The CFI’s Financial Inclusion 2020 project team has been talking to the experts lately to get their views on the main recommendations that came out of our 2013 Roadmap to Inclusion process.
One of the high level recommendations was as follows:
Regulators need to craft regulation that allows technology-enabled business models to emerge, while balancing access and protection for base of the pyramid consumers.
We asked some of the experts to give their views on whether this recommendation is moving forward across the developing world. The general response was, “Not fast enough,” and so we probed to find out more about what is getting in the way.
Many of the players in financial inclusion envision a rich technology-enabled ecosystem in which customers can affordably use electronic means to make payments (inter-operably, of course) and to access savings, credit, and other financial services. In this vision, providers sometimes compete and sometimes partner to offer various services. Financial institutions, telecommunication companies, payment providers, governments, and others find themselves part of a complex network that seamlessly enables consumers to manage and enhance their financial lives.
However, the experts we talked with, both regulators and providers, do not yet see this vision in reality in any developing country, not even much-hyped Kenya.
The first thing the experts noted is that this is not fundamentally a technology problem. The technologies are available. Nor is it primarily a problem of choosing between bank-led and telco-led models. The models are converging as they advance from their first versions into more fully developed models that can carry more varied financial services. Nor is it even a problem of policy making capability, as banking authorities in most countries are at least minimally equipped to write good regulations.
Instead, this is more a challenge of political economy, with many classic features. Competing models vie for dominance. Incumbents with established positions jockey to maintain those positions. First movers want to keep their advantage as long as possible, while second movers advocate for increased competition. Regulators face the difficult challenge of identifying the public interest in a setting in which traditional private actors may have political influence, while the intended beneficiaries in the lower income public are generally not heard. Public and political opinion is often dominated by non-market concerns, such as opinions that the poor should receive services at low prices (or free), or that national pride requires domestic systems. Regulators cannot avoid taking a stand, because it is their responsibility to determine who plays the game in the first place, through licensing.
We can see this at work in the quest for interoperability, for example. Interoperability helps enable the large transaction volumes that many business models require – so interoperable systems could be a win for both providers and customers. The question is how to get a virtuous circle going that can create interoperability and high volume, making it worthwhile for providers to make the investment needed to enter the market. There is an enormous degree of path dependency: where you end depends on where you start. Kenya has a dominant provider; Tanzania does not, which helps explain why Tanzania has moved sooner toward interoperability in mobile money. Latin America has a well-developed, multi-channel payments system based on financial institutions; Africa does not, which helps explain why some African regulators have been more willing than their Latin counterparts to allow telcos to experiment.
What’s a regulator to do? Call in game theorists and political economists to sort this out? Consult other regulators and examine specific country cases from which to draw lessons? Use a “test and learn” approach that invites experimentation? Dialogue with providers early in the process? All of the above, say the experts we asked.
One thing they all may agree on is that the regulator’s role is to legitimize providers and get out of the way. Ah, if only that were as easy to do as it is to say!
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