what data they need to collect, in which format and frequency, and set up data collection mechanisms that ensure the data quality. To improve their data, DFS supervisors can benefit from advances in supervisory technology (SupTech).
Supervision of Agent Networks
Agents are a fundamental feature of DFS business models across the globe. Their sheer number in emerging markets often raises concern about how they can be effectively supervised. Fortunately, supervisors can focus on the DFS providers themselves, rather than directly on agents. The main concerns related to the use of agents are operational and consumer risks, and AML/CFT issues. Proportional supervision requires assessing the effectiveness of the internal controls and risk management practices adopted by DFS providers, not the agents in their networks.
Photo by Bastian As, 2015 CGAP Photo Contest