Written by Rebecca Marx, Victoria Rau, and Paul Newall
Banking Beyond Branches has published many blogs highlighting how digital financial services (DFS) can expand financial inclusion, including through refugee populations, budget smartphones, and remittances. We also called attention to government policies toward financial inclusion as a key trend in 2016 and our prediction has been complemented by the Center for Global Development’s latest release: Financial Regulations for Improving Financial Inclusion.
A key focus for the report is examining the complexities in the ex-ante vs. ex-post debate on regulations – akin to tightrope walking for regulators. As we see in markets such as Nigeria and India, ex-ante policies may often inhibit the industry with too many regulations from the get-go. Ex-post regulation, on the other hand, may be too late to respond to issues. The key to this debate, some argue, is to allow the market to get out ahead, but keep it “within shouting distance”, as phrased by Marisa Lago, US Department of Treasury. In particular, the question of interoperability is of central concern – should the market evolve to interoperability naturally (presuming it does), or should it be mandated? Regulators want to ensure that the market will advance through competitive market mechanisms, but “maintain the capacity to be interoperable”.
Balancing proactive ex-ante regulation with reactive ex-post regulation and maintaining a level competitive landscape feature strongly in the report. The recommendations are intentionally agnostic to the technologies and players involved in providing financial services. They state that banks introducing additional mobile channels should still be scrutinized as banks, while digital services providers entering the market should be scrutinized more or less depending on the types of services they intend to provide, i.e. adopting a ‘service’ risk-based approach to regulation.
If it is anticipated that greater financial inclusion will be achieved by “disruptive” technologies in payments and financial services, as we would argue on this blog, then trying to regulate the payments industry as it advances is going to be a key question moving forward. A technology or innovation that truly disrupts does not announce its arrival with enough lead-time for regulators to anticipate the potential consequences or develop the appropriate regulatory framework. Innovative ways of paying for goods and services and storing or transferring money can just show up and are often out of “shouting distance” quite quickly. They disrupt the status quo and challenge existing rules, but who knows if they will gain enough traction to stay.
To analyze the role of ex-ante vs. ex-post regulations, and how central banks respond to disruptive technology, we need not look further than Kenya (whose former Central Bank Governor was a key contributor to this report). While lauded as the predominant mobile money case study, Kenya has had its own regulatory questions to answer. In 2014, the Communication Authority of Kenya (CAK) required Safaricom to allow its mobile money agent to host services from other operators but market competitor Airtel pushed regulators to go even further. Airtel, asserting that mobile cash transfers from M-Pesa to Airtel Money are twice as expensive as transactions between Safaricom customers, wants to see regulators monitoring interoperability costs in order to reduce barriers to entering the market for other operators.
In July 2015, the government introduced new regulations that, if passed, would lead to the break-up of Safaricom in an effort to protect against monopolies. Fred Matiang’I, the cabinet secretary at the Ministry of Information said, “Telecommunications firms need to be regulated to ensure some players are not strangled”. If the regulation is passed it could force Safaricom to separate M-Pesa from its mobile phone services and infrastructure business, to the glee of Airtel. In September 2015, Airtel chief executive Mr. Youssefi said, “Airtel is likely to exit Kenya if the market structure is not addressed in terms of dominance”.
While the discussion of M-Pesa’s dominance of the Kenyan market has certainly been elevated, reaction from Kenya’s authorities has been slow. The CAK said it would need at least one-and-a-half years to conduct a study to determine the thresholds of abuse and dominance in the telecommunications industry, and only after that study can anti-competitive practices in the market be addressed. Time will tell if regulatory action will be taken while providers are still “within shouting distance”.
From the above example, we are able to see some of the pros and cons of ex-post regulation. While Safaricom was able to develop themselves into the leading mobile payments players, rivals have felt that the playing field was not level – something ex-ante regulations might have mandated. The report attempts to provide regulators, such as Kenya’s, a framework to address these challenges and chart their path.