Financial inclusion through technology: the regulator perspective

  • John PALMER, Toronto Centre 
  • Speakers
  • Ghiyazuddin Ali MOHAMMAD, AFI 
  • Socorro HEYSEN, Superintendencia de Banca, Seguros y AFP, Peru
  • Dirk ZETZSCHE, University of Luxembourg

    John PALMER opened the session by affirming that there are exciting developments taking place in financial inclusion, which stands as an important vehicle to alleviate poverty and empower women and girls. One of these exciting developments is the emergence of FinTech. In turn, FinTech creates challenges and dangers for inclusive microfinance customers and intermediaries, and requires the involvement of regulators and other national authorities in a balancing act, helping protect customers from abuse and preventing financial systems from destabilising. However at the same time, trying not to suppress responsible innovation and fostering innovation that enhances financial inclusion. He then contextualised the role of the Toronto Centre in preparing regulators to be part of the solution to innovations in financial inclusion, and not the problem. 

    After briefly introducing the panellists, Palmer explained the structure of the session, composed of different rounds of questions and a Q&A with the audience. 


    Palmer’s first question was directed to Ghiyazuddin Ali MOHAMMAD, and revolved around the four pillars of the strategic framework for digital transformation, as published in a recent paper from AFI. Ghiyazuddin clarified that the framework consists of leveraging the existing infrastructure of digital financial inclusion, and includes a: 1) Digital ID and eKYC; 2) Open electronic payment system; 3) Account Opening & digitisation of payments; and 4) Value-added services strategy. He further noted that these pillars should not be prescriptive in nature; the framework is a living approach and should be seen as geographically contextual. Ghiyazuddin highlighted that the framework requires an enabling regulatory environment to ensure consumer protection, data privacy and cyber security.

    The question to Matthew SOURSOURIAN addressed the potential of FinTech to reduce costs in financial inclusion, thus allowing providers to expand their client base. Soursourian commented that it is important to distinguish between the different levels of innovation that FinTech brings. He explained that, at the same time that we see new entrants in the market, we also see existing financial institutions using FinTech to enhance and expand their services. Soursourian also pointed out that Regtech (regulatory technology) is benefiting both providers, and regulators and supervisors in bringing down their costs. For providers, costs are reduced in terms of complying with regulation. For regulators and supervisors, costs are reduced in terms of making the supervision and inspection process easier. 

    On the specific question on lowering costs, Soursourian noted that one of the main challenges for providers is in customer acquisition, which is closely linked to expensive due diligence requirements and AML/CFT regulations. He added that new developments are seen not only in terms of lowering costs, but also lowering risks for providers. Soursourian illustrated these developments with the examples of remote identification of customers, e-KYC, alternative client scoring, cloud computing, personalisation of products and integration of just-in-time advisory services.

    Palmer then asked Dirk ZETZSCHE to comment on the role of Central Banks and other national agencies in establishing the basic infrastructure for digital transformation, where e-identity plays a key role. Zetzsche reaffirmed that the lack of a base ID is the main barrier for financial inclusion, and that most policy approaches focus on creating the infrastructure for individuals to obtain a government-provided ID. He argued, however, that we should move away from the base ID approach, and find creative solutions around biometric identification. There are several features in people which are unique and can be used for identification. Scanning biometric features will allow individuals to be registered at a bank and start their business without the need for an official ID.

    Palmer also invited Socorro HEYSEN to comment on the latest developments in FinTech within the microfinance sector in Peru. Heysen revealed that there are many developments in the country, but still at small volumes. She detailed that there are 27 FinTech organisations in Peru, consisting of three main types: 1) Analysis-type platforms (for example comparison, analysis and scoring platforms, auction-type platforms for deposits, credit scoring); 2) Crowdfunding type start-ups (small organisations that operate mostly in urban environments and assess their borrowers based on credit bureaus, they are not a platform for financial inclusion yet); 3) e-Money and different types of payment services (mainly illustrated by the Peruvian mobile wallet BIM, a fully-interoperable national mobile money platform started by financial institutions in early 2016). 

    On the regulatory side, Palmer questioned Zetzsche on the challenges that Fintech providers pose to regulators and on the steps regulators have taken to address these challenges. Zetzsche first stressed that innovation brings speed to changes, but it is not good in itself and can be extremely risky. He explained that there is a triangle of interests to be considered, and that there is an inherent tension between these dimensions: 1) Openness to innovation; 2) Protection of the financial system; 3) Client protection. Zetzsche elaborated that, whenever we allow for intermediation in the financial system, we accept a certain degree of risk; balancing these risks in a pro-innovation way is the challenge of regulators. He added that the more innovation there is, the more challenges there are on the side of the regulator. 

    In terms of possible steps for regulators, Zetzsche mentioned that it’s possible to stick to non-legal means; for example, through innovation hubs. In terms of legal means, he named four approaches: 1) Doing nothing; 2) Abolishing regulation; 3) Setting up a tested learning environment; 4) Setting up a regulatory sandbox. Zetzsche further noted that all approaches have their benefits and downsides; for example, sandbox regimes may help to overcome regulatory barriers, but they may also be corruptive to existing legislation and create unfair competition.

    Palmer’s second question to Ghiyazuddin Ali Mohammad revolved around the main risks that FinTech brings to inclusive finance. Ghiyazuddin specified these three major risks, in a context where technology-based models are growing rapidly but legislation frameworks are old and inflexible: 1) Data protection - related to data ownership, usage and privacy; 2) Money laundering and terrorist financing; and 3) Cyber security - related to the threat to financial and political stability.

    Palmer then questioned Soursourian on the basic regulatory enablers for digital financial inclusion to thrive. Soursourian emphasised that, in adapting to the challenges that Fintech brings, regulators’ objectives should remain the same, and revolve around stability, integrity and consumer protection, complemented by inclusion. CGAP’s Financial Inclusion + Stability, Integrity, and Protection (I-SIP approach recognises both trade-offs and synergies amongst these policy objectives. Soursourian further elaborated that inclusion can support each one of these goals, and reinforce their objectives. In terms of the basic regulatory enablers for digital financial inclusion, Soursourian revealed the four categories: 1) Non-bank e-money issuers; 2) Agent regulation; 3) Consumer protection; 4) Risk-based due diligence.

    In response to the current challenges that regulators are facing, Heysen admitted that it is an interesting but hectic time to be a regulator. She stressed that regulators must understand the different business models that are there, which ones need regulation, what type of regulation, and from what point of view that regulation should be implemented. Heysen explained that some business models need all types of regulations, while some don’t need any regulation at all. She also emphasised the need for regulators to create a level playing field to promote and facilitate innovation, while avoiding regulatory gaps. Finally, Heysen also mentioned the need to sometimes remove legal obstacles to promote innovation.

    Palmer closed this session by noting that the regulation of FinTech presents big challenges to regulators, but that creative solutions can foster the development of the sector and mitigate risks.