It is always dangerous to make predictions in an industry which is expanding and evolving rapidly, so it is with trepidation that I now do so. However, the predictions below are based on market insights and observations from working many years within the mass retail financial sectors and in Digital Financial Services (DFS).
1. DFS will drive financial inclusion strategies, new information requirements, and increase the importance of consumer protection: The power of DFS to provide basic payment services has been powerfully demonstrated in East Africa, and the first time created a realistic expectation of a world in which everyone has access to payment instruments – subject to the caveat of affordable pricing. This ubiquity is a powerful driver for national financial inclusion strategies. However, whilst the ‘pure access dynamic’ is being tackled, the ‘quality of service dynamic’ remains to be addressed. The ubiquity of DFS combined with the drive for financial inclusion will create new information requirements. However, the very fact that third parties are necessarily a part of complex agency arrangements, means that quality of service cannot be guaranteed and the potential for malpractice exists. These factors will drive focus on consumer protection across the DFS space.
2. Increased supervision of Mobile Money Operators: To date, many central banks have been collecting data on mobile money operations, but are yet to actively supervise all the players in the industry. There are many potential reasons for this; to suggest a few – the capacity of the regulator, the rapid evolution of the industry, the dual regulatory jurisdiction of mobile money operators between central banks, and Communications Commissions. However, there are increasingly powerful push factors which, in my view, make increased supervision of mobile money operators inevitable:
i. The publicity around frauds, some of which have been very significant, and have been related to the internal workings of mobile money operators
ii. The furore around KYC which led to a record fine for MTN Nigeria
iii. The spiralling volume and value of transactions through digital channels
iv. New emphasis on consumer protection
v. The need to develop risk management frameworks for mobile money (which can then be audited)
vi. The increased sophistication of mobile money information systems.
3. The registration and potential regulation of FinTech companies and updation of National Payments Acts: The payments world is now buzzing with FinTech, whether this is in terms of cryptocurrency, or products that ride over the top of mobile phone-based operating systems. As part of this, an increasing range of FinTech-based companies will be required to be registered and/or regulated. National Payments Acts will be updated much more quickly to accommodate different categories of payment actors and to provide a defined legal space in which they operate.
4. There will be a significant focus on risk management frameworks for digital financial services: MicroSave, through its Agent Network Accelerator studies in Bangladesh, India, Indonesia, Kenya, Nigeria, Pakistan, Senegal, Tanzania, Uganda and Zambia have shown the growing significance of fraud, at all levels of the DFS ecosystem. This implies a much greater focus on the development of robust risk management frameworks within the digital financial services industry, and, as a corollary, the strengthening of the back offices of mobile money operators of all types.
5. Regulation of channel pricing verses product pricing: To encourage competition, interconnection or interchange fees will be monitored and in some markets controlled. So, for example, a telecommunications company will have a maximum fee that it can charge competing companies for use of its USSD gateway. However, there is the potential that increased use of Internet-based protocols and over-the-top transactions will make a current focus on channel pricing irrelevant over time.
6. Non-exclusivity will actually mean non-exclusivity: There is, in some DFS markets, a difference between the principle and the practice of non-exclusivity of agents. Exclusivity will continue to fade, and pressure will be applied by central banks for this to happen. However, the extent and time that this will take will be significantly influenced by the political economy, specifically the influence of large corporations in specific markets.
7. Interoperability will extend, but will imply standardising interconnectivity: Regulators generally profess a desire for interoperability. However, interoperability operates at different levels. Firstly, it operates at account to account level, from one wallet to another; secondly, it can operate at agent level – possibly through shared agents; thirdly, it can operate at the level of merchant acceptance – the ability of merchants to accept multiple payments, without having to deal with multiple acquirers or issuers; lastly, it can operate as full financial and payment system interoperability. The work of the Better Than Cash Alliance (BTCA) shows that whilst interoperability is a trend which is widely desired, its actual practice and adoption will be market specific. However, a factor which makes interoperability much more difficult is the ability of institutions to interconnect; interconnectivity implies the free flow of information in standard formats, either through the adoption of ISO8583 or through the use of Application Programmable Interfaces (APIs).
8. Central banks will rely increasingly on shared intelligence: The rapid evolution of the industry, and, increasingly, cross-border transactions, implies that central banks must seek to share ideas and intelligence and to evolve practices much more quickly than has been the case to date. Initiatives such as the Alliance for Financial Inclusion with working groups for central bankers across many areas related to digital financial inclusion, will be especially important.
9. Central banks need appropriate support: Many central banks clearly need support in adapting their responses to supervision, in risk management, and in understanding the rapidly-evolving digital finance marketplace. They have a limited core of staff members who understand mobile money and these staff are often over-stretched.
10. Government policy will start to significantly influence payment system architecture: This point is perhaps harder to see initially, but nevertheless is worthy of the status of a prediction as it is a fundamental driver of change. Government have their own objectives, which can be supported by the national payment system architecture. Typically, governments want to bring transactions into the tax net. They want to make payments efficiently and effectively to a large number of people. They need and want to enforce both KYC/AML. They want to avoid making payments to ‘ghost’ employees/beneficiaries. They want to expand access to national savings instruments, such as Treasury Bills and Treasury Bonds. The juggernaut of government policy will bring together joint initiatives between Ministries of Finance and central banks. We’re seeing the power of government policy influencing payment system architecture in India through the Aadhaar digital national identity and PMJDY financial inclusion programmes, as well as the National Payment Corporation of India’s Immediate Payment System and Unified Payment Interface. As demonstrated by the India case, government policy will be a significant driver of the introduction of National Identification Cards; in countries currently without these, biometrics will be used to create unique identifiers.
MicroSave’s extensive work with central banks, Ministries and payment services providers across Africa and Asia, clearly indicates that we are at an inflection point characterised by complexity, opportunity and risk. How we respond to these in the next five years will determine the access to, and impact of, digital financial services for the mass market.