BRIEF Digital Financial Inclusion:

Implications for Customers,

Regulators, Supervisors, and
Standard-Setting Bodies
“Digital financial inclusion can be a game changer for unserved and under-served low-income
households as well as micro- and small enterprises. The regulatory, supervisory and standard-
setting challenges—and likewise the solutions—include those we currently face, and others we
can only imagine as billions of new digital finance users go online. We have the opportunity—
and indeed the responsibility—to prepare for both the risks and the rewards of the digitisation
of financial services.”—Jaime Caruana, General Manager, Bank for International Settlements, welcoming
remarks to the 2nd Global Partnership for Financial Inclusion (GPFI) Conference on Standard-Setting Bodies and
Financial Inclusion, 30–31 October 2014.

With the prospect of reaching billions of new inclusion” and summarizes its impact on financially
customers, banks and nonbanks have begun to offer excluded and underserved populations; outlines the
digital financial services for financially excluded and new and shifting risks of digital financial inclusion
underserved populations, building on the approaches models that are significant to regulators, supervisors,
that have been used for years to improve access and standard-setting bodies (SSBs); and concludes
channels for those already served by banks and with observations on digital financial inclusion issues
other financial institutions. Innovative digital financial on the policy-making horizon.
services involving the use of mobile phones have been
launched in more than 80 countries (GSMA 2014).1 As
Digital financial inclusion and
a result of the significant advances in the accessibility
its impact on the financially
and affordability provided by digital financial services,
millions of poor customers are moving from exclusively
excluded and underserved
cash-based transactions to formal financial services. “Digital financial inclusion” can be defined as digital
The benefits of this development include economic access to and use of formal financial services by
growth and stability, both for the customers and for excluded and underserved populations. Such services
the economies where they and their families reside. should be suited to the customers’ needs and delivered
However, the use of digital financial services by responsibly, at a cost both affordable to customers and
formerly excluded customers brings not only benefits sustainable for providers.
but also risks, due in part to the characteristics of a
typical poor customer (inexperienced with formal Today’s providers of such financial services can be
financial services and unfamiliar with consumer rights). divided into four broad groupings based on the
Some of the risks are new while others, although party holding the contractual relationship with the
well known, may take on different dimensions in the customer: (i) a full-service bank offering a “basic”
financial inclusion context. or “simplified” transactional account for payments,
transfers, and value storage via mobile device or
This Brief2 aims to provide national and global policy payment card plus point-of-sale (POS) terminal; (ii) a
makers with a clear picture of the rapid development limited-service niche bank offering such an account
of digital financial services for the poor and the need via mobile device or payment card plus POS terminal;
for their attention and informed understanding. It (iii) a mobile network operator (MNO) e-money issuer;
proposes a concise definition of “digital financial and (iv) a nonbank non-MNO e-money issuer.3 All

1 There is no global data source for nonmobile digital financial services for the financially excluded and underserved.
2 This Brief is largely drawn from an Issues Paper prepared by CGAP for the 2nd GPFI Conference on Standard-Setting Bodies and Financial
Inclusion (GPFI 2014).
3 The first two “bank-based” models often rely on nonbanks to provide processing or other technology. A recently issued report by the
Committee on Payments and Market Infrastructures (CPMI) analyzes the increasing influence of nonbanks on retail payment systems. The
report finds that improved efficiency through bank outsourcing to nonbanks has the potential to lower fees, increase the range of payment
methods, and reach new markets and customers (CPMI 2014).
February 2015
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four models function via three components: a digital and, for women in particular, increasing economic
transactional platform, an agent network, and the participation (World Bank Development Research
customer’s access device. (See Box 1.) With these Group, Better than Cash Alliance, and Bill & Melinda
components in place, payments and transfers, as well Gates Foundation 2014). However, access to digital
as credit, savings, insurance, and even securities, can financial services does not come without risks to
be offered digitally to excluded and underserved customers as well as to providers.
customers.
New risks of digital financial
Uptake is rapid and significant in some markets.4 inclusion
Digital financial services can make life easier for
Digital financial inclusion introduces new market
customers by allowing them to transact locally in tiny
participants and allocates roles and risks (both
amounts and better manage their characteristically
new and well known) in different ways compared
uneven income and expenses. The payment, transfer,
to traditional approaches to retail financial service
and value storage services of the digital transactional
delivery.5 The three key components of digital
platform and the data generated by customer
financial inclusion models (see Box 1) correspond
usage can enable providers to offer additional
to the three main triggers of new or shifting risks:
financial services tailored to customer needs. Digital
(i) the new parties and arrangements involved in
financial inclusion can also reduce the risk of loss,
the management and storage of account data
theft, and other financial crimes posed by cash-
and the holding of customer funds; (ii) the digital
based transactions, as well as the costs associated
technology; and (iii) the use of agents as the principal
with transacting in cash. Ultimately, it can advance
customer interface. These three components, as well
economic growth by enabling asset accumulation
as the typical profile of the financially excluded or
underserved customers in question, introduce various
risks, including operational risks, consumer-related
Box 1. Three key components of a risks, and risks related to financial crime.
digital financial inclusion model
The digital transactional platform. Innovative
Digital transactional platform. A digital digital financial services typically involve at least
transactional platform enables a customer to make
one bank and one nonbank in both the electronic
or receive payments and transfers and to store value
electronically through a device that transmits and
storage and management of data and the holding
receives transaction data and connects—directly of customers’ funds. Protecting customer funds will
or through the use of a digital communication depend on many factors, including whether the
channel—to a bank or nonbank permitted to store holder participates in a deposit insurance system
electronic value. and whether the specific type of account in which
Retail agents. Retail agents armed with a digital the funds are held is insured. If the account pools
device that is connected to communications multiple customers’ funds, coverage limits may apply
infrastructure to transmit and receive transaction to the account as a whole or to customers’ individual
details enable customers to convert cash into balances. Even if the customers’ funds are insured, if
electronically stored value and to transform stored
they are pooled and a third party (such as an MNO)
value back into cash. Depending on applicable
regulation and the arrangement with the principal
is responsible for storing and managing records of
financial institution, agents may also perform other customers’ account balances, then there are risks
functions. related to real-time accuracy and reconcilability of
the records of the failing holder of funds with those
Device. The device used can be digital, such as
of the entity managing the accounts.
a mobile phone that is a means of transmitting
data and information or an instrument, such as a
Digital technology-related risks. The quality and
payment card that connects to a digital device (e.g.,
POS terminal). reliability of the digital technology affect the risks of
disrupted service and lost data, including payment

4 An example is bKash in Bangladesh, which reached almost a quarter of the adult population in just over two years of operation. See http://
www.cgap.org/photos-videos/benefits-challenges-digital-financial-inclusion.
5 Risks presented by banks and nonbanks may be the same or similar; however, differences in regulatory and supervisory risk mitigation
measures applied to banks and nonbanks will affect the risk probability. See CPMI (2014). A 2015 report by the Basel Committee on Banking
Supervision (BCBS) on its 2013 survey of 59 jurisdictions and their regulatory and supervisory practices regarding institutions relevant
to financial inclusion reveals significant variation both in the complexity of the surveyed financial sectors and in the survey respondents’
regulatory and supervisory approaches (BCBS 2015).
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instructions (e.g., due to dropped messages), thinking about disclosure and recourse and raise
as well as the risk of a privacy or security breach other consumer protection issues.6 Some policy
resulting from digital transmission and storage of makers are leaning toward product standards and
data. These privacy and security risks are magnified guidelines to complement digital innovations in
because a large number of agents handle customers’ disclosure and recourse. In addition, in the event the
transactional and other data and the profile of consumer suffers a loss, liability can be unclear due to
previously excluded and underserved customers. the multiple parties involved in service delivery: both
agents and third-party providers of communications
Agent-related risks. Agents and agent networks
and technology services.
introduce new operational, financial crime and
consumer risks, many of which are due to the physical Increased need for cross-sectoral coordination and
distance between agents and the provider or the communication. Digital financial inclusion—which
agent network manager and the resulting challenges involves new providers, services, and consumers—
to effective training and oversight. Operational risks requires significant cross-sectoral coordination and
include fraud, agent error, poor cash management communication among regulators and supervisors.
by the agent, and poor data handling. In addition to This is true both at the country-level (e.g., credit,
the financial crime risks of fraud and theft (including insurance, and investments offered via digital
data theft), agents may fail to comply with anti- transactional platforms require the attention of
money laundering and combatting the financing of multiple financial regulators and supervisors, and
terrorism (AML/CFT) rules regarding customer due may call for involvement of the telecommunications
diligence, handling records, and reporting suspicious regulator as well) and the global level of SSBs and
transactions. Agents may also take actions that other international bodies, such as the International
reduce transparency (e.g., on pricing, terms, and Telecommunications Union.
recourse), engage in abusive treatment of customers
(including overcharging), or fail to handle customer Customer identity—new opportunities and
data confidentially. challenges in the digital context. Financial identity
for poor people when services are delivered digitally
Other issues on the carries the potential for both inclusion and AML/
policy-making horizon CFT gains, but also raises privacy and fraud risks.
Meaningful and manageable privacy principles—
Beyond addressing these new and shifting risks
which will involve work at both the national and
through effective regulation and supervision, policy
global levels—offer the prospect of win-win solutions.
makers will face the following additional issues as
digital financial inclusion expands in reach, scope,
and scale.
References
BCBS. 2015. “Range of practice in the regulation
Product- and model-specific issues in digital
and supervision of institutions relevant to financial
financial inclusion. In some countries, in addition to
inclusion.” January.
payments, transfers, and value storage, credit and
insurance products are being offered to previously Caruana, Jaime. 2014. Welcoming Remarks for 2nd
excluded and underserved customers via digital GPFI Conference on Standard-Setting Bodies and
transactional platforms. Such products—and the Financial Inclusion: Standard Setting in the Changing
often complex relationships among the banks and Landscape of Digital Financial Inclusion, hosted
nonbanks combining to offer them—introduce both by the Financial Stability Institute at the Bank for
operational risks to the provider and customer risks. International Settlements, 30–31 October.
When products are bundled—such as life insurance CGAP. 2014. “Benefits & Challenges of Digital
packaged with a prepaid mobile plan—regulation and Financial Inclusion.” Video. http://www.cgap.org/
supervision becomes more complicated, requiring photos-videos/benefits-challenges-digital-financial-
coordination among regulators (see below). inclusion
Consumer protection issues. New financial services GPFI. 2014. “Issues Paper: Digital Financial Inclusion
and products offered digitally to excluded and and the Implications for Customers, Regulators,
underserved customers both challenge traditional Supervisors and Standard-Setting Bodies.”

6 In some cases, new models may offer opportunities for improved consumer protection measures, such as real-time warnings or interfaces that
are more intuitive for the customer.
 February 2015

CPMI. 2014. “Non-banks in retail payments.” Koker, Xavier Faz, Michel Hanouch, Kathryn Imboden,
September. Kabir Kumar, Kate McKee, and Stefan Staschen and
All CGAP publications
the secretariats of the six SSBs that participated in
GSMA. 2014. “2013 State of the Industry Report on are available on the
the 2014 GPFI conference: the BCBS, the CPMI,
Mobile Financial Services for the Unbanked.” CGAP Web site at
the Financial Action Task Force, the International www.cgap.org.
World Bank, Better than Cash Alliance, and Bill & Association of Deposit Insurers, the International
Melinda Gates Foundation. 2014. “The Opportunities Association of Insurance Supervisors, and the CGAP
of Digitizing Payments—How Digitization of International Organization of Securities Commissions. 1818 H Street, NW
Payments, Transfers, and Remittances Contributes MSN P3-300
The authors also express their appreciation for
Washington, DC
to the G20 Goals of Broad-Based Economic insights from the 3rd Meeting on Financial Inclusion 20433 USA
Growth, Financial Inclusion, and Women’s Economic among senior SSB leadership held at the BIS on 2
Empowerment.” August. October 2014, co-chaired by HM Queen Máxima of Tel: 202-473-9594
the Netherlands, the UN Secretary General’s Special Fax: 202-522-3744
Acknowledgments Advocate for Inclusive Finance for Development
Email:
The authors are grateful to the numerous colleagues and Honorary Patron of the GPFI and Stefan Ingves,
[email protected]
who gave input, especially Camille Busette, Louis de chairman of the BCBS.
© CGAP, 2015

AUTHORS:
Kate Lauer and Timothy Lyman