Ahead of its Group meeting in Geneva on 14 December, Sacha Polverini, Chairman of ITU’s Focus Group on Digital Financial Services, looks at the challenges facing regulators within the sector, and how the work undertaken by various international organizations could provide the right framework to take an emerging new industry to the next level.
With two billion 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, supporting their efforts in lifting themselves out of poverty – and staying out. 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 telcos, 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 had the chance to develop and mature; 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 policy makers 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 systematic manner.
International standard setting bodies (SSBs) 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 measurements that facilitates comparison between one country and another. They are also well positioned to support direct or indirect technical assistance and build capacity locally.
SSBs like the Basel Committee on Banking Supervision (BCBS), the Financial Action Task Force (FATF) and the International Association of Deposit Insurers (IADI) 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 Telecommunication 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 on 14 December.
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 build capacity.
Financial exclusion is an acute challenge that affects over a quarter of the world’s population worldwide. 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.
Sacha Polverini (@sacha279) joined the Bill & Melinda Gates Foundation’s Financial Services for the Poor (FSP) team in December 2012 as Senior Program Officer – Regulation and Policy. A graduate of University L.U.I.S.S Guido Carli in Rome, Sacha holds a Master’s degree in European Political Studies from the Universite’ Libre de Bruxelles. In addition he has completed the post-graduate management program at Solvay Business School, Ecole de Commerce de Solvay, Brussels.