In many emerging economies, digital financial services markets are limited to one or two major providers, reducing innovation, customer choice and potentially facilitating monopolistic or cartelistic behavior. Why are DFS markets prone to concentration? Is this a problem? In this primer, CGAP applies a framework to help answer these questions and demonstrate how regulation can have a substantial impact on competitive dynamics in the DFS marketplace. The paper also proposes regulatory levers that policy makers can use to promote more competition. Looking ahead, a competitive landscape becomes especially important given the rising importance of customer data and the entry of large, multinational technology companies into DFS markets.
The argument for robust and fair competition is persuasive. Competition serves customers by promoting innovation and efficiencies, which lead to lower prices, greater choice, better quality services and improved products. At a national level, competition can curb excessive concentration of economic power and potentially reduce operational risks from service outages. From a financial inclusion perspective, more competition also increases the likelihood that DFS will reach low-income people currently excluded or poorly served by the financial sector.