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The Roadmap Approach to Regulating Digital Financial Services
Jonathan GreenacreResearch Fellow,
University of New South Walesj.greenacre@unsw.edu.au
ITU Workshop on “Digital Financial Services and Financial Inclusion”
(Geneva, Switzerland, 4 December 2014)
2
The Roadmap Approach to Regulating DFS
Part 1. What is proportionate regulation?
Part 2. The roadmap approach can help us design proportionate regulation
Part 3. Let’s apply the roadmap approach to storage and transfer of e-money
Part 4. Next steps
3
Part 1. What is proportionate regulation?
Part 2. The roadmap approach can help us design proportionate regulation
Part 3. Let’s apply the roadmap approach to storage and transfer of e-money
Part 4. Next steps
The Roadmap Approach to Regulating DFS
4
Proportionate regulation:
The costs of regulation must be proportionate to the benefits and risks of DFS.
We need to understand the relationship between benefits, risks, and regulation.
What is proportionate regulation?
5
Part 1. What is proportionate regulation?
Part 2. The roadmap approach can help us design proportionate regulation
Part 3. Let’s apply the roadmap approach to storage and transfer of e-money
Part 4. Next steps
The Roadmap Approach to Regulating DFS
6
Incremental method: Start with the most basic model of DFS;Then examine more complex models, one building block at a time.
For each building block, determine: Benefits; Risks that come with those benefits; Regulation that can deal with those risks.
The method behind the roadmap approach
7
Part 1. What is proportionate regulation?
Part 2. The roadmap approach can help us design proportionate regulation
Part 3. Let’s apply the roadmap approach to storage and transfer of e-money
Part 4. Next steps
The Roadmap Approach to Regulating DFS
8
Question: How can a regulator design proportionate regulation for storing customers’ funds?
Benefits of storage• Access to notes and coins• Interest payments • Economic growth
Risks from storage• Operational/technological• Liquidity• Insolvency• Credit risk• Bank failure • Bond default
Regulation• Capital requirements• Fund isolation• Fund safeguarding• Insurance for the issuer • Insurance for the bank.
Establish relationship
Establish relationshipLook at lending to
establish the relationship between benefits, risks, and regulation.
Let’s use the roadmap to design proportionate regulation for storing
customers’ funds
Benefits
Risks
We set up the roadmap by putting benefits on one axis and risks on the
other
Issuer
Asset Liability
Cash Customer account 1
Customer account 2
Customer account 3
Benefits
Risks
No lending (basic model)
Customer Cash merchant
Model 1: Our most basic model of storage
Access to e-money
Benefits
Risks
Issuer•Telecommunications; •Operational / technological;•Insolvency; •Liquidity.
No lending (basic model)
Customer Cash merchant
Issuer
Asset Liability
Cash Customer account 1
Customer account 2
Customer account 3
Basic regulation•Consumer law; •Business conduct.
Basic regulation•Consumer law; •Business conduct.
There is no lending, so the benefits, risks and required regulation are very
basic
Access to e-money
Benefits
Risks
Issuer•Telecommunications; •Operational / technological;•Insolvency; •Liquidity.
No lending (basic model)
Customer Cash merchant
Issuer
Asset Liability
Cash Customer account 1
Customer account 2
Customer account 3
Bank
Company Bonds
Government/Central Bank Bonds
Asset Liability
Cash reserves
Pooled account
Issuer lending
Basic regulation•Consumer law; •Business conduct.
Basic regulation•Consumer law; •Business conduct.
(e.g. Bolivia, Indonesia, Namibia, Philippines)
Model 2: Let’s add a building block: the issuer can invest customers’ funds
Access to e-money
Benefits
Risks
Issuer•Telecommunications; •Operational / technological;•Insolvency; •Liquidity.
Issuer (previous risks); plus: •Bond default; and •Bank failure.
No lending (basic model)
Customer Cash merchant
Issuer
Asset Liability
Cash Customer account 1
Customer account 2
Customer account 3
Bank
Company Bonds
Government/Central Bank Bonds
Asset Liability
Cash reserves
Pooled account
Issuer lending
Basic regulation•Consumer law; •Business conduct.
Basic regulation•Consumer law; •Business conduct.
Interest payments to customers
Moderate regulation•Previous regulation; plus •Issuer: prudential-like regulation;
• Diversification;• Capital requirements.
•Bank: basic prudential regulation.
Moderate regulation•Previous regulation; plus •Issuer: prudential-like regulation;
• Diversification;• Capital requirements.
•Bank: basic prudential regulation.
Now there is lending, which creates additional benefits, risks, and required
regulation
Interest payments to customers
Access to e-money
Benefits
Risks
Issuer•Telecommunications; •Operational / technological;•Insolvency; •Liquidity.
Issuer (previous risks); plus: •Bond default; and •Bank failure.
No lending (basic model)
Customer Cash merchant
Issuer
Asset Liability
Cash Customer account 1
Customer account 2
Customer account 3
Company Bonds
Government/Central Bank
Bonds
Lending to firms / financial
markets
Consumer lending
Bank
Company Bonds
Government/Central Bank Bonds
Asset Liability
Cash reserves
Pooled account
Issuer lending
Basic regulation•Consumer law; •Business conduct.
Basic regulation•Consumer law; •Business conduct. Bank lending
Moderate regulation•Previous regulation; plus •Issuer: prudential-like regulation;
• Diversification;• Capital requirements.
•Bank: basic prudential regulation.
Moderate regulation•Previous regulation; plus •Issuer: prudential-like regulation;
• Diversification;• Capital requirements.
•Bank: basic prudential regulation.
Interest payments to customers
(Permitted in most countries, although limitations apply in Bolivia)
Model 3: Let’s add another building block: the bank can lend out customers’ funds
Interest payments to customers
Access to e-money
Benefits
Risks
Issuer•Telecommunications; •Operational / technological;•Insolvency; •Liquidity.
Issuer (previous risks); plus: •Bond default; and •Bank failure.
Previous risks; plusFull bank failure: •Exogenous;•Endogenous.
No lending (basic model)
Customer Cash merchant
Issuer
Asset Liability
Cash Customer account 1
Customer account 2
Customer account 3
Company Bonds
Government/Central Bank
Bonds
Lending to firms / financial
markets
Consumer lending
Bank
Company Bonds
Government/Central Bank Bonds
Asset Liability
Cash reserves
Pooled account
Issuer lending
Basic regulation•Consumer law; •Business conduct.
Basic regulation•Consumer law; •Business conduct.
Moderate regulation•Previous regulation; plus •Issuer: prudential-like regulation;
• Diversification;• Capital requirements.
•Bank: basic prudential regulation.
Moderate regulation•Previous regulation; plus •Issuer: prudential-like regulation;
• Diversification;• Capital requirements.
•Bank: basic prudential regulation.
Full regulation•Previous regulation (for previous risks);•Bank: more extensive prudential regulation.
Full regulation•Previous regulation (for previous risks);•Bank: more extensive prudential regulation.
Bank lendingEconomic growth
Interest payments to customers
There is bank lending, which creates even more benefits, risks, and required
regulation
Moderate regulation•Previous regulation; plus •Issuer: prudential-like regulation;
• Diversification;• Capital requirements.
•Bank: basic prudential regulation.
Moderate regulation•Previous regulation; plus •Issuer: prudential-like regulation;
• Diversification;• Capital requirements.
•Bank: basic prudential regulation.
Full regulation•Previous regulation (for previous risks);•Bank: more extensive prudential regulation.
Full regulation•Previous regulation (for previous risks);•Bank: more extensive prudential regulation.
Economic growth
Interest payments to customers
Access to e-money
Benefits
Risks
Issuer•Telecommunications; •Operational / technological;•Insolvency; •Liquidity.
Issuer (previous risks); plus: •Bond default; and •Bank failure.
Previous risks; plusFull bank failure: •Exogenous;•Endogenous.
No lending (basic model)
Customer Cash merchant
Issuer
Asset Liability
Cash Customer account 1
Customer account 2
Customer account 3
Company Bonds
Government/Central Bank
Bonds
Lending to firms / financial
markets
Consumer lending
Bank
Company Bonds
Government/Central Bank Bonds
Asset Liability
Cash reserves
Pooled account
Issuer lending
Basic regulation•Consumer law; •Business conduct.
Basic regulation•Consumer law; •Business conduct. Bank lending
Benefit 1 of the roadmap: groups our research into benefits, risks and regulation and shows the relationship between them
Interest payments to customers
Moderate regulation•Previous regulation; plus •Issuer: prudential-like regulation:
• Diversification;• Capital requirements.
•Bank: basic prudential regulation.
Moderate regulation•Previous regulation; plus •Issuer: prudential-like regulation:
• Diversification;• Capital requirements.
•Bank: basic prudential regulation.
Full regulation•Previous regulation (for previous risks);•Bank: more extensive prudential regulation.
Full regulation•Previous regulation (for previous risks);•Bank: more extensive prudential regulation.
Economic growth
Interest payments to customers
Access to e-money
Benefits
Risks
Issuer•Telecommunications; •Operational / technological;•Insolvency; •Liquidity.
Issuer (previous risks); plus: •Bond default; and •Bank failure.
Previous risks; plusFull bank failure: •Exogenous;•Endogenous.
No lending (basic model)
Customer Cash merchant
Issuer
Asset Liability
Cash Customer account 1
Customer account 2
Customer account 3
Company Bonds
Government/Central Bank
Bonds
Lending to firms / financial
markets
Consumer lending
Bank
Company Bonds
Government/Central Bank Bonds
Asset Liability
Cash reserves
Pooled account
Issuer lending
Basic regulation•Consumer law; •Business conduct.
Basic regulation•Consumer law; •Business conduct. Bank lending
I want DFS to provide these benefits
This means I must deal with these risks
I can use this regulation to deal with those risks
Interest payments to customers
Benefit 2 of the roadmap: we can design proportionate regulation
Moderate regulation•Previous regulation; plus •Issuer: prudential-like regulation;
• Diversification;• Capital requirements.
•Bank: basic prudential regulation.
Moderate regulation•Previous regulation; plus •Issuer: prudential-like regulation;
• Diversification;• Capital requirements.
•Bank: basic prudential regulation.
Full regulation•Previous regulation (for previous risks);•Bank: more extensive prudential regulation.
• Form of deposit insurance.
Full regulation•Previous regulation (for previous risks);•Bank: more extensive prudential regulation.
• Form of deposit insurance.
Economic growth
Interest payments to customers
Access to e-money
Benefits
Risks
Issuer•Telecommunications; •Operational / technological;•Insolvency; •Liquidity.
Issuer (previous risks); plus: •Bond default; and •Bank failure.
Previous risks; plusFull bank failure: •Exogenous;•Endogenous.
No lending (basic model)
Customer Cash merchant
Issuer
Asset Liability
Cash Customer account 1
Customer account 2
Customer account 3
Company Bonds
Government/Central Bank
Bonds
Lending to firms / financial
markets
Consumer lending
Bank
Company Bonds
Government/Central Bank Bonds
Asset Liability
Cash reserves
Pooled account
Issuer lending
Basic regulation•Consumer law; •Business conduct.
• Civil law
Basic regulation•Consumer law; •Business conduct.
• Civil lawBank lending
Benefit 3 of the roadmap: we can identify unclear areas of law and research (in red)
to customers
Regulation•Encryption•Guarantees•Identification•Capital requirements•Anti-money laundering•Liability rules•Issuer:
• Capital adequacy• Liquidity
•Bank:• Capital adequacy rules• Liquidity.
Risks•Settlement•Systemic•ML/TF•Inflation
Benefits •Transfer funds in small network (non-interoperable)•Transfer funds in a wide network (interoperable)•Transfer funds in the banking system
How can a regulator design proportionate regulation for transferring customers’ funds?
Answer: look at the size and type of participants to establish the relationships between benefits, risks, and regulation.
Establish relationship
Establish relationship
Now let’s use the roadmap to design proportionate regulation for transferring
e-money between customers
Benefits
Risks
Again, we put benefits on one axis and risks on the other
Benefits
Risks
Non-interoperable(basic model)
CustomerCustomer
Issuer
Model 1: Our most basic transfer model (Kenya)
Benefits
Risks
Access to transfers within a scheme
• Settlement risk: • ML/TF; • Inflationary.
Non-interoperable(basic model)
CustomerCustomer
Issuer
Basic regulation•Business conduct•AML/CFT•Macro-economic policy.
Basic regulation•Business conduct•AML/CFT•Macro-economic policy.
Funds can only be transferred within a scheme, which means the benefits, risks,
and required regulation are very basic
Benefits
Risks
Access to transfers within a scheme
• Settlement risk: • ML/TF; • Inflationary.
Non-interoperable(basic model)
CustomerCustomer
Issuer
Interoperable
Basic regulation•Business conduct•AML/CFT•Macro-economic policy.
Basic regulation•Business conduct•AML/CFT•Macro-economic policy.
Issuer
Issuer
(Indonesia, Tanzania)
Model 2: Let’s add a building block: funds can be transferred across
mobile money schemes
Benefits
Risks
Access to transfers within a scheme
• Settlement risk: • ML/TF; • Inflationary.
• Previous risks (made stronger); • Interconnection.
Non-interoperable(basic model)
CustomerCustomer
Issuer
Interoperable
Basic regulation•Business conduct•AML/CFT•Macro-economic policy.
Basic regulation•Business conduct•AML/CFT•Macro-economic policy.
Issuer
Issuer
Moderate regulation•Previous regulation (stronger application) plus•Issuer: interconnection
o Capital/liquidity requirements
Moderate regulation•Previous regulation (stronger application) plus•Issuer: interconnection
o Capital/liquidity requirements
Access to mm transfer system
Now we have a system which increases benefits, risks, and requires
more extensive regulation
Benefits
Risks
Access to mm transfer system Access to transfers within a scheme
• Settlement risk: • ML/TF; • Inflationary.
• Previous risks (made stronger); • Interconnection.
Non-interoperable(basic model)
CustomerCustomer
Issuer
InteroperableBank
Banking Clearing System
Bank
Bank
Interoperable with banking system
Issuer
Issuer
Basic regulation•Business conduct•AML/CFT•Macro-economic policy.
Basic regulation•Business conduct•AML/CFT•Macro-economic policy.
Moderate regulation•Previous regulation (stronger application) plus•Issuer: interconnection
o Capital/liquidity requirements
Moderate regulation•Previous regulation (stronger application) plus•Issuer: interconnection
o Capital/liquidity requirements
Access to mm transfer system
(Malawi, Tanzania)
Model 3: Let’s add another building block: funds can be transferred between mobile money and the banking system
Access to mm transfer system Access to transfers within a scheme
Benefits
Risks• Settlement risk: • ML/TF; • Inflationary.
• Previous risks (made stronger); • Interconnection.
• Issuers: previous risks (made stronger); • Banking risks; • Issuers – banks: interconnection.
Non-interoperable(basic model)
CustomerCustomer
Issuer
InteroperableBank
Banking Clearing System
Bank
Bank
Interoperable with banking system
Issuer
Issuer
Basic regulation•Business conduct•AML/CFT•Macro-economic policy.
Basic regulation•Business conduct•AML/CFT•Macro-economic policy.
Moderate regulation•Previous regulation (stronger application) plus•Issuer: interconnection
o Capital/liquidity requirements
Moderate regulation•Previous regulation (stronger application) plus•Issuer: interconnection
o Capital/liquidity requirements
High levels of regulation•Previous regulation; plus•Banking risks•Issuer / bank: interconnection.
High levels of regulation•Previous regulation; plus•Banking risks•Issuer / bank: interconnection.
Access to mm-bank transfer system
Access to mm transfer system
Now the network includes the banking system, creating even more benefits, risks, and regulation to the previous two models
Benefits
Risks• Settlement risk: • ML/TF; • Inflationary.
• Previous risks (made stronger); • Interconnection.
• Issuers: previous risks (made stronger); • Banking risks; • Issuers – banks: interconnection.
Non-interoperable(basic model)
CustomerCustomer
Issuer
InteroperableBank
Banking Clearing System
Bank
Bank
Interoperable with banking system
Issuer
Issuer
Basic regulation•Business conduct•AML/CFT•Macro-economic policy.
Basic regulation•Business conduct•AML/CFT•Macro-economic policy.
Moderate regulation•Previous regulation (stronger application) plus•Issuer: interconnection
o Capital/liquidity requirements
Moderate regulation•Previous regulation (stronger application) plus•Issuer: interconnection
o Capital/liquidity requirements
High levels of regulation•Previous regulation; plus•Banking risks•Issuer / bank: interconnection.
High levels of regulation•Previous regulation; plus•Banking risks•Issuer / bank: interconnection.
Access to mm transfer system Access to transfers within a scheme
Access to mm-bank transfer system
Access to mm transfer system
Benefit 1 of the roadmap: groups our research into benefits, risks and regulation and shows the relationship between them
Benefits
Risks• Settlement risk: • ML/TF; • Inflationary.
• Previous risks (made stronger); • Interconnection.
• Issuers: previous risks (made stronger); • Banking risks; • Issuers – banks: interconnection.
Non-interoperable(basic model)
CustomerCustomer
Issuer
InteroperableBank
Banking Clearing System
Bank
Bank
Interoperable with banking system
Issuer
Issuer
Basic regulation•Business conduct•AML/CFT•Macro-economic policy.
Basic regulation•Business conduct•AML/CFT•Macro-economic policy.
Moderate regulation•Previous regulation (stronger application) plus•Issuer: interconnection
o Capital/liquidity requirements
Moderate regulation•Previous regulation (stronger application) plus•Issuer: interconnection
o Capital/liquidity requirements
High levels of regulation•Previous regulation; plus•Banking risks•Issuer / bank: interconnection.
High levels of regulation•Previous regulation; plus•Banking risks•Issuer / bank: interconnection.
I want DFS to provide these benefits
This means I must deal with these risks
I can use this regulation to deal with those risks
Access to mm transfer system Access to transfers within a scheme
Access to mm-bank transfer system
Access to mm transfer system
Benefit 2 of the roadmap: helps us design proportionate representation
Benefits
Risks• Settlement risk: • ML/TF; • Inflationary.
• Previous risks (made stronger); • Interconnection.
• Issuers: previous risks (made stronger); • Banking risks; • Issuers – banks: interconnection.
Non-interoperable(basic model)
CustomerCustomer
Issuer
InteroperableBank
Banking Clearing System
Bank
Bank
Interoperable with banking system
Issuer
Issuer
Basic regulation•Business conduct•AML/CFT•Macro-economic policy.
Basic regulation•Business conduct•AML/CFT•Macro-economic policy.
Moderate regulation•Previous regulation (stronger application) plus•Issuer: interconnection
o Capital/liquidity requirements
Moderate regulation•Previous regulation (stronger application) plus•Issuer: interconnection
o Capital/liquidity requirements
High levels of regulation•Previous regulation; plus•Banking risks•Issuer / bank: interconnection.
High levels of regulation•Previous regulation; plus•Banking risks•Issuer / bank: interconnection.
Access to mm transfer system Access to transfers within a scheme
Access to mm-bank transfer system
Access to mm transfer system
Benefit 3 of the roadmap: we can identify unclear areas of law and research (in red)
30
Part 1. What is proportionate regulation?
Part 2. The roadmap approach can help us design proportionate regulation
Part 3. Let’s apply the roadmap approach to storage and transfer of e-money
Part 4. Next steps
The Roadmap Approach to Regulating DFS
31
Real-time payments
Savings
Loans
Insurance
Etc
No. of building blocks
Mas and Almazán (2014)
We can use the regulatory roadmap approach for other areas of DFS
Our aim: proportionate regulation of each of these financial services
Jonathan GreenacreEmail: j.greenacre@unsw.edu.auPhone: +61 468 929445
Geneva, Switzerland, 4 December 2014 32
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