In her remarks at CFI’s tenth anniversary symposium, Elisabeth Rhyne mentioned that more than technology itself, the growing number and variety of players involved in the financial inclusion space is the greatest change the sector has seen in the past decade.
This view resonated with the Global Microscope team. Earlier this year, we reviewed the framework for our annual ranking of countries on the enabling environment for financial inclusion. As we created a revised framework, we saw that technology is only part of the story: the diversity of stakeholders also presents a significant change from previous editions.
We saw that technology is only part of the story: the diversity of stakeholders also presents a significant change from previous editions.
The Global Microscope started in 2007 as a study of the regulation of microfinance institutions (MFIs), but today it must address the enabling environment for MFIs, banks, insurance providers, money issuers, cross-border payment providers, fintechs, and banking agents.
There is no clear roadmap to navigate this broadening panorama, and from a regulator’s perspective, this might seem daunting. The temptation might be to limit the actors in the market and continue to operate business as usual. However, the diversity of players is actually key to creating more inclusive ecosystems.
In their recent essay “Getting Policies right in the Digital Era,” Ariadne Plaitakis and Simone di Castri argue that competition and innovation should be added to the policy mandates of financial authorities. When we compare the findings of the 2018 Microscope, which measure regulatory and policy inputs for financial inclusion, to financial inclusion outcomes, we see that greater competition is an important driver in the adoption of digital financial services.
The Microscope evaluated the regulatory frameworks of 55 countries to determine among other things, what are the legal market entry restrictions for e-money issuers. Most countries allow a wide variety of providers, including mobile transfer operators (MTOs), to obtain a license to issue e-money. However, in some countries (16 out of 55) authorities still restrict the type of players that can enter the market, which means that mobile providers have to partner with banks to enter the market.
When we compared the Microscope’s analysis of market entry barriers for e-money issuers to the results of the Global Findex, we found that countries that do not restrict the type of provider that can issue e-money have much higher rates of e-money adoption. The average percentage of mobile money accounts in less restrictive countries is 18 percent compared to a 9 percent average in countries where e-money issuers have to partner with banks. These results give a clear message: let a wide variety of providers operate.
As MTOs consolidate as dominant players in the provision of e-money, promoting interoperability is another key role that regulators can assume to foster greater competition. Peru and Indonesia, two of the Microscope’s top five countries, have made interoperability a cornerstone of their financial inclusion strategies.
Interoperability was also identified as major driver for the uptake of e-money in Madagascar, one of the “surge countries” identified by CFI in its most recent report on the Global Findex. In 2016, Madagascar became the second African country, after Tanzania, to roll out interoperable e-money services. Interoperability also exists at the agent network level, which allows agents to perform transactions for multiple operators.
Between 2014 and 2017, the percentage of adults with access to an account doubled, growing from nine percent to 18 percent. The percentage of adults with a mobile money account grew from four to 12 percent and the percentage of adults who had made or received a digital payment increased from five to 15 percent. The ease to transfer money created by interoperability has been, according to our interviewees, a major driver for financial inclusion in the country. We see a second key message for regulators: lead the market toward interoperability.
The regulatory approach that allowed e-money to flourish has been described as a “test and learn” approach. This means that regulatory authorities allowed these products to evolve with light-touch or ad-hoc regulation. In order to foster fintech innovation, some countries, including Argentina and China, have adopted an even more liberal “wait and see” approach, letting innovative products operate freely in the market. This flexibility has enabled innovation and has become a guiding principle to regulate digital financial services. In 36 of the Microscope countries, regulators have opted to let innovative products grow before setting the rules of the sector.
However, evidence from Kenya and Tanzania, suggest that as emerging services mature, continuing the “test and learn” model can have adverse consequences for competition. For example, in Kenya, e-money providers were not subject to the same transparency rules as other financial services providers until 2016. Transparency requirements encourage providers to compete on quality and price and promote the entrance of new players that can bring lower costs. In the Global Microscope we found variations in market conduct rules between traditional and digital financial services in 22 out of 55 countries. A third key message emerges: keep market conduct rules consistent between traditional and emerging services.
The ascent of e-money gives regulators and policymakers useful insights that can guide decision making as they navigate an increasingly complex landscape. Technology has radically transformed the financial services industry and has a great potential to make services more accessible and tailored to users needs. However, as this year´s Microscope findings suggest, a greater variety of providers can help bring these innovations to populations that have been traditionally underserved.