Policy makers and regulators worldwide are developing an increasing appreciation for the expanding role that digital financial services play in reaching financially excluded and underserved customers. Global standard-setting bodies (SSBs) are also increasingly recognizing the significant implications these developments hold for them.
A new white paper from The Global Partnership for Financial Inclusion (GPFI) offers a roadmap through some of the most critical issues facing country-level policy makers, regulators and supervisors and the SSBs, and seeks to guide them on how to bring more people into the formal financial system through digital channels, while also protecting systemic stability, preventing financial crimes such as money-laundering and terrorist financing, and protecting financial consumers.
The deliberations of the Financial Stability Board and SSBs headquartered in places like Basel, Paris, and Madrid may appear far removed from the realities facing financial inclusion advocates on the ground in emerging market and development economies. Yet to compete in the global economy, countries across the income spectrum must work within the frameworks established by SSB standards and guidance.
All seven of the most relevant SSBs are showing increasing ownership of financial inclusion issues, taking on new workstreams, revising their standards, issuing new guidance, and participating in international events that have deepened their relationship with the GPFI and their interest in financial inclusion. This is in response, not only to encouragement from the G20 and advocates such as United Nations Secretary General’s Special Advocate for Inclusive Finance for Development Her Majesty Queen Máxima of the Netherlands, but importantly also in response to demand from their country members for guidance in navigating the fast changing landscape.
How could digital financial inclusion change everything for the SSBs?
The new digital business models, in which non-bank and even non-financial firms typically play leading roles, the new digital products and suites of bundled products often specifically targeting financial excluded and underserved customers and based on cutting-edge data analytics, and the profile and behaviors of the new digital customers themselves all challenge country-level regulation and SSB standards and guidance developed with the traditional financial sector paradigm in mind. They are changing the nature, and also the level, of risks with which the SSBs deal. These changes can be seismic in the speed and scale depending on the market. They also raise many crosscutting topics relevant to the core mandates of multiple SSBs – and on which they must collaborate in order to give coherent guidance to country level policy makers, regulators and supervisors.
A few examples, all addressed in recommendations for action in the GPFI White Paper, illustrate the changing picture:
Frontier issues in financial consumer protection: Protecting customers figures importantly in the mandates of many of the SSBs, and they need to collaborate to guide country level regulators and supervisors faced with payment products, transaction accounts, savings, credit, insurance – even investment products – all offered digitally to financially excluded and underserved customers. There are many more actors in digital finance —banks, non-bank financial institutions, non-financial firms, and agents—than in traditional retail banking and insurance, and their roles often vary in the digital context. This means that existing protections may be misdirected. The use of agents as the primary interface with customers in particular changes the consumer protection dynamic, including new types of fraud. The digital products themselves also bring with them novel consumer protection challenges, such how to disclose terms on hand-held mobile devices, as well as data privacy and confidentiality issues. Among the most important consumer protection challenges in digital financial inclusion relate to the distinguishing characteristics of excluded and underserved customers, including the possibility – or even likelihood – that digital services will be first formal financial services they use.
Competition in interoperability: The extent to which customers of competing digital financial service providers are able to transact business with each other, and the role—if any—that regulation and regulators, payment system overseers, or supervisors should play in working towards this objective, are fundamental issues in digital financial inclusion. For both SSBs and country-level financial sector policy makers, the competition and interoperability issues are more complicated in the digital context if mobile phones are involved, given the involvement of mobile network operators and telecommunications authorities.
Crowdfunding: Crowdfunding and other peer-to-peer financial services are expanding rapidly in varying country contexts, with market participants and market observers striving to keep pace with and assess developments. Policy makers have limited—and only recent—experience in the regulation and supervision of crowdfunding, and thus far such experience is primarily in developed economies with well-regulated capital markets and established financial consumer protection frameworks. Both the SSBs and country-level policymakers recognize the tension between encouraging market-based funding, particularly of micro, small, and medium enterprises often not well served by the banking sector, while also protecting consumers. In the digital financial inclusion context, this calls for attention to both ends of the crowdfunding transaction, given that both borrowers and lenders may be unsophisticated. As crowdfunding grows, so will the need to consider its financial integrity and even financial stability ramifications – topics implicating core objectives of multiple SSBs.