2016 has seen a sharp-eyed global focus on clarifying what responsible digital financial inclusion means in practice. This is connected to the increasing recognition that digital financial inclusion brings new and significant risks for consumers, as well as considerable benefits.
The September 2016 McKinsey Global Institute Report – How Digital Finance Could Boost Growth in Emerging Economies – suggests that widespread use of digital finance (payments and digital services delivered via mobile phones and the Internet) could add $3.7 trillion to the GDP of emerging economies – or six percent – by 2025. Which in turn could create around 95 million jobs.
So responsible digital financial inclusion is important.
But what was new in 2016? Consider these important developments:
Publication of the G20 GPFI White Paper: The White Paper emphasises that digital financial inclusion can both offer benefits and create new risks for consumers, which need addressing (Part IV B). These risks arise from the ‘new’ elements of digital financial inclusion (providers, business models, technologies, widespread use of agents, and types of products) and, importantly, the low levels of financial capability of the financially excluded and underserved.
These new risks (summarised in Box 10) concern the need for a level regulatory playing field, transparency and disclosure in a digital world, product suitability and bundling, provider liability for agents, mistaken and unauthorised transactions, data privacy and security, service continuity, and safeguarding client funds.
The White Paper also includes a useful summary of the role of international standard-setting bodies in relation to consumer protection and digital financial inclusion.
Publication of the Payment Aspects of Financial Inclusion (PAFI) Report 2016: This Report was published by the Joint Task Force of the Bank for International Settlements Committee on Payments and Market Infrastructures and the World Bank Group. It provides a comprehensive assessment of measures that might be taken to address financial inclusion factors affecting payment systems and services.
The Guiding Principles in the PAFI Report note the importance of consumer protection, whilst recognising the need to balance innovation and competition. Guiding Principle 2 states: the legal and regulatory framework underpins financial inclusion by effectively addressing all relevant risks and by protecting consumers, while at the same time fostering innovation and competition.
Launch of the Better Than Cash Alliance Responsible Digital Payments Guidelines: The Guidelines provide practical, action-oriented guidance on what responsible digital payments (such as e-money accounts) look like from the perspective of financially excluded or underserved clients. They are a useful checklist for all stakeholders – be they providers or procurers of payment services, policy makers or regulators.
The Guidelines recommend eight good practices:
- Treat Customers Fairly
- Keep Client Funds Safe
- Ensure Product Transparency for Client
- Design for Client Needs and Capability
- Support Client Access and Use Through Interoperability
- Take Responsibility for Providers of Client Services Across the Value Chain
- Protect Client Data
- Provide Client Recourse.
For further discussion of this see the blog I wrote with Beth Porter from the Better Than Cash Alliance: Responsible Digital Payments: Reducing the risks that come with new opportunities
Endorsement by G20 Leaders of the G20 High-Level Principles for Digital Financial Inclusion: The Principles provide the basis for country action plans to leverage digital technologies to help achieve financial inclusion goals. There are eight Principles, supported by suggested actions that can be taken at the country level to implement each Principle (subject to country context). Two Principles specifically focus on what is needed from the perspective of providing responsible digital financial services:
Principle 5: Establish Responsible Digital Financial Practices to Protect Consumers
Establish a comprehensive approach to consumer and data protection that focuses on issues of specific relevance to digital financial services.
Principle 6: Strengthen Digital and Financial Literacy and Awareness
Support and evaluate programs that enhance digital and financial literacy in light of the unique characteristics, advantages, and risks of digital financial services and channels.
The next step is to implement the Principles. The G20 Leaders’ Communique at the September 2016 Hangzhou Summit stated: “We encourage countries to consider these principles in devising their broader financial inclusion plans, particularly in the area of digital financial inclusion, and to take concrete actions to accelerate progress on all people’s access to finance.” The Principles’ preamble also notes the G20 commitment to help low income developing countries take action to advance digital financial inclusion.
Publication of the Basel Committee on Banking Supervision (BCBS) Guidance on the application of the Core Principles for Effective Banking Supervision to the regulation and supervision of institutions relevant to financial inclusion 2016: This Report contains important new guidance on the application of many of the Core Principles in a financial inclusion context. The guidance is intended for the benefit of all countries, regardless of whether they are BCBS members. Specifically, Annex A contains guidance for supervisors based on the G20 High-Level Principles on Financial Consumer Protection, and related reports on effective implementation approaches.
What are the key messages from all this activity?
- Digital financial inclusion creates new types of risks for consumers
- Consumer protection is important to build trust in the use of digital financial services and achieve financial inclusion targets and the resultant economic benefits
- This is especially the case in an environment where clients have low levels of financial capability and there is constant innovation in providers, delivery channels, business models and products
- There is increasing recognition of the links between consumer over-indebtedness and financial stability and the need to consider new forms of responsible lending standards for loans made available through digital channels (such as mobile phones)
- The marketing of digital financial services based on alternative data sources and related algorithms. Big Data may be great for financial inclusion but poses data protection and other challenges
- Any new consumer protection framework approach should be enabling and proportionate in design and reflect the benefits of financial inclusion and innovation
- Development of supervisory capacity and resources to deal with the challenges of responsible digital financial inclusion is critical.
These milestones are significant examples of 2016 global policy initiatives relevant to responsible digital financial inclusion. We can expect to see more activity in 2017. What will this activity relate to? Time will tell, but my best guess is we will see work on:
- Responsible lending in a digital context
- The consumer protection challenges with the use of Big Data and related analytics
- Implementation of the G20 Principles and of the Better Than Cash Alliance Guidelines
- Capacity building for supervisors
- Innovations coming out of the regulatory sandboxes that are being established by financial sector regulators around the world.
And probably more…
Happy New Year!