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