1. IMPACT OF
DIGITAL
FINANCIAL
SERVICES
INNOVATION
ON POLICY
AND
REGULATION
PRESENTED BY HILDA
MUTSEYEKWA
HARARE
14 July 2016

2. OUTLINE
 The emerging Scenario
 Implications
 Collaboration
 Light Touch Regulation
 Competition Regulation
 Consumer Protection
 Privacy, Data Protection and Security

3. The Emerging Scenario
 “Banking is essential, banks are not,” Bill Gates, then CEO of
Microsoft, 1994.
 From cash heavy to cash- lite to cashless transaction
processing going into the future.
 Characterised by in-store payments, online payments, peer-to-
peer payments, carrier billing, mobile point-of-service
payments, and payments using mobile wallets.
 From branch networked banking to branchless banking
characterised by agent banking.
 The next wave of change could be virtual banking where there
might be no need for banks but just National Operating Centres
manned by very few people.
 Banks will rely heavily on the ubiquitous distribution networks
of third parties to deliver financial services and credit products.

4. The Emerging Scenario cont..
 Mobile and banking services are converging
through the following scenarios:
 combinations of usage of mobile money and bank
accounts.
 Where we have a variety of cash-in/deposit and
cash-out/withdrawal functions and money flowing
from Customers with bank accounts to:
 unbanked persons by making transfers to their
mobile wallets;
 their mobile wallets to pay businesses or cash-out
through mobile money agents instead of withdrawing
at ATMs or bank branches.

5. The Emerging Scenario cont..
 Convergence of mobile and banking services
 MNOs are evolving from solely providing mobile money services to
jointly providing services through partnerships with banks.
 Telecom companies venturing into banking and banks venturing into
Telecommunication.
 Banks and MNOs now directly competing in the provision of digital
financial services with some MNOs opting to buy existing banks. For
example; Econet ‘s acquisition of Steward Bank.
 The provision of bundled telecommunications and banking services
through one entity with multiple licences.
 Banks being permitted to provide ‘branchless banking’, through
agents who can also be mobile money agents.
 Banks adding a delivery channels including web interfaces for
transfer, payment and investment transactions. (additional features
layered onto traditional banking)

6. The Emerging Scenario cont..
 In some cases MNOs are partnering with banks to deliver
savings and loans through existing mobile money service
interfaces;
 Cases in point:
 Vodacom in Tanzania partnered with Commercial Bank of Africa
(CBA) in launching M-Pawa.
 Safaricom did so earlier with CBA (M-Shwari) in 2012, and with
Kenya Commercial Bank (KCB M-Pesa) in 2015, each of which are
accessible through the M-Pesa menu.
 In Uganda, MTN has a mobile lending arrangement with Stanbic
Bank.
 MNOs such as Tigo in Ghana have also successfully partnered with
insurance companies to offer insurance products.
 This has implications for the regulation of market entry as in a
number of countries, market entry has been permitted only under
a bank-led model

7. Implications: A Collaborative
Approach
 Collaboration among the telecommunication sector regulator, banking sector
regulator and the Competition Authority.
 RBZ: Prudential financial regulation, including safeguarding user funds,
protecting against fraud, terrorism financing and money laundering.
 POTRAZ: Access to and pricing of telecommunications network services used
for delivery of the services.
 CTC: Cutting across all regulators’ areas of responsibility including issues to
do with market entry; agent exclusivity; account to-account
interoperability.
 The fact that digital financial systems operate over telecommunications
networks, means data protection and security are pertinent issues to both
regulators.
 There are a lot of interlinkages among financial; telecommunication and
competition Authorities whereby they have to reinforce one another.

8. Implications: A Collaborative
Approach
 Hence coordination and collaboration among these
regulatory bodies is necessary :
 for the development of a conducive regulatory environment
that fosters innovation, growth and inclusivity in the
provision of digital financial services collaboration is
beneficial:
 for efficiency purposes, and where powers overlap,
collaboration may reduce duplication in resources;
 Reducing conflict between various regulators especially on
anticompetitive behaviour;
 to allow regulators to draw on each other’s respective
strengths, including ensuring that the institution with the
stronger legal powers, larger budget or political credibility
uses them optimally.

9. Implications: Light Touch
Regulation
 In general robust regulation is needed to protect against systemic risks
in banking
 However, the need to strike a balance between financial
protectiveness, innovation and financial Inclusion has resulted in a
light touch approach to regulation as follows:
 Regulation increasingly being tweaked to match the kind and scale of
risk involved in transactions.
 We are witnessing a relaxation of entry conditions into both the financial
and telecoms market. Whereby:
 The Central bank has opened up the financial services market to other
players such as MNOs and money transfer agencies.
 Banks now offering banking services through agents unlike the traditional
scenario where delegation of customer-facing functions where limited
to registered legal entities with a business licence or minimum
amount of capital.

10. Implications: Light Touch
Regulation
 Relaxation of criteria for one to operate as a banking agent- No hard and
fast obligations on :
 capital requirements ; reserve requirements; governance
requirements and reporting and disclosure requirements .
 Full banking regulations no longer applied unnecessarily as it can be
disproportionate and counterproductive.
 A lighter licensing regime, such as electronic money issuer (EMI)
licences, may be appropriate.
 However, prevention of terrorism finance and money laundering may
also justify limiting the amounts that may be Transferred, requiring
certain record keeping, and identification of the sender.
 The risks are increasingly mitigated by requirement for SIM registration
and PIN numbers and the recording of transactions digitally.
 This reduces (anonymity risk), enable tracking of each transaction
(reducing elusiveness risk), and enable the monitoring the frequency
and scale of transactions. (enabling oversight).

11. Implications: Competition
Regulation
 Traditionally central banks are known for treating competition issues as a
lower priority than financial stability and prudential regulation).
 Technological developments and innovation are bringing in other barriers to
entry as well as new products that may influence market power.
 For example USSD channels were hitherto regarded as peripheral to an
MNO core’s business has now become a hot subject of regulatory interest.
 Need to strike a balance between allowing investment and innovation to reap
its rewards whilst at same time safeguarding competition.
 The focus is on understanding the dynamics of market power in both mobile
telecommunications and digital financial services markets.
 The fact digital financial services ride on telecommunication networks and their
agencies has brought competition regulation issues to the centre stage.
These include issues to do with:

12. Implications: Competition
Regulation cont..
Access to telecommunication networks:
 A key area for focus in some markets will be the terms and pricing of access of competing mobile
money providers to the MNOs’ USSD channels.
 MNOs can use their market power over communications channels to leverage network effects to
prevent competitors gaining traction in the downstream mobile money market.
 This concern over vertical integration and control over a bottleneck resource for downstream
competitors is ‘meat and potatoes’ in telecommunications regulation and competition law.
 Strategies include:
 refusing to provide USSD to competitors or delay supply based on justifications such as lack of
capacity or technical readiness.
 offering prices which squeeze the competitors’ margins to make their business commercially
unviable, and discriminating in pricing and other terms.
 Such exclusionary behaviour can foster and embed a vicious circle of network effects in both the
mobile money and telecommunications markets.
 The Telecommunications Regulatory Authority of India (TRAI) was the first to set a price ceiling for
USSD sessions in 2013 of USSD for mobile money
 In Zambia, for example, MTN was fined by the competition authority for restricting access to USSD of
Zoona, a major payments competitor.
 In Zimbabwe, one MNO was investigated by the Competition and Tariff Commission (CTC) for
possible breaches of the Competition Act.

13. Implications: Competition
Regulation cont..
Agent networks;
the fact that many agents double up as agents for both
telephone services and financial services means that
incidences of abuse of market power can become
prevalent.
Hence the need to guard against anti- competitive
behaviour whilst at the same time encourage
investment in agent networks to increase density of
penetration and drive coverage to unserved areas.
This is necessary to ensure that exclusive dealing
does not impede competitors from entering and
growing in the market

14. Implications: Competition
Regulation cont..
Interoperability
 Large MNOs with extensive infrastructure and upfront investment in mobile money networks have
little incentive to voluntarily interoperate with smaller MNOs and other mobile financial services
providers.
 There is thus a risk that without interoperability, or introducing it too late, the market leader may
become entirely invulnerable to competition.
 Where one service provider is dominant, these network effects can crowd out competition and
entrench the current market structure.
 This is because of the mutually-reinforcing network effects of telecommunications and mobile money
services which can be a strong barrier to market entry.
 As the market matures, interoperability becomes mandatory in order to mitigate harmful network
effects.
 This should happen at the right time when agent networks are built out, lead firm recoups its
investment, and its dominance becomes embedded.
 In addition, interoperability may impose additional costs on service providers to allow for compatibility
between diverse technologies and systems.
 Beyond technical interoperability, it will also be important to ensure that charges for making cross-
network transfers do not discourage cross-network transfers.

15. Implications: Competition
Regulation
 Interoperability cont..
 Financial regulators will typically benefit greatly from coordinating
discussions on interoperability with both telecommunications regulators
and competition authorities.
 Both have an understanding of competitive markets in a network industry,
network effects and the need for interoperability.
 The telecommunications regulator will also typically have extensive
experience with the practicalities of telecommunications network
interconnection, including flow-through problems of wholesale pricing for
cross-network transfers.
 While telecommunications interconnection and mobile money
interoperability are not the same thing, there are lessons worth sharing
among regulators.

16. Implications: Competition
Regulation cont..
Access to and control of data
 As the digital financial services market evolves, access to and control of transaction data
assumes more importance.
 In most cases network services providers will naturally have an upper hand on transaction
information as mobile money accounts are linked to mobile phone numbers.
 This means MNOs will have monopolistic control over information on credit history which they
can use to their advantage especially where they have dominance in the provision of mobile money.
 Risk-based financial services, in particular lending and insurance, will depend on profiling
customers to come up with credit scorecards and other evaluations.
 Lenders may face information asymmetries that reduce the quality of their credit evaluations and
lending decisions.
 This may pose barriers to entry, growth and innovation in mobile financial services, reducing
competition and increasing costs of lending and borrowing.
 Questions arise as to who owns the data : Is it the consumer, the service provider or is it a public
good that should be availed to all competing providers?
 Most probably regulators are likely to consider requiring open access to data where it is an ‘essential
facility’ for mobile credit when the provider is dominant.
 Standards on how customers’ transactional data is secured, accessed, analysed and shared (and
who owns it) may be necessary to stimulate the development of mobile financial services.

17. Implications: Consumer
Protection
 Consumer protection has not been a secondary priority in financial regulation, as it
has been in much traditional telecommunications regulation.
 Liberalisation and competition were primarily expected to trigger the desired
consumer benefits.
 The upsurge in mobile financial services has conjured up several consumer
protection issues to do with Transparency, disclosure and effective consent.
 Because of the increasing popularity of digital financial services, consumers may
not have the requisite financial literacy and knowledge of available alternatives to
make well informed decisions.
 As such they can be stuck with providers who may offer high transaction prices
and lower quality of service (principally USSD) without competitive pressure .
 In some cases, the consumer may not even know whether the MNO is charging him
or her – or the provider – for the session.
 Some MNOs inform the customer of the charges after the transaction, and others do
not inform the customer at all
 Hence there is need to develop rules as to what must be disclosed and when it must
be disclosed to potential customers.

18. Implications: Consumer Protection
 Disputes and complaints processes are now critical.
 Processes for redressing customer complaints about the
collection and use of incorrect data, or data incorrectly
collected, will be needed.
 Disclosure on what data about a customer is collected,
how it will be treated and used, including for third
parties, will also need to be developed.
 Dispute and complaints procedures are important to
protect consumers and ensure trust in the mobile money
system.

19. Implications: Privacy, data
protection and security
 The lack of access to formal financial services in rural areas
makes consumers more prone to granting consent to the
access and use of their data, unaware of the risks.
 Breaches of privacy and particularly data security may result in
identity theft, harm to credit records, fraud and other risks.
 A range of privacy and data protection issues will need to be
addressed in most mobile financial services markets.
 These include:
 requirements to obtain effective consent, including through ‘opt-in’
permissions for use of customer data.
 Rules on liability for third parties’ use of customer data need to be
developed.
 Privacy and marketing rules.

20. Implications: Privacy, data
protection and security
 Regulators will likely need to enforce some basic protective
measures, and the requirement for dominant providers to adopt
the ‘Privacy by Design’ principle.
 Issues to do with data security also assume importance as
they can stimulate service uptake and increase consumer
protection.
 Such Issues relate to access control, authentication, non-
repudiation (i.e., preventing customers denying transactions
they have carried out), data confidentiality communication
security, data integrity, availability and privacy.
 The development of industry standards, in dialogue with the
regulators, for this purpose, will be important to ensure actual
adoption.

21. conclusion
 Policy and regulation of financial services and
telecom services is changing.
 Light touch, collaborative approach,
underpinned by self regulation through setting
of industry standards.
 Co-opetition, access to and control of
transaction data as well as consumer
protection taking centre stage unlike before.