The Need for a Changing Regulatory Landscape for Digital Financial Services

Apr 22, 2017
Tags :
  • Digital Financial Services,
  • Financial Inclusion,
  • Policy and Regulation,
  • GSMA’s recent report titled ‘The Mobile Economy’ for 2017[1] has undertaken a comprehensive scan of the global telecommunications landscape. Given the direct impact of telecommunications on digital financial services (DFS), increase in mobile subscribers presents a growing opportunity for increasing the footprint of DFS.

    The report states that at the end of 2016 there were a recorded 4.8 billion unique mobile subscribers, representing 65 percent of the world’s population while the recorded mobile internet penetration in 2016 was 48 percent of the world’s population, anticipated to grow to 60 percent by 2020. Similarly, in 2016 the mobile industry contributed $ 3.3 trillion to Global GDP, which is likely to grow to $4.2 trillion by 2020 (See Figure 1 and 2 below). A large chunk, 72 percent, of the rapidly increasing mobile subscribers are from ten countries, including Pakistan[2], where an additional 17 million subscribers are anticipated to be added to the current mobile subscriber base of 137,791,721[3] by 2020.


    Source: The Mobile Economy, 2017, GSMA


    Source: The Mobile Economy, 2017, GSMA


    Every new mobile subscription is viewed as an opportunity for expanding financial inclusion through an increased number of mobile wallets. However, to convert a sim owner to a mobile wallet user, enabling regulation is essential. The World Bank suggests that a conducive policy and regulatory environment can create an opportunity for financially including an additional 69.3 million adults in Pakistan.[4] This opportunity is bound to create a significant impact on reaching the target of 50 percent financially included by 2020, identified in the National Financial Inclusion Strategy (NFIS).[5]

    Along with other measures, regulation is a key ingredient that will enable Pakistan to achieve the target adopted under NFIS. The Center for Global Development (CGD) Task Force[6] , a body assigned to “identify needed regulatory changes to increase financial inclusion by encouraging innovation and the use of new technologies, especially those related to digital finance, while protecting consumers and financial stability”[7] , believes that continuous regulatory modifications are essential for adopting and adapting new technologies in DFS, increase their regular usage and for enhancing competition amongst providers for the benefit of the poorer segments of society. Similarly, while various stakeholders take incremental steps towards improving financial inclusion numbers, regulation is imperative for consumer protection and maintaining the integrity of the financial system.

    The CGD task force identifies three focus areas of regulation, including competition policy, levelling the playing field and know-your-customer (KYC) requirements as these directly affect retail payments.

    a. Competition policy refers to enabling ease of entry, and encouraging new providers into the market. However while this is enforced, strong antitrust rules and procedures should be employed to bar entities with exorbitant powers and uncompetitive pricing.

    b. A level playing field promotes healthy competition between providers. In levelling the playing field, the CDG task force suggests that consumers should be protected from fraud and other negative practices through regulation assigning this responsibility to the various providers of financial services including banks, digital service providers (DSP’s) and others.

    c. KYC requirements directly relate to safeguarding the integrity of the financial system by enforcing that financial institutions are aware of who they deal with.[8]

    Analysing the three focus areas identified above in light of Pakistan’s regulatory environment, it is observed that the State Bank of Pakistan’s rules for Payment Service Providers (PSP’s) and Payment Service Operators (PSO’s), initially released in Oct 2014, have allowed easier entry into the market for the respective entities. However the NFIS states that these regulations are constrained by the absence of specification of the roles of PSP’s and PSO’s and assign similar levels of capital for all types PSP’s and PSO’s.[9] Similarly, the Branchless Banking Regulations for Financial Institutions (June 2011) focus on ways to curtail fraudulent practices and enforce KYC requirements. Given Pakistan’s progress towards creating an enabling environment for Pakistan, the Global Microscope ranks the country 5 out of 55 countries[10] for enabling environment for financial inclusion.

    Global practices suggest that DFS ecosystems will not be sustainable until extensive consumer trust is developed and healthy competition is promoted whilst maintaining the integrity of the overall system. In light of this, regulation should be continuously evolving. Although this may prove challenging for regulators, developed countries such as Britain have introduced the concept of a regulatory sandbox. Adopting such practices may allow regulators to meet this challenge and keep pace with innovation.

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    • [7] The Task Force comprises leading experts from around the world with deep knowledge of the challenges for designing and implementing regulations for improving financial inclusion
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