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Digital Finance options will assist in alleviating poverty

Regulators must aid digital financial services uptake

by Robin Christie | 25 Feb 2015
The Centre for International Finance and Regulation (CIFR) has called for regulators to zone in on building sustainability and consumer demand in the digital financial services space.

According to a CIFR-funded research paper, ‘Building Consumer Demand for Digital Financial Services: The New Regulatory Frontier’, efforts to improve financial inclusion with digital financial services could be wasted if consumer uptake is not improved.

It states that the issue is particularly pressing in emerging markets, where digital financial services have the greatest potential to improve the public’s financial inclusion.

“Digital financial services (DFS) are held out as key financial solutions for improving financial inclusion. However, targeted end users often offer little in the way of obvious profitable opportunities and so market forces alone are not enough to ensure the supply of services and products which match end-users’ means, needs or wants,” states the paper.

“As a result DFS in emerging markets may suffer from limited uptake and usage, with consequently little effect on financial inclusion.”
Building consumer demand

It adds that, while financial regulators in emerging markets have been focusing on supporting the success of digital financial services largely through institutional and regulatory framework efforts, they must work to understand and build consumer demand as a first step.

“This requires a change in mindset for financial regulators who are more familiar with promoting financial stability, safety and efficiency,” it states.

Highlighting the paper’s findings, lead researcher, Professor Ross Buckley from the University of New South Wales, said that regulators must work to minimise the gap between the digital services being provided by financial institutions and the budgets and needs of end users.

“The regulation of digital financial services, and mobile money in particular, has been the focus of considerable discussion and debate,” he said.

“However, without more emphasis on building consumer demand, these services could suffer from limited uptake – leaving us with sophisticated frameworks for regulating digital financial services but little to actually regulate.”

Moving on

The report makes several recommendations to suggest how financial regulators can build demand and influence the development of successful digital financial services. These include:

Shifting government payments to electronic channels.
Improving financial literacy and building trust for new payment methods.
Driving the development of open, interoperable and interconnected systems.
The paper also recommends that regulators focus on building consumer demand through promoting partnerships in digital financial services as a means of promoting financial inclusion.

“Partnerships introduce collaboration risks and heighten consumer risks; requiring regulators to adjust regulatory frameworks to ensure such risks are identified and mitigated,” it notes.

Commenting on the partnerships issue, Buckley added that key collaborators should include payment providers, banks, microfinance institutions, and mobile network operators.

“Collaboration between these players can strengthen the products and services available and, in turn, strengthen financial systems more broadly,” he said.

“Regulators will have a role here in assessing and approving partnerships amongst regulated entities and also identifying and mitigating any associated risks.”

Financial inclusion

According to Buckley, while the report’s recommendations advocate for a broader role for financial regulators, this increased focus would ultimately help to improve financial inclusion.

“While this represents a new regulatory frontier for financial regulators, it is a frontier well worth navigating in order to ensure the unbanked and under-banked benefit as much as possible from the abundance of innovative digital financial services available today,” he said.

Financial inclusion is such an important measure, notes the paper, because it acts as an important means for alleviating poverty and promoting a country’s broader economic development.

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