It has been more than 10 years since CGAP first studied emerging financial services models that use agents as alternative delivery channels and digital technology to connect customers to their financial services providers. We have been exploring the potential to advance financial inclusion through what was then called branchless banking, but nowadays is better known as digital financial services (DFS). What started off as a niche topic is now part of the mainstream of financial inclusion. From the beginning, the creation of an enabling regulatory framework was thought to be one of the drivers of success for DFS.
Ten years ago, in 2008, we published our first comprehensive report on regulating DFS, which identified the key regulatory building blocks. Among these are the four basic regulatory enablers that have guided our work in creating appropriate regulatory frameworks for DFS in 10 countries in Africa and Asia. In this paper, we revisit our experience and share lessons gleaned from our in-country work.
Enabler 1. Nonbank E-Money Issuance. A basic requirement is to create a specialized licensing window for nonbank DFS providers to issue e-money accounts (also called prepaid or stored-value accounts) without being subject to the full range of prudential rules applicable to commercial banks and without being permitted to intermediate funds.
Enabler 2. Use of Agents. DFS providers—both banks and nonbanks—are permitted to use third-party agents, such as retail shops, to provide customers access to their services.
Enabler 3. Risk-Based Customer Due Diligence (CDD). A proportionate anti-money laundering framework is adopted, allowing simplified CDD for lower-risk accounts and transactions. The latter may include opening and using e-money accounts and conducting over-the-counter transactions with DFS providers.
Enabler 4. Consumer Protection. Consumer protection rules are tailored to the full range of DFS providers and products—providing a necessary margin of safety and confidence.
There is little doubt that these four enablers are necessary (though not sufficient) conditions for DFS to flourish. What is less known is how countries can address the four enablers in their regulatory frameworks and what we can learn from this. This Focus Note distills the main elements that need to be addressed in regulation for each of the four enablers from our experiences in 10 countries: Kenya, Rwanda, Tanzania, and Uganda in East Africa; Côte d’Ivoire and Ghana in West Africa; Bangladesh, India, and Pakistan in East Asia; and Myanmar in Southeast Asia. It reflects on the different ways these countries have implemented the enablers and what their experiences have been. It does not recommend a single best approach, but provides a point of reference for policy makers and regulators to help them implement an appropriate regulatory framework for DFS.
Each country in our study had its own approach that took into account the influence of the market, the political economy, the broader regulatory system, the level of technological development and innovation, and cultural and historical experiences that were unique to each country. Despite these differences in country context, the basic regulatory enablers have proven to be key in laying the foundation for a thriving DFS market.