Guest Articles

May 30

Anton Didenko / Ross P. Buckley

Finding the Right Balance: A Toolkit for Regulating Digital Financial Services in Emerging Markets

Following concerted international efforts, the number of adults without access to financial services has dropped significantly in recent years, from 2.5 billion in 2011 to 1.7 billion in 2017, according to the World Bank Global Findex Database Report. These improvements have largely arisen from the provision of digital financial services (DFS). DFS are crucial to advancing financial inclusion, and financial regulators in many countries are working had to assist the development of DFS ecosystems. However, finding the right regulatory balance is not easy. Banks are accustomed to prudential regulation and their relatively expensive and profitable business models can afford it. However, such profits are often not on offer from providing DFS and, for this reason, telecommunications companies are typically the providers. However, the full weight of prudential regulation tends to crush DFS provided by telcos, while too little regulation can leave consumers exposed and a service floundering because consumers don’t trust it.


Gateway to Inclusion

In financially inclusive DFS ecosystems, universal access to transaction accounts acts as a gateway to other financial services. This requires commitment from public and private stakeholders, adequate legal and regulatory frameworks, access to information, a stable information and communications technology infrastructure and other relevant measures. Given that many of these requirements are beyond the scope of a financial regulator’s mandate, the regulator must work alongside other regulatory agencies – such as, possibly, those for telecommunications, competition and privacy – to pursue this goal. Numerous other challenges exist, including the emergence of new financial service providers and the need to ensure that mere access to financial services translates into financial usage. Each of these issues must be addressed in an enabling regulatory framework.

A recent paper seeks to address these challenges through a comprehensive analytical framework – what we call the Regulatory Diagnostic Toolkit (RDT). Its key objectives can be summarised as:

  • Reduced barriers to entry for DFS;
  • A level playing field and flexibility in the market to promote innovation;
  • An effective yet proportionate approach to consumer protection;
  • Sustained rapid growth and large-scale volumes of operations and underlying transactions; and
  • Access to market information for providers, while ensuring the security and privacy of customer data.

The RDT should be viewed as a support tool for regulators seeking alignment with international standards and initiatives, while simultaneously responding to the opportunities that DFS present for financial inclusion. The Global Partnership for Financial Inclusion is a leader in such international standards setting. In February 2019, they released their Priorities Paper for the G20 Meeting in Japan. They are joined by the Consultative Group to Assist the Poor, who in May 2018 released a report on “Basic Regulatory Enablers for Digital Financial Services,” and the Alliance for Financial Inclusion, who have published the Maya Declaration and the Denarau Action Plan.


Regulations That Work

The RDT contains both an analytical framework and a step-by-step guide on how to use the framework. It therefore allows regulators to pursue security and efficiency in the DFS ecosystem by providing a complete toolset for assessing, adapting and revising DFS regulatory frameworks.

Application of the RDT begins with a market assessment, in which regulators consider where the market is headed and determine their own objectives for the market, in order to identify any regulatory barriers and gaps. The RDT then presents seven subject domains covering the main regulatory issues connected to DFS. Whilst regulators are not expected to address each subject domain comprehensively in their regime, these domains provide a structured approach to assessing a regulatory framework. Briefly, they include:

  1. Overall Regulatory Architecture: This provides an overview of the country’s DFS regulatory regime to help identify and assess factors that give rise to barriers to wider adoption of DFS.
  2. Building the Ecosystem: This examines dimensions that concern the regulators’ intention and capacity to implement enabling regulation.
  3. Protection of Funds: This assesses the country’s regulatory mechanisms relating to the protection of e-money funds (customer money stored electronically)
  4. The Use of Agents: This examines existing regulatory and contractual arrangements with regard to the use of agents to sell or assist customers in using DFS.
  5. Consumer Protection: This assesses the effectiveness of the country’s financial consumer protection framework.
  6. Anti-Money Laundering/Combating the Financing of Terrorism: This evaluates the balance achieved between implementing proportionate AML/CFT measures and promoting financial inclusion.
  7. Data Privacy: This reviews the regulatory and contractual mechanisms concerning customer data and privacy protection.

The RDT can be applied by a diagnostic team or used by financial regulators to undertake their own assessment.

In conclusion, the RDT provides an analytical framework for financial regulators to use as an objective means to assess, review and refine regulatory frameworks that support DFS. Its application should improve policy development through a structured and data-driven process. We have trialled it once, in the Solomon Islands. We invite other regulators around the developing world to apply, and benefit from, it – and we would be delighted to assist in this process.


Anton Didenko is a research fellow and Ross Buckley is the KPMG Law – King & Wood Mallesons Professor of Disruptive Innovation at the University of New South Wales.


Photo courtesy of picjumbo_com.




Finance, Technology, Telecommunications
digital finance, financial inclusion, fintech, regulations