Published on All About Finance

Shifting regulation of digital financial services: from enabling to fostering competition

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Branchless banking and mobile solutions in developing countries tend to be dominated by very few large (mostly telco) players, focus narrowly on the payment function of money that calls for a national footprint, elicit relatively infrequent usage from the majority of customers, and exhibit low levels of service innovation. There are few examples globally of what I call an intensive model: smaller players making the business economics work by driving much greater usage from a much smaller customer base.

Tackling financial inclusion — that is, making financial services truly a mass-market offering — will require more, and more diverse, players contributing variously their resources, inventiveness and goodwill. We need more players jumping in: to create more competitive tensions and force more service and business model differentiation, but also because in most markets the usual path to scale is through specialization.

In a recent paper, I argue that the prevailing regulatory “best practices” in branchless banking and mobile money focus on enabling participation in the market but are not sufficiently strong in fostering competition. There are two sides to this.

First, regulators can reduce the cost of entry and give much more flexibility for new entrants wishing to contest the market, while still entirely protecting the integrity and safety of the system. There are usually strong barriers to entry embedded in the following types of regulations:

  1. Agent regulations, and the need to secure a retail cash in/out footprint. The obligation on financial service providers to appoint retail outlets as agents has the perverse effect of fragmenting the retail base across a multiplicity of providers, each seeking locational advantages, and forces each financial service provider to assume daunting operational and legal responsibilities. A more scalable and entry-friendly approach would for the financial authority to license (and supervise) cash in/out networks as independent entities, giving them the freedom to serve any and all financial service providers they wish merely by maintaining customer accounts with each. When transactions occur on a real-time, prepaid basis, financial risks are few; regulation of cash in/out networks would therefore major on consumer protection aspects. Shifting the contractual basis between issuers and cash in/out networks would naturally lead to broadly shared and interconnected agent networks.
  2. E-money licenses, and the need to operate under a ´sub-banking´ license. Many countries have opened up the possibility of providers getting an e-money license, but this license is generally conceived as an inferior form of banking. It is common for e-money license terms to preclude paying of interest on saved balances, impose lower account caps, ban their marketing as savings accounts or using the term banking at all, and exclude them from deposit insurance. What is required is a license that does not constitute an alternative to banking, but an alternative form of banking – one that entails fewer risks. E-money licenses ought to be conceived as narrow banking: it is like a normal bank on the liability side of its balance sheet (and hence not subjected to the limitations enumerated previously), but is heavily restricted on the asset side (hence presenting much lower risk). 
    Second, there is a growing need for policymakers to ensure there is a level playing field across all players, whether they are large or small, whether they have one type of license or another, and whether they are banks, telcos or any other type of players.  The following issues need to be placed more squarely in the center of the emerging regulatory framework for digital financial services:
  3. Preventing regulatory arbitrage. Regulations must not provide any unjustified regulatory advantage to one type of license holder over any other, and in particular should not be more burdensome for banks rather non-banks (including telcos). License terms can be different only insofar as different types of license holders are exposed to different types of risks, based on the activities they are allowed to carry out. Thus, it is legitimate for banks to have more intermediation freedom than e-money issuers, in return for which they are subjected to higher capital requirements and more intrusive prudential supervision. But it is not reasonable for banks and e-money issuers to be subjected to different regulations for agent banking or account opening, which are common functions to both types of licensees.
  4. Preventing anti-competitive practices by dominant players. Network-based markets, of which electronic payments is one, are characterized by economies of scale and network effects, which confer strong advantages to the larger players. Regulators must therefore take steps to prevent larger players from exploiting their scale advantage to lock out smaller competitors, by driving towards interconnection of platforms (interoperability) and precluding pricing below cost (anti-dumping).
  5. Preventing mobile operators´ abuse of essential service elements under their exclusive control. Mobile operators´ participation in retail payments presents competitive challenges which banking and telecoms operators will need to monitor closely and address jointly. The problem is that mobile operators are both component suppliers and direct competitors to financial institutions wanting to offer mobile financial services. There is a risk that mobile operators transfer market power from their core telecoms market to the emerging retail mobile payments market, in such a way as to effectively shut banks out of mobile payments. Competition policy needs to be vigorously applied to ensure that mobile operators do not use their market power in the communications market and their control over the telecoms numbering range to gain unfair control over financial service providers who must use the telecoms services of mobile operators.


Ignacio Mas

Consultant on Mobile Money

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