This blog series is following the ways disruptive innovators have entered the market to provide products and services which not only increase consumer welfare, and drive financial inclusion, but also force their competition to up their game. While disruptive innovation generally flows from the private sector, without the appropriate ‘rules of the game’ in place there will be little scope for new entrants to play on the field. That is to say, without a regulatory environment conducive to fostering and promoting innovation, it is likely to be stifled.
Photo Credit: Solene Ducretot
Frank Herbert, the author of the Dune saga, once wrote that “there is little that bureaucrats hate more than innovation”. There are always exceptions, of course, but regulators tend to keep a close eye on ensuring that incumbent firms comply with the rules, rather than looking at innovative firms and products which don’t fit neatly under the regulatory framework. On the other side of the coin, innovative firms may tend to concentrate on their product offering rather than the regulatory environment they are operating in.
In developing economies, the policy approaches of regulators and competition authorities where financial services are taking off has often been fairly laissez faire. Their objective has usually been to avoid stifling innovation or deterring firms from entering and investing in a market. However, this implicitly assumes that it is not possible to have regulation that both protects consumers and promotes competition and innovation. In other words, that there is a tension between ensuring an appropriate degree of consumer protection, facilitating innovation, promoting competition and ensuring financial inclusion.
One regulator which is taking a new approach to this in a developed market is the United Kingdom’s Financial Conduct Authority (FCA), which regulates conduct in UK financial services markets. The FCA recently opened the doors to a new Innovation Hub. This is part of ‘Project Innovate’, an FCA initiative to support innovation where it could genuinely improve the lives of consumers.
There are two main strands to the work of the Innovation Hub. The first is giving direct support to innovators, whether these are regulated firms, start-ups, or unregulated technology businesses.
For example, innovators will be offered help to navigate regulation. They might also receive face-to-face engagement before a formal application to be authorised is submitted. The FCA will also work with firms to test innovative tools, such as improved disclosure practices, and use what it learns to update its rules.
The second main strand of work considers how to adapt the regulatory regime to foster innovation. This involves identifying policies and processes that need to change to support innovation. Roundtables, surgeries and other events will be held to identify burning issues and to ask innovators for their help in designing solutions.
In short, support will be offered to innovator businesses that are looking to introduce groundbreaking or significantly different financial products or services to the market. Flexibility can be introduced to the regulatory framework to support innovation if this would bring benefits to consumers of financial services. This new approach is designed to help the FCA to meet its specific objective of promoting effective competition and also its overarching objective to make markets work well for consumers.
Understanding the role that the competitive environment and, equally importantly, competition policy play in the development of mobile financial services is clearly important for promoting financial inclusion. Supporting innovation can also help regulators meet their objectives such as promoting competition and making markets work well for consumers. CGAP is currently undertaking an analysis to better understand the relationship between competition and financial inclusion, including the regulatory environment, and will be sharing further research on this and other related areas of competition in mobile financial services in the coming months.