The digital ecosystem—a collection of organizations, individuals, and policies that enable and deliver digital financial services—is rapidly evolving due to increased smartphone penetration in emerging markets and innovation in mobile technologies. How will this shift help or hinder innovation and development of digital financial services?
FiDA’s Snapshot 13, The opportunities for and threat to the growth of digital financial services, discusses three principal areas where opportunities for or threats to the growth of digital financial services may arise, namely: regulation, technology, and partnerships. For instance, regulation has spurred innovation in digital finance in some markets but hampered it in others. In 2015, the UK’s Financial Conduct Authority became the first to launch a regulatory sandbox (a means to develop regulation that can keep up with the fast pace of innovation) so that FinTech startups can test their services without normal constraints and thereby flourish. However, recent regulation on lending and data flows has negatively impacted the growth of alternative lending FinTechs in some emerging markets. Financial Inclusion on Business Runways (FIBR) found that—unlike regulations in the developed markets of China, the UK, or the US—regulation in Ghana and Tanzania did not allow non-financial institutions to lend, potentially preventing innovative FinTechs from providing credit to the unbanked. For digital finance to thrive, regulators need to effectively manage risks to stability and integrity, such as by protecting privacy and shielding against fraud, without stifling future innovation, as further discussed in FiDA’s Snapshot 14 (forthcoming).
Snapshot 13 discusses these opportunities and threats in more detail, presents notable new learning in this field (such as the opening of APIs and increasing tech accelerator programs), points to implications for consumer protection and transparency, and lists the top 10 reads in this space this year.