Financial Stability Implications from FinTech

30 Aug 2017

Technology-enabled innovation in financial services (FinTech) is developing rapidly. With its emergence, there will be both opportunities and risks to financial stability that policymakers, regulators, supervisors and overseers should consider. This is particularly important as many innovations have not yet been tested through a full financial cycle, and decisions taken in this early stage may set important precedents. Policymakers should continue to assess the adequacy of their regulatory frameworks as adoption of FinTech increases, with the objective of harnessing the benefits while mitigating risks. In this regard, the German G20 Presidency, as part of its focus on digitalisation, has suggested that the Financial Stability Board (FSB) build on the monitoring to date and identify supervisory and regulatory issues of FinTech that merit authorities’ attention from a financial stability perspective.

Currently, any assessment of the financial stability implications of FinTech is challenging given the limited availability of official and privately disclosed data. It will be important to take into account materiality and risks in evaluating new areas. It will also be important to understand how business models of start-ups and incumbents, and the market structure, are changing.

To draw out the supervisory and regulatory issues of FinTech, the FSB developed a framework that defines the scope of FinTech activities and identifies the potential benefits and risks to financial stability. It provides a basis on which future analysis and monitoring can be made. As most FinTech activities are currently small compared to the overall financial system, the analysis focuses on conceivable benefits and risks. Nonetheless, international bodies and national authorities should consider taking FinTech into account in their existing risk assessments and regulatory frameworks in light of its rapid evolution. Indeed, many authorities have already made regulatory changes to adapt to FinTech activities.

Digital Financial Inclusion: Emerging Policy Approaches

01 Jul 2017

This report examines how countries are implementing measures in line with the G20 High-Level Principles for Digital Financial Inclusion (HLPs) published in 2016—aiming at catalyzing government actions to drive financial inclusion through a focus on digital technologies.  Digital financial services, together with effective oversight and supervision, can expand the scale, scope and reach of financial services, and are essential to closing the remaining gaps in financial inclusion. Digital technologies also offer affordable and convenient ways for individuals, households and businesses to save, make payments, access credit, and obtain insurance.

Digital Financial Services and Risk Management Handbook

28 Sep 2016

The last decade has seen a wave of innovative financial services aimed at serving the unbanked populations in emerging markets. Low-income individuals, microentrepreneurs and rural populations that were previously left out of the market due to the high costs of physical expansion are now accessing financial services through mobile phones and networks of agents acting as representatives of financial service providers. This has resulted in a remarkably rapid increase in financial inclusion in some countries. In other markets adoption has been slower and the results are less catalytic, but all markets are growing and are expected to continue to do so as services and products develop. It is expected that the expansion of digital financial services will make an important contribution towards the goal of reaching universal financial access by 2020.

However, with the many opportunities provided by ground-breaking technology and innovative business operations also come new risks. The risks related to implementing digital financial services extend far beyond operational and technical risks. In order for the financial inclusion industry to be able to capitalize fully on the benefits of digital financial services, it is important that the accompanying risks are understood and adequately addressed. In this fast evolving field, it has become apparent that what matters to one provider matters to all as large cases of fraud, for example, affect not just consumer trust in one provider but in the market and promise of digital financial inclusion as a whole.

The Partnership for Financial Inclusion is a joint initiative of IFC and the MasterCard Foundation to expand microfinance and advance digital financial services in Sub-Saharan Africa. Through the interactions with clients of the program as well as the broader industry in the region and beyond, we identified a need for a handbook on how best to handle risk management for digital financial services. <Read the Handbook>

Responsible Digital Payments Guidelines

21 Jul 2016

The Better Than Cash Alliance ‘Responsible Digital Payments Guidelines’ identify eight good practices for engaging with clients who are sending or receiving digital payments and who have previously been financially excluded or underserved.

The focus of the Guidelines is on the common types of digital payments services provided to the financially underserved such as electronic money transaction accounts. For clients to adopt and use digital payments, they need to feel protected from risks such as loss of privacy, exposure to fraud, and unauthorized fees. This means that service providers need to proactively take steps to protect their clients and that regulators should ensure a sound consumer protection regulatory framework.

This is especially true for financially excluded and underserved clients and those with low financial and technological capability who are participating in a world of rapid innovation involving new types of financial services, providers, partnerships, and distribution channels. In an inclusive digital payments ecosystem, it is important for all the stakeholders to do their part to ensure that digital payments are made responsibly.

The Guidelines’ aim is to provide a helpful tool for all stakeholders supporting responsible practices in the move from cash to digital payments in order to reduce poverty and drive inclusive growth.

A Market Systems Approach to Financial Inclusion Guidelines for Funders

11 May 2016

Impressive gains have been made toward increasing access to finance for poor and low income people since Good Practice Guidelines for Funders of Microfinance was published in 2006. During this time we have seen major progress in terms of achieving sustainability and scale with the introduction of new product offerings, development of innovative business models, technology-enabled delivery channels, and the engagement of a much broader range of private and public actors, both in terms of financial service providers (FSPs) as well as funders. Policy makers have increasingly recognized that access to and use of formal financial services not only have a positive impact at the client and household levels but, if done sustainably and at scale, can have a broader positive impact on national economic development by helping to lower transaction costs, manage risks, and even mitigate economic inequality, a development objective shared by funders and policy makers alike (Karpowicz 2014; Dabla-Norris, et al. 2015; Turegano and Garcia-Herrero 2015).

Understanding the potential impact of financial services for households and economies, policy makers, practitioners, and funders have shifted their focus from classic microfinance, the provision of financial services to the poor by specialized service providers, to financial inclusion, a state where both individuals and businesses have opportunities to access, and the ability to use a diverse range of appropriate financial services that are responsibly and sustainably provided by formal financial institutions. This move reflects a growing recognition that microfinance is just one entry point among many (e.g., government-to-people payment schemes, small and medium enterprise finance, digital financial services [DFS], “no-frills” bank accounts, etc.) for achieving universal financial inclusion and its associated social and economic development goals.

Mobile Money Services – Design and Development for Financial Inclusion

27 Apr 2016

Mobile money services are being deployed rapidly across emerging markets as a key tool to further the goal of financial inclusion. Financial inclusion, the development of novel methods to enable individuals at the base of the pyramid to access formal financial services and become part of the formal financial system, is considered a key pre-requisite for lifting these populations out of poverty and for driving economic growth.

There have been some notable successes, such as Vodafone / Safaricom’s M-Pesa in Kenya. Within five years of its launch, M-Pesa had 15 million customers, equivalent to 37.5% of the country’s population, and was processing $10 billion annually. However, the success of mobile money services more broadly has been limited – in its 2012 Mobile Money Adoption Survey of mobile money services in emerging markets targeting the unbanked, GSMA identified only 14 “sprinters,” or those services which were scaling rapidly, out of the 150 total such services. Even replicating successful services in additional geographies has proven challenging, including efforts by Vodafone to take the M-Pesa model to other countries in which it operates, such as South Africa. In addition, mobile money operators do not seem to have, a-priori, a good sense for which factors will determine the ultimate success of a deployment. Yet, the pace of new deployments is only accelerating, and given these past results and the apparent challenge in learning from them, it is likely that many new deployments will also prove less than successful.

Therefore, in this research, we analyzed an array of mobile money deployments from across the emerging markets to attempt to understand which characteristics are critical for the success of a mobile money service, particularly at launch. Our research covered five successful mobile money deployments – Telesom ZAAD in Somaliland, Dialog eZ Cash in Sri Lanka, Econet EcoCash in Zimbabwe, SMART Communications SMART Money in the Philippines, and Globe Telecom GCASH in the Philippines – and five less successful deployments – Vodacom M-Pesa in South Africa, MTN m-money in Uganda, Eko Financial Services in India, and the broader situations in Nigeria and Brazil.

Assessing Price Fairness in Microfinance A framing note to inform the Evolution of the Client Protection Standards

13 Apr 2016

In the context of the Evolution of Standards of the Smart Campaign and its Responsible Pricing work stream, the Smart Campaign commissioned special research on alternative analysis methods for credit product pricing. This paper aims to provide an alternative to the market based comparative approach used for evaluating pricing for credit products under standards 1.0.

The Smart Campaign certification process currently (version 1.0) applies a market test to determine responsible prices: as long as an institution‟s prices are in line with its market peers, its prices are considered responsible. This test was selected rather than other measures because can be applied in a straightforward way. Nevertheless, the Secretariat, Certification Committee and the Smart Campaign Steering Committee have identified challenges linked to a market-based approach in the analysis of responsible prices for the purpose of financial institution certification (SC standard 4.1.1.) including:

  • Markets are at different levels of maturity and not always functioning well (e.g., high priced markets, monopolistic or oligopolistic environment).
  • The presence of “market leaders” in certain markets raises the question of whether leading institutions should be held to higher standards in terms of pricing, given their influence on the market as a whole.
  • There is often difficulty achieving relevance and consistency in the creation of peer groups for pricing comparisons.
  • The scarcity and poor quality of pricing data makes pricing comparisons challenging. The purpose of this project is to examine these issues and make recommendations on how to address them in the standard-setting and certification process

Protecting the poor: A microinsurance compendium

09 Apr 2015

“Protecting the Poor: A microinsurance compendium, volume II”, is a unique collection of recent practices and emerging ideas in microinsurance. It covers the numerous innovations that have emerged in recent years to meet the challenges of providing insurance to low-income people, from new products and delivery channels to consumer education tools, while examining institutional changes in regulations, providers and schemes. 

As the microinsurance community dramatically evolves and millions more low-income households have access to better insurance cover, this timely second volume will be an invaluable resource for policy-makers, insurers, academics and NGOs.

Digital Financial Inclusion: Implications for Customers, Regulators, Supervisors, and Standard-Setting Bodies

11 Mar 2015

With the prospect of reaching billions of new customers, banks and nonbanks have begun to offer digital financial services for financially excluded and underserved populations, building on the approaches that have been used for years to improve access channels for those already served by banks and other financial institutions. Innovative digital financial services involving the use of mobile phones have been launched in more than 80 countries (GSMA 2014).1 As a result of the significant advances in the accessibility and affordability provided by digital financial services, millions of poor customers are moving from exclusively cash-based transactions to formal financial services. The benefits of this development include economic growth and stability, both for the customers and for the economies where they and their families reside. However, the use of digital financial services by formerly excluded customers brings not only benefits but also risks, due in part to the characteristics of a typical poor customer (inexperienced with formal financial services and unfamiliar with consumer rights). Some of the risks are new while others, although well known, may take on different dimensions in the financial inclusion context.

This Brief aims to provide national and global policy makers with a clear picture of the rapid development of digital financial services for the poor and the need for their attention and informed understanding. It proposes a concise definition of “digital financial inclusion” and summarizes its impact on financially excluded and underserved populations; outlines the new and shifting risks of digital financial inclusion models that are significant to regulators, supervisors, and standard-setting bodies (SSBs); and concludes with observations on digital financial inclusion issues on the policy-making horizon.

Credit Reporting Knowledge Guide

26 Aug 2014

In 2001, the International Finance Corporation (IFC) launched the Global Credit Bureau Program, later renamed the Global Credit Reporting Program, to better reflect the nature of its operations. The objective of this second edition of the Credit Reporting Knowledge Guide is to disseminate best practices in credit reporting development, and to contribute to credit information sharing in emerging markets. Since the program was launched, it has helped develop favorable credit reporting environments in more than 60 countries, principally through technical assistance. This assistance has included support to the regional credit bureau in Central America and the first credit bureaus established in the Arab Republic of Egypt, Cambodia, Morocco, and Tajikistan; work on the legal and regulatory framework in Kenya and Panama; and ongoing assistance toward the development of credit reporting systems in Mongolia, the Solomon Islands, Sierra Leone, Tanzania, Liberia, Azerbaijan, and other countries. Since 2002, IFC has also partnered with the World Bank to monitor credit reporting environments in more than 180 countries. Annual survey results are incorporated into the annual Doing Business report and disseminated to governments, bureaus, registries, creditors, and other interested stakeholders. Through this combination of analytical and operational work, IFC and the World Bank have become recognized as leaders in credit reporting development in emerging markets.