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.
E-Money Issuance by Nonbanks
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Use of Agents
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.
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.