Regulatory and supervisory authorities overseeing financial service providers face significant challenges emerging from the digitization of financial services. The world of digital financial inclusion is growing at a fast pace — much faster than capacity and resources to tackle it from a regulatory and supervisory standpoint.
The G20 Global Partnership for Financial Inclusion’s recently published white paper acknowledges that lack of supervisory capacity is one of the key challenges to carrying out their mandate effectively. The use of digital technology exacerbates this challenge, as supervisors face issues such as:
- Emerging new risks triggered by the use of digital technology as a primary delivery mechanism
- The use by banks and nonbanks of agents as channels to deliver in-person advice and services
- Licensing and supervision of new types of service providers, including FinTech start-ups;
- Protection of previously unserved and underserved customers
- Cooperation with an increasing number of stakeholders
- Regulators and supervisors are looking for ways to improve their capacity despite the absence of sufficient resources and scattered international guidance.
In response, long-term partners — CGAP and Toronto Centre — joined forces and piloted the first week-long Digital Financial Inclusion Supervision training program in Tanzania.
Pilot in Tanzania
- The pilot was hosted by the Bank of Tanzania in Dar Es Salaam from August 8th to 12th, 2016.
- It was attended by more than 25 regulators, supervisors, economists and policy makers from Ghana, Kenya, Malawi, Tanzania, Uganda, and Zambia.
- International experts, Ros Grady and Kate Lauer, engaged participants in more than 15 different sessions during the week, discussing key concepts, best practices and specific challenges brought by participating countries. They were joined by Calvin Johansson, Program Director at Toronto Centre and former Director of Supervisory Practices at Office of the Superintendent of Financial Institutions in Canada.
- Participants drafted and discussed their own action plans with experts and peers.
The liveliest discussions during the program concerned protection of outstanding e-money balances, clients’ entitlement to interest accrued on trust accounts holding the outstanding balances, supervision of banks’ and nonbanks’ agent networks, and interoperability. These discussions helped to raise important questions that may help the international community, including financial market standard setting bodies, better understand where their guidance is needed most.
The following are some of the questions that arose:
- How does a trust account work in practice? Who owns the interest accrued on the trust account?
- Who is liable for a failed transaction in an agent model, the financial service provider or the agent? How can those models be effectively supervised given the limited supervisory resources available? Should financial service providers be responsible for an agent’s fraud?
- How necessary are know-your-customer (KYC) processes (aimed at verifying the identity of customers) in the digital arena, how much is too much, and what does risk-based KYC mean in practice?
- How can supervisors better cooperate within their own organizations and with external stakeholders?
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