Building an enabling regulatory framework is fundamental for fostering inclusive digital financial services (DFS), but it is not enough. Supervision is essential for the effective implementation of regulations and to ensure that DFS providers identify, manage and mitigate their risks and comply with minimum requirements. Without effective supervision, DFS providers may take excessive risks that could jeopardize financial inclusion, consumer protection, integrity or stability. There are two aspects to effective DFS supervision:
- Proportionality: it must be scaled in line with the DFS provider’s business model, complexity and risk profile, otherwise supervision could impose excessive compliance costs that impact the provider’s viability and ability to cater to underserved populations. Proportionality demands a solid knowledge of DFS business models, their benefits and risks, and it should be applied in all phases of DFS supervision— from licensing and authorization, to enforcement—to avoid stifling innovation.
- Risk-based: Integral to proportionality is that supervisory procedures should be adapted to the risk profile of DFS providers. This helps authorities optimize their use of scarce resources and avoid stifling DFS innovation and growth.
Three areas that merit the attention of DFS supervisors are electronic money issuers, data collection, and agent networks.
Supervision of E-Money Issuers
A regulatory window for nonbank e-money issuers (EMIs) is a basic enabler for creating inclusive DFS, but there is no single recipe for their supervision. What is proportional in one country can be disproportionate in another; hence it requires understanding the EMIs’ business and risk profiles. For example, while EMIs take funds from customers, unlike banks, they do not extend credit, which changes their risk profiles. Proportional but effective EMI supervision at the least should cover fund safeguarding, operational and technology risks including cybersecurity, anti-money laundering/combating the financing of terrorism (AML/CFT), and consumer protection.
Data for DFS Supervision
Supervisors face challenges keeping pace with rapid innovation and the widening range of DFS providers. Quality data – reliable, timely, complete, and readily accessible data— are crucial for proportional and effective DFS supervision in this fast-changing environment. Supervisors must define what data they need to collect, in which format and frequency, and set up data collection mechanisms that ensure the data quality. To improve their data, DFS supervisors can benefit from advances in supervisory technology (SupTech).
Supervision of Agent Networks
Agents are a fundamental feature of DFS business models across the globe. Their sheer number in emerging markets often raises concern about how they can be effectively supervised. Fortunately, supervisors can focus on the DFS providers themselves, rather than directly on agents. The main concerns related to the use of agents are operational and consumer risks, and AML/CFT issues. Proportional supervision requires assessing the effectiveness of the internal controls and risk management practices adopted by DFS providers, not the agents in their networks.
Photo by Bastian As, 2015 CGAP Photo Contest