Boat Dealers in Aswan. Photo by Mustafa Shorbaji, 2018 CGAP Photo Contest Photo by Mustafa Shorbaji, 2018 CGAP Photo Contest

Regulation for Inclusive Digital Finance

An Enabling Regulatory Framework is Critical for Financial Inclusion

Digital financial services (DFS) have become the leading driver of inclusion for the unbanked around the world, particularly in developing countries. What makes this possible is not only innovation in products and technology but regulation. A complex set of rules underlies the ability of ordinary people to access financial services conveniently and safely through a few simple steps at the point of service – usually a mobile phone or a shop. For this to happen, legislators and central bankers must ensure that regulations in such areas as banking, payments, consumer protection, and anti-money laundering fit together to form an enabling framework.

How can regulation enable DFS for inclusive finance? First, a legal basis is necessary for a range of providers to serve the underbanked and unbanked, using a variety of delivery channels. These may include bank and nonbank providers as well as networks of agents – each with distinct strengths in serving clients across the country. Second, regulation supplies the mechanism for dealing collectively with the risks that DFS pose to customers and the financial system. Third, the way in which DFS-specific rules are developed and applied can (and should) accommodate innovation while promoting safety. The ideal is a balanced or proportionate regulatory system that enables and protects but avoids imposing undue compliance costs on (often low-margin) DFS providers.

The Four Basic Enablers 

What steps can regulators take to promote financial inclusion through digital financial services?  Based on its work in 10 countries in Africa and Asia, CGAP has identified four building blocks for creating an enabling and safe DFS regulatory framework. 

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E-Money Issuance by Nonbanks

A basic enabling condition for DFS is a special licensing window for nonbank e-money issuers (EMIs). Like banks, EMIs collect funds from customers based on a promise to repay, but EMIs cannot extend credit or engage in risky banking operations. Hence, EMIs have a much lower risk profile than banks and require less oversight. They issue e-money accounts free from many of the prudential safeguards applied to traditional banks. This opens the DFS market to new providers such as mobile network operators (MNOs) and specialized payment services providers (PSPs), which are often more successful in reaching the mass market. The EMIs store customer funds converted into e-money (“e-float”) in basic transaction accounts, but are not authorized to intermediate those funds. Special rules are needed to protect the e-float – e.g. requiring fund isolation and investment in safe, liquid assets.
Photo by Moksumul Haque, 2016 CGAP Photo Contest Photo by Moksumul Haque, 2016 CGAP Photo Contest



What happens to interest earned on float accounts? CGAP believe that electronic money issuers should be allowed – but not required – to distribute some or all of the float interest to their e-money customers.

A special licensing category for nonbank e-money issuers is considered a key regulatory enabler for inclusive digital financial services. This Technical Note compares the EMI license with the payments bank license that India, Mexico and Nigeria have created.

The expansion of digital financial accounts among poor customers has raised the question of whether e-money should be covered by deposit insurance and if so, how. This Technical Note examines the options while arguing that deposit insurance should not be the first line of defense in many emerging markets.

This Technical Note looks in detail at safeguards such as maintaining customer funds in bank accounts and diversifying funds across several banks to reduce the concentration risk. It also discusses the option – offered in some countries – of placing funds in other safe, liquid assets.
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Use of Agents

Retail agents make inclusive DFS possible and are therefore a key focus of enabling regulation. Providers use agents - third parties such as retail shops - to provide customers easy access to their services close to where they live, thus expanding their outreach at low cost. The sheer number of these agents poses a challenge for regulatory oversight. Regulation targets the licensed DFS provider, which is legally responsible for actions taken on its behalf by agents. Supervisors assess providers’ systems for monitoring agents, e.g. internal controls and risk management practices. Another issue of concern to regulators is setting eligibility standards – who can become an agent (or a certain type of agent) and what qualifications are required. The question also arises of uniform versus differentiated standards for DFS agents. Frequently, agency rules are adopted piecemeal, so that agents dealing with different types of providers, accounts, or activities may have separate and distinct rules.
Photo by Mahfuzual Hasan Bhuiyan, 2015 CGAP Photo Contest Photo by Mahfuzual Hasan Bhuiyan, 2015 CGAP Photo Contest



Agents play a crucial role in lowering the cost of delivery to reach the unbanked and underbanked population. An increasing number of countries, especially emerging markets and developing economies, allow a diverse array of banks and nonbank institutions to distribute digital financial services through agents.

Regulations often give big financial institutions near total control over mobile money cash-in/cash-out networks. Changing the rules would enable small entrepreneurs to play a bigger role in building last-mile cash networks.

Mobile money and banking agents blend seamlessly into the daily economic lives of consumers in countries like Kenya and Uganda, offering convenience and expanding access points to financial services. But agent exclusivity clauses can limit customers' choices.
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Risk-Based Customer Due Diligence 

DFS operate within regulatory contexts shaped by policies on anti-money laundering and countering the financing of terrorism (AML/CFT). Proportionate AML/CFT frameworks use a risk-based approach to protect the integrity of the system while imposing the least burden on DFS outreach. This means allowing simplified customer due diligence (CDD) for lower-risk accounts and transactions, as recommended by the Financial Action Task Force (FATF) in its international guidance. Applying this approach eases providers’ costs of customer acquisition and ongoing transaction monitoring while bringing more people into the formal financial sector. A common risk-based approach is to create risk tiers in which CDD procedures of varying intensity are applied. The tiers are tied to the kinds of accounts or transactions provided, the types of clients, and the modalities of account opening and transacting (e.g., in-person or not). In the meantime, advances in ID systems in several countries are reducing cost and risk, while expanding inclusion.

Photo by Aswin Antony, 2017 CGAP Photo Contest Photo by Aswin Antony, 2017 CGAP Photo Contest



Regulators face a challenge in balancing policies on anti-money laundering and combating the financing of terrorism against their financial inclusion goals. This Technical Note provides guidance on using risk-based approaches to customer due diligence, with examples from around the world.

If financial services providers are going to work together to improve customer due diligence, more flexibility will be required to exchange customers’ information responsibly.

Financial services providers, regulators and financial intelligence agencies around the world are working more closely together on customer due diligence, often with the help of new technologies. How can financial inclusion benefit?
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Consumer Protection

In order to drive financial inclusion, DFS must cultivate trust and reliability, and this in turn depends on effective financial consumer protection (FCP). Absent such protection, services may expand, but achieving a sustainable, inclusive market over the long term would be difficult. Transparency and disclosure requirements are core features of FCP, along with standards of fair dealing. Accountability to customers and regulators demands that each provider set up a system for handling customer complaints. Further, electronic transactions pose some special risks to consumers. Providing certainty here requires standards of digital platform reliability and protection against mistaken or unauthorized transactions. The growth of DFS models based on massive collection and exploitation of customer data has also prompted regulation dealing with protection of customer data, restrictions on its use, and localization of storage. Last, as with agent regulations, FCP rules are not always consistent for different providers and products.
Photo by Chara Lata Sharma, 2017 CGAP Photo Contest Photo by Chara Lata Sharma, 2017 CGAP Photo Contest



Exploring the potential impact of incorporating the collective voice of consumers into financial sector policy and regulation, and opportunities for funders to help elevate these voices.  

Here are three steps that regulators can take to advance a customer outcomes-based approach to financial consumer protection.

With the customer outcomes-based approach emerging as a promising consumer protection paradigm, this research identifies the core components of the approach that help authorities make financial consumer protection regulation more customer-centric.

Consent forms are the backbone of data protection efforts worldwide, but there’s a problem: no one reads them. To protect people’s data, policy makers must go beyond consent.
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CGAP’s experiments with a diverse range of financial service providers have found that innovative approaches to digital credit can improve the products and improve consumer protection, which often is a wise business decision.

Additional Resources

Successful development of DFS regulation pays careful attention to wider contextual factors and competing policy objectives. These objectives can be summarized as inclusion, stability, integrity, and consumer protection (I-SIP). Policy processes should identify I-SIP linkages and work to maximize synergies while minimizing negative outcomes. Experience shows that achieving such a balance requires experimentation and iteration.


A how-to guide for financial sector policy makers on successfully managing the interplay among four core objectives – financial inclusion, stability, integrity and consumer protection.