With 2 billon people still unbanked globally, digital financial services (DFS) are providing millions of low-income people with the opportunity to access basic and affordable financial services. A functioning DFS ecosystem requires some key elements, including business models that can profitably handle low-value transactions, an accurate understanding of consumer needs, behaviour and drivers, and a regulatory framework that promotes a healthy and competitive marketplace.
However, regulating DFS in developing countries has proven challenging. DFS is a fast evolving industry with a host of new players such as telecommunications, retailers and alternative payment service providers that until now have not been part of the core financial services mix. Many of the current rules and definitions were developed for an industry that has gone through some major transformations as a result of the financial crisis and technical innovation.
New players require different regulatory approaches. To build the right framework and guidelines, regulators need to first develop a proper understanding of the various risks involved, for both the financial system and end-users.
To properly identify and assess risks, data and experience are essential. With access to the right statistics, regulators can be far more specific about the size and frequency of risk and create more refined risk models. Finding the right balance is critical.
Over-regulation could stifle innovation and kill any industry before it has the chance to develop and mature whereas under-regulation can lead to abuses and excessive risk taking. The right data then needs to be combined with initiatives aimed at building local capacity so that policymakers can leverage past experience and ensure the safety of the financial system.
However, much of the data that helps assess risk, such as size and frequency of fraud, the recurrence of system breakdowns, the number of DFS-related consumer disputes or how often customers’ funds are lost, is largely unavailable to regulators. There are no common global definitions, methodologies or even standards that local regulators can use to start collecting this data in a consistent and systemic manner.
International standard setting bodies have the ability, remit and reach to draw on international best practice and experience. They are ideally placed to help deliver a common set of definitions and measurement that facilitates comparisons between one country and another. They are well positioned to support direct or indirect technical assistance and build capacity locally.
The Basel Committee on Banking Supervision, the Financial Action Task Force and the International Association of Deposit Insurers have been increasingly looking at integrating financial inclusion in their work. Recently, the Committee on Payments and Market Infrastructure from the Bank for International Settlements (BIS) and the World Bank published a joint report looking at how payment systems can increase access to basic financial services.
From a non-financial perspective, the International Telecommunications Union’s Focus Group on DFS for Financial Inclusion has been convening key DFS stakeholders to work on practical guidelines and toolkits that regulators in emerging markets can use to fast-track policy reform. It will host its next round of discussions in Geneva between 6th and 8th December 2016.
These are important initiatives that can provide material support to local decision makers. They now need to be supplemented by more focused activities aimed at collecting data and building capacity. Financial exclusion is an acute challenge that affects over a quarter of the world’s population.
DFS has been delivering some tangible and promising results. But to drive scalable change, regulators are dependent upon securing enough data and experience to address the risk of this new generation of financial products and services.
Much more needs to be done. The work of the BIS, the World Bank, and more recently ITU, is just a start. Establishing best practice and building the right international frameworks need commitment, consistent dialogue and collaboration. Only then will the world have the right institutional mechanisms in place to deliver real change at scale.