What is the role of regulation in digital finance?

Janet Shulist

Past examples and research have both shown that burdensome or overly prescriptive regulation hinders mobile money innovation and scale. For instance, a study conducted in 2015 found that heavy regulation—such as “an insistence that banks play a central role in the  [mobile money] schemes, together with burdensome KYC and agent restrictions”—was often fatal to mobile money. More notably, with the torrent of new entrants in digital finance that are neither banks nor mobile network operators (MNOs), the digital finance community  must re-examine what lessons from mobile money can be transferred to these new players (such as FinTechs) while still encouraging innovation.

FiDA’s Snapshot 14, “What is the role of regulation in digital finance?”, discusses how the shift to a digital ecosystem has precipitated new entrants, technologies, and innovative business models and, at the same time, new challenges for policymakers and regulators who want to manage risks to stability and integrity without stifling innovation. For more traditional digital finance providers—such as banks, mobile network operators, and microfinance institutions—the role and impact of enabling regulation for digital finance, and the parameters within it, are relatively established. For example, one study found that, on average, regulatory frameworks that are open and progressive are associated with greater mobile banking usage.

However, for newer entrants, such as FinTech players, effective enabling regulatory frameworks are less clear. For instance, FIBR found a lack of regulatory clarity for specific FinTech business models in Ghana—citing online peer-to-peer lending as an example—which has likely discouraged entrepreneurs from entering the market. Discussions between FinTechs and regulation are underway elsewhere too. Yet whether these discussions will lead to ‘evolutionary’ approaches or ‘revolutionary’ ones is less clear.

Snapshot 14 discusses the role of regulation in more detail, presents notable new learning in this field (such as RegTech and interest rate caps in sub-Saharan Africa), points to the implications of the rising number of FinTechs in digital finance as well as  the developments taking place in China’s ‘TechFin’ industry, and lists the top 10 reads in this space this year.