MPesa And GCash: Can ‘Lean Regulation’ Be A Gamechanger for Financial Innovation?
Monday, October 7, 2013
Hang around Silicon Valley long enough, and you will hear about the “Lean Startup Approach,” a methodology developed by Steve Blank and popularized by Eric Ries. The Lean Startup Approach emphasizes scientific experimentation, validated learning, iterative product design, and frequent product releases to gain customer feedback so that entrepreneurs can innovate on observed – rather than on pre-supposed – customer needs.
Many prominent Internet software companies — includingIntuit INTU -0.12% and DropBox — employ this philosophy and deliver strong results. However, we have been encouraged to see the Lean Startup Approach taking root in the world of “suit and tie” financial services regulation. We term this trend “Lean Regulation” where regulation is iteratively layered in as the market develops. We have observed this approach being applied more and more in emerging markets, and believe it has relevance to more mature markets as well.
Emerging economies could teach the developing ones a thing or two about mobile financial services innovation. For example, Kenya has witnessed the meteoric rise of M-Pesa (pesa is Swahili for money), a mobile money platform that was incubated at Vodafone VOD -0.63% and seeded with funding from the U.K.’s Department for International Development. Early on, Stephen Mwaura, head of the national payments system, and his colleagues at the Central Bank of Kenya (CBK), adopted a Lean Regulation approach to working with M-Pesa. Through frequent dialogue with M-Pesa, and guided by its technical expertise, CBK took steps to mitigate key systemic risks, while still providing M-Pesa enough room to innovate, evolve and grow. For example, CBK executed an operational risk audit, as well as a survey of 3,000+ customers, which further increased the central bank’s comfort level.