Payment Services Directive II (PSD2) for FinTech and Payment Service Providers

29 Sep 2017

The introduction of the Payment Services Directive II (PSD2) will open up the payment services market by regulating the FinTech revolution currently happening on a community level. The EU-wide harmonization of online payments is aimed at increasing the security for payment transactions and account information and creating a level playing field to enhance competition. PSD2 introduces the Third Party Provider (TPP) as a definition to regulate new payment services. Two new types of TPPs are introduced, namely Account Information Service Providers (‘AISPs’) and Payment Initiation Service Providers (‘PISPs’).

Banks are obligated to open up their IT infrastructure to TPPs. Through the initiation of PSD2, innovative payment services companies are enabled to compete with the banks.

Both AISPs and PISPs will have to comply with the regulatory requirements under PSD2 and perhaps also to apply for a license under the PSD2. The PSD2 licensee is allowed to passport this license to other EU/EEA member states (single license regime), which allows them to provide their services in those countries. Without such license, parties qualifying as a TPP are prohibited to offer their services as per January 13, 2018.

Formalization of the governance and the risk management function is critical: a solid risk management framework needs to be designed and set up including a risk appetite statement, risk management policies and procedures, risk reporting and an internal control framework. This requires extensive strategic, risk management, compliance, IT, legal and HR knowledge and expertise.

Building a Secure and Inclusive Global Financial Ecosystem

08 Sep 2017

The 2017 Brookings Financial and Digital Inclusion Project (FDIP) report evaluates access to and usage of affordable financial services by underserved people across 26 geographically, politically, and economically diverse countries. The report assesses these countries’ financial inclusion ecosystems based on four dimensions of financial inclusion: country commitment, mobile capacity, regulatory environment, and adoption of selected traditional and digital financial services.  The report further examines key developments in the global financial inclusion landscape, highlights selected financial inclusion initiatives within the 26 FDIP countries over the previous year, and provides targeted recommendations aimed at advancing financial inclusion.

Consumer Protection in Digital Credit

30 Aug 2017

Digital credit is a fast-growing phenomenon in many emerging markets. These tiny loans are having a large impact, allowing millions of low-income consumers to borrow money with just a few taps on a phone menu or clicks on an app screen. But digital credit also raises serious consumer protection concerns. Will borrowers really think through their decisions to borrow or just borrow on impulse because access is easy and payment instant? Do we really know enough about consumers to make sure we are sending the right offers to the right borrowers, and not encouraging reckless borrowing? Are we okay with loans that have annual interest rates above 100 percent?

This publication presents both the consumer protection risks and the opportunities for improved consumer use of digital credit. There is not enough being done to implement minimum standards in consumer protection for digital credit, and this exposes the industry and consumers to risks such as credit bubbles and mass-blacklisting of consumers in credit bureaus for just a few dollars of debt. Yet there is also a growing number of providers that are developing innovative new approaches to consumer protection for digital credit products. This Focus Note highlights evidence from CGAP experiments with a diverse range of digital credit providers, and provides clear and direct evidence that consumer protection is not only the right thing to do, but often a wise business decision.

This publication was originally published by CGAP.

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.

Responsible Pricing: Field Evidence

30 Jun 2017

Responsible pricing remains a challenging issue with no clear-cut answers. However, key guidelines and tools have been developed to guide FSPs in strategic decision making. Notably, they include MFTransparency’s proposed approach to defining balanced pricing and the Smart Campaign’s new framework grounded in “assessments by induction” that replaced the market-based comparative approach to assessing fair pricing in client protection certifications. At the core of these frameworks is the understanding that the main variables influencing pricing are profit and operating efficiency, over which FSPs have reasonable control.

MicroFinanza Rating would like to share its experience in assessing responsible pricing and to provide some operational guidance to financial service providers (FSPs) to promote best practices. The recommendations presented here largely draw upon the research and guidance provided by responsible inclusive industry stakeholders, namely MFTransparency, Smart Campaign, and the Social Performance Task Force.

Customer Experience Playbook

16 Jun 2016

CGAP partnered with Janalakshmi, the largest urban microfinance institution in India serving 3 million poor Indian women, and global development advisory, Dalberg, to understand the Janalakshmi customers’ journey and design and test customer experience improvements for them. One of the outputs from this work is this Customer Experience (CX) Playbook, which aims to help FSP staff serving poor customers, to implement customer experience improvements, and ultimately influence their organizations to build a culture of customer-centric innovation.

The CX Playbook is divided into the following eight sections detailing different stages of embedding customercentricity within the organization. Each section contains operating principles and useful tools for each stage. The Playbook also describes typical challenges faced in implementing such projects along with suggested solutions. Use the CX Playbook for either end-to-end CX projects or specific aspects such as user research or CX ideation.

  1. Introduction
  2. Customer Experience (CX) 101
  3.  Managing CX Projects
  4. Customer Research
  5.  Develop CX Ideas
  6. Prototyping
  7. Measuring & Sharing Results
  8. Scaling Up
  9. Adopting a CX Culture

Microfinance Credit Risk Management Tool Guides: Credit Scoring

14 Apr 2016

Scoring is a method of assigning a numerical value (the “score”) to a client in order to predict how likely he or she is relative to others to experience some event or perform some action in the future. This is predicated on the notion that past behavior is indicative of future behavior for populations with similar characteristics. By analyzing a sample of historical client and business data, trends are deduced to better understand (potential) clients and predict future events such as credit repayment. This tool guide focuses on credit scores – a number that represents an assessment of the creditworthiness of a person, or the likelihood that the person will repay a loan. Financial institutions use scoring models to assess the credit risk of a borrower and aid in the credit evaluation processes. A score can be applied along the steps of the microfinance lending methodology, providing objective inputs to make the process more effective and enhance standards and controls. Credit scoring models are not intended to replace loan officers and other commercial staff, but rather to complement and facilitate their work by supporting assessment of willingness to pay.

The Green Index: An Innovative Tool to Assess the Environmental Performance of MFIs

29 Mar 2016

The idea of the Green Index emerged from an observation: in the microfinance sector, there is still no clear understanding of what is meant by “environmental performance in microfinance” and no commonly accepted tool to assess the environmental performance of microfinance institutions (MFIs). The e-MFP Microfinance and Environment Action Group therefore decided to develop a practical tool to assess the environmental performance of a microfinance institution.

The objectives of such a tool are:

  • to foster reflection on environmental responsibility and the triple bottom line approach in microfinance;
  • to promote the integration of green indicators in microfinance performance assessment tools (such as social performance management tools);
  • to have a pedagogical approach by disclosing the main environmental strategies that can be adopted and implemented by an MFI.

The State of Microinsurance: The insider’s guide to understanding the sector

08 Oct 2015

This annual magazine is the result of a major initiative by the Microinsurance Network bringing together some of the most authoritative voices within the field of microinsurance with the objective of taking stock of the sector and providing sector players with an in-depth understanding of the context in which they operate.

In this first edition of the magazine the reader will, amongst other, learn about the state of microinsurance across the globe using data from the World Map of Microinsurance programme, failures and innovations in distribution of microinsurance by MicroEnsure, approaches to regulation across the globe from A2ii, the ILO’s Impact Insurance Facility take on the complexity of assessing and meeting demand, and the role of microinsurance in disaster risk management strategies from the Geneva Association.

Arab Credit Reporting Guide

02 Oct 2015

The Arab Credit Reporting Guide was prepared by IFC’s and AMF’s credit reporting experts as well as external credit reporting experts1. IFC and AMF are grateful for the support from Arab central banks, credit registries in each country and credit bureaus, where present, for their input to the credit information sharing survey distributed and to the case studies presented in this guide. IFC would also like to acknowledge the support of its donors, without whom IFC’s MENA Credit Reporting Program’s activities would not be possible. In specific we would like to thank donors contributing to the MSME Technical Assistance Facility, a joint initiative between IFC and the World Bank. The facility is supported by UKaid, Department of Foreign Affairs, Trade and Development Canada, Danish International Development Agency, Japan, and Switzerland’s State Secretariat for Economic Affairs.

This guide endeavors to inform stakeholders of the credit information industry in MENA, including central banks, CRs, CBs, international agencies, and lending institutions. Importantly, we hope that this guide will focus attention on the development of the industry in the region. The result would bring large benefits to the ultimate stakeholder, the consumer.