Policy Making and Digital Financial Services
Digital financial services are expanding the possibilities for the financially excluded and underserved to access formal financial services. They are also raising important new regulatory issues for policy makers seeking to ensure these services are delivered responsibly, at a cost affordable to the customer, and sustainable for the providers. In more and more countries, significant numbers of poor and low-income customers are able to transfer funds and store value via digital transactional platforms accessed through mobile phones or other low-cost digital communications infrastructure. A wide range of retail agents transform customers’ cash into electronically stored value and back into cash. The digital transactional data footprint this creates is helping spur offerings of more tailored financial services. Governments are also using digital transactional platforms to deliver an increasing range and volume of payments and benefits, which often carries significant cost savings as well as providing a potential entry point into formal finance for recipients.
Compared with traditional approaches to retail financial service delivery, digital financial inclusion introduces new market participants and allocates roles and risks differently. Key regulatory focus areas concerning digital financial services relate to agents, consumer protection, anti-money laundering and countering the financing of terrorism (AML/CFT), and e-money (what we refer to as the "basic regulatory enablers"). Leading digital financial services markets provide relevant lessons about "emerging regulatory enablers" such as competition, interoperability, agent exclusivity, deposit insurance coverage of digital stored-value products, interest payment on e-money accounts and others. Many of these issues fall within multiple regulators’ competencies, requiring effective communication and collaboration among them.
Examples of policy issues include:
- The use of agents as the primary interface with the customer introduces new consumer protection challenges, such as risk of agent fraud and theft affecting consumers, abusive treatment by agents, inadequacy of recourse roles and arrangements, and agents’ failure to handle customer data confidentially. Many countries are now confronting new agent-related issues, including questions around whether to apply the same rules to bank and non-bank agents where both exist in a given market, who takes on liability for agents’ conduct, and how and by whom agents should be supervised.
- Inclusive payment system regulation that enables participation by banks and non-banks, and effective payment system oversight, take on increasing importance as digital transactional platforms reach scale. Regulation and policies that promote interoperability and interconnectivity will be critical to the success of digital financial inclusion.
- Competition between banks and non-banks for new customers—including the financially excluded and underserved—is present in many markets and may result in lowering of fees, efforts on the part of banks to reduce their operational costs, and the introduction of new products and services. It is therefore important for the success of digital financial inclusion to balance incentives for existing providers to launch new products with high upfront costs and risks, with the long-term goal of a market that is open to new entrants and further innovation on product delivery.
CGAP’s global policy work seeks to advance thought leadership generally on new frontiers in inclusive regulation, supervision and standard setting. Working closely with international financial sector standard-setting bodies and other global organizations, CGAP has been championing the financial inclusion agenda. For instance, as lead Implementing Partner for the GPFI Subgroup on Regulation and SSBs, CGAP contributed to the framework to explore this frontier issue during the third GPFI/FSI Conference on New Frontiers in the Supervision and Oversight of Digital Financial Services, as well as to the Guidance on the application of the Core principles for effective banking supervision to the regulation and supervision of institutions relevant to financial inclusion issued by the Basel Committee for Banking Supervision in 2016.
In addition, CGAP is working in ten focus countries in Africa and Asia on the regulation and supervision of digital financial services and on distilling from these countries lessons of broader interest.
- Digital Financial Inclusion: Implications for Customers, Regulators, Supervisors, and Standard-Setting Bodies
- The Seismic Implications of Digital Financial Inclusion
- Global Standard-Setting Bodies and Financial Inclusion: The Evolving Landscape
- Guidance on the application of Core principles for effective banking supervision to the regulation and supervision of institutions relevant to financial inclusion
- Deposit Insurance and Digital Financial Inclusion
- Supervision of Banks and Nonbanks Operating through Agents
- Emerging Regulatory Enablers in Digital Financial Services