The Digital Financial Services Primer

Leon Perlman1

ABSTRACT2

Digital Financial Services (DFS) is a relatively new, low-cost means of digital access to transactional financial
services. Often termed ‘mobile money’ or ‘mobile financial services,’ DFS is one of the core solutions used in
developing countries to catalyze financial inclusion and provide much-needed low-cost access to financial services.

Aimed at those at the Bottom of the Pyramid (BOP) in developing countries, it shifts provision of financial services
it uses digital access devices such as mobile phones and digital value transfer channels. It also features the
emergence of agent networks for cash-handling and DFS account signups.

DFS can be offered banks and non-banks – known as Digital Financial Service Providers (DFSPs) - who may be
licensed or authorized by a range of regulators to provide these services, either on their own or in mandated
partnerships. Core DFS regulators include the central bank, the financial intelligence unit and the national
telecommunications authority. ‘Enabling and proportional’ regulatory regimes allow DFSPs to collect customer
funds through agents operating on their behalf, convert those funds into electronic money (e-money) to be stored in
customer stored value accounts (SVAs) that are used for primarily transactional purposes.

While DFS has demonstrated novel responses and innovations from regulators and lawmakers to facilitate and
supervise new market participants, often the regulatory innovations have been incremental or perfunctory, featuring
some interesting carve-outs that often represent the local political economy, for example requiring formation of
specific financial entity vehicles to provide DFS.

Initial, foundational services include remittance and bill payments, but with limited interoperability between
competing providers. There are signs however of a more integrated approach, where DFSPs integrate into a national
payment system and the broader economy, while central banks themselves are building interoperable switches to
catalyze this integration. Governments are increasing digital liquidity in DFS and hence driving DFS use by placing
social payments into DFS SVAs. New forms of vendor platforms also facilitate these improvements.

While some 690 million people in 91 countries actively use their DFS accounts, handicapping a more rapid
evolution and adoption of DFS are strict anti-money laundering (AML) rules; poor identity document regimes in
many countries that stifle account signups; and poor mobile coverage and lack of high speed mobile data coverage
in rural areas that forces DFS customers there to use insecure and error prone text-based DFS user interfaces on
their phones. All these factors appears to be the cause of a drop in account usage in some countries in favor of a
dependency on agent-derived over-the-counter transactions. There is also a downstream effect on competition and
the commercial viability of some DFSPs. This brief primer on DFS expands on these issues and demonstrates how
technological, regulatory and commercial components interact to form the DFS ecosystem.3

1
Leon Perlman Ph.D.; Head: Digital Financial Services Observatory, Columbia Institute for Tele-information, Columbia
University, New York.
2
This research was funded through a grant from the Bill and Melinda Gates Foundation, which facilitated the creation of the
Digital Financial Services Observatory, a DFS policy and regulatory research project of the Columbia Institute for Tele-
information at Columbia University in New York. See www.dfsobservatory.com
3
Much of the background and foundational data in this primer is drawn inter alia from Perlman, L (2003) Mobile Commerce,
Payments Conference, Cape Town, SOuth Africa; Perlman, L (2010) Mobile Money, Mobile Money Conference at Columbia
Business School; and Perlman, L (2012) LLD Thesis: Legal and Regulatory Aspects of Mobile financial Services, available at
https://bit.ly/2KGfC8k

1
Table of Contents

ABBREVIATIONS 3
1 Introduction 5
2 The Evolving DFS Ecosystem 9
2.1 Overview 9
2.2 The DFS Scheme 10
2.3 Mobile Technology and User Interfaces 13
2.4 Transformational Innovations in DFS 14
2.4.1 Regulatory Innovations 15
2.4.2 Emergence of New Actors 16
2.4.3 Technology Improvements and Innovations 17
2.5 Aspirational Use Cases Benefits of DFS 18
2.6 Factors Needed To Initiate and Catalyze DFS 18
2.6.1 Overview 18
2.6.2 Market and Ecosystem Need 19
2.6.3 Infrastructural Components 20
2.6.3.1 Identity Systems 20
2.6.3.2 Transaction Processing Ubiquity 21
2.6.3.3 DFS Vendor Platforms 22
2.6.3.4 Ubiquitous Mobile Network Coverage 22
2.6.3.5 Supporting Systems and Providers 23
2.6.3.6 User and Merchant Interfaces 23
2.6.4 The Regulatory Environment for DFS 23
2.6.4.1 Overview 23
2.6.4.2 The Regulators of DFS 25
2.6.4.3 Factors and Components in Regulatory Development 28
2.6.4.4 Aspects of a Foundational DFS Enabling and Proportional Regulatory Environment 29
3 Selected DFS Results and Challenges So Far 33
4 Conclusion 40

2
ABBREVIATIONS

2G Second Generation Mobile

3G Third Generation Mobile
4G Fourth Generation Mobile
AFR Access to Finance Rwanda
AML Anti-Money Laundering
ATM Automated Teller Machine
BIS Bank for International Settlements
BMGF Bill and Melinda Gates Foundation
BOP Bottom of the Pyramid
BOT Bank of Tanzania
BOU Bank of Uganda
BTCA Better Than Cash Alliance
CB Central Bank
CDD Customer Due Diligence
CDR Call Data Record
CGAP Consultative Group to Assist the Poor
CICO Cash-in, Cash-out
CIV Customer Identification and Verification
CPMI Committee on Payment Market Infrastructure
DCB Direct Carrier Billing
DFID Department for International Development
DFS Digital Financial Services
DFSP Digital Financial Services Provider
eID Electronic Identification Document
eKYC Electronic Know Your Customer
e-money Electronic Money
EMI Electronic Money Issuer
FATF Financial Action Task Force
FRAND Fair, Reasonable and Non-Discriminatory
G20 Group of Twenty
G2P Government To Person
GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit
GPFI Global Partnership for Financial Inclusion
GPRS General Packet Radio Services
GSM Global System for Mobile Communications
GSMA GSM Association
ID Identity
IFC International Finance Corporation
IMF International Monetary Fund
ITU International Telecommunications Union
ITU FG DFS International Telecommunications Union Focus Group on Digital Financial Services
IVR Interactive Voice Response
KYC Know Your Customer
LONO Letter of No Objection
MEFMI Macroeconomic & Financial Management Institute of Eastern & Southern Africa
MFS Mobile Financial Services
ML Money Laundering
MMS Multimedia Messaging Service
MNO Mobile Network Operator

3
MOU Memorandum of Understanding
NTA National Telecommunications Authority
OTC Over the Counter
P2P Person to Person
PAFI Payment Aspects of Financial Inclusion
PSP Payment Service Provider
QOS Quality of Service
RBA Risk Based Approach
SIM Subscriber Identity Module
SMP Significant Market Power
SMS Short Message Service
SOV Store of Value
SRA Sector Regulatory Authorities
SSB Standard Setting Body
STK SIM Toolkit
SVA Stored Value Account
TF Terrorism Financing
TSP Technical Service Provider
UCC Uganda Communications Commission
UI User Interface
UN United Nations
UNCDF United Nations Capital Development Fund
UNSGSA United Nations Secretary General’s Special Advocate
USAID United States Agency for International Development
USSD Unstructured Supplementary Service Data
UX User Experience
VAS Value Added Services
WAP Wireless Access Protocol
WASP Wireless Application Service Provider

4
1 Introduction
Digital Financial Services (DFS) is a relatively new, 4 low-cost means of digital access to transactional financial
services.5

Aimed at those at the Bottom of the Pyramid (BOP)6 in developing and emerging countries7 and with an aspirational
goal of improving financial inclusion, it shifts provision of financial services from primarily banks to non-banks,
with the core access to services using a mobile phone.8

With its increasing ubiquity and expansion of basic mobile coverage across emerging and developing countries,
new technologies and innovations in vendor platforms have facilitated the use of the mobile phone to evolve from
a basic telecommunications utility of calls and messages to that of a new enhanced role as a payment and person-
to-person (P2P) transfer instrument.

The most proximate means then to facilitate formal financial inclusion and thus access to formal services is through
development of a DFS ecosystem that can provide ubiquitous and low cost national access to Digital Financial
Service Providers (DFSPs) and banks primarily through the use of low-cost mobile phones operating off mobile
networks.

4
While DFS is a relatively new term, its scope includes even an early implementation of a mobile phone-centric transactional
financial ecosystem was launched in 2001 in the Philippines. It was initially called ‘mobile banking,’ later ‘mobile money,’
then ‘mobile financial services,’ and leading to the contemporaneous term DFS.
5
See Exhibit 3 below on sample of conceptions of DFS through the lens of industry observers, regulators and participants.
6
The term BOP was introduced sometime in 1999 by Prahalad and Hart to describe what they observed were ‘Four Consumer
Tiers.’ At the very top of the world economic pyramid, they said were 75 to 100 million affluent Tier 1 consumers from around
the world, comprising a cosmopolitan group of middle- and upper-income people in developed countries and the few rich elites
from the developing world. In the middle of the pyramid, in Tiers 2 and 3, are poor customers in developed nations and the
rising middle classes in developing countries, the targets of past emerging-market strategies. Tier 4, they indicated, were the
4 billion people at the bottom of the pyramid who had an annual per capita income — based on purchasing power parity in US
dollars — is less than USD 1,500, the minimum considered necessary to sustain a decent life. For well over a billion people —
roughly one-sixth of humanity — per capita income is less than USD 1 per day. See Prahalad, C & Hart. S (1999) Strategies
for the Bottom of the Pyramid: Creating Sustainable Development, available at https://bit.ly/2OdTYsV. For an analysis of the
BOP concept years later with revised figures, see Kolk, A, Rivera-Santos, M & Rufin, C (2012) Reviewing a Decade of
Research on the 'Base/Bottom of the Pyramid' (BOP) Concept, available at https://ssrn.com/abstract=2193938
7
In this paper, the DFSO follows the UNDP classification of developed and developing countries for the most part. It uses the
Human Development Index (HDI) to classify countries. HDI is a composite index of three indices that measure longevity,
education and income in a country to classify countries. Developed countries are countries in the top quartile of the HDI
distribution and developing countries are countries in the bottom three quartiles. The term developing countries is however
being used loosely in this paper. In the DFSO’s research of developing countries, we also included countries that may not
necessarily be in the lower three quartiles of the HDI distribution but have high financial exclusion and can benefit from the
use of DFS, for example Brazil and Russia. Nielsen, L (2011) Classification of Countries Based on their Level of Development,
available at https://bit.ly/2JEg4n7; and UNDP (2018) Human Development Index, available at
http://hdr.undp.org/en/content/human-development-index-hdi
8
The moniker ‘mobile money’ and ‘mobile financial services’ often refers to some or all of evolving DFS components. Mobile
money is the term used by the GSM Association (GSMA) to describe all mobile phone-based financial transactions. See GSMA
(2018) 2017 State of the Industry Report on Mobile Money, available at https://bit.ly/2IvPZ94

5
 ‘Financial Inclusion’ is often defined as the provision and use of formal accounts operated by regulated entities
that cater to those at the BOP.9 With payments being the connective tissue of a financial system,10 not having
access to an account makes personal liquidity management and payments for even basic services very difficult.
Financial inclusion aims also to lower account costs, allow for greater proximity to financial intermediaries,
enforce stronger legal rights, facilitate better management of financial risk11 and drive development through
access to more capital - thus reducing poverty.

There is a clear recognition12 that financial stability in an economy and financial inclusion go hand in hand
because they represent two sides of the same coin. It can also lead to more politically stable environments.13
Similarly, at a pure macro level, financial inclusion attracts greater participation by different segments of the
economy to the formal financial system particularly by improving the process of intermediation between savings
and investments. As a result, the Group of Twenty (G20),14 the World Bank,15 the International Monetary Fund
(IMF),16 and a number of United Nations (UN) agencies17 have all made financial inclusion a priority. In
particular, the World Bank’s ‘Findex’ global survey of adult financial use is a pivotal tool in measuring progress
towards financial inclusion.18 Many countries have developed long-term national financial inclusion strategies to
execute on an inclusive vision.19

Exhibit 1: The Nature of Financial Inclusion

9
Franklin, A, Demirguc-Kunt, A, Klapper, L et al. (2016) The Foundations Of Financial Inclusion: Understanding Ownership
And Use Of Formal Accounts, available at https://bit.ly/2LTBLRr
10
BMGF (2018) Level 1, available at https://leveloneproject.org/
11
World Bank Group (2018) The Global Findex Database 2017, available at https://globalfindex.worldbank.org/
12
Neaime, S & Gaysset, I (2016) Financial Exclusion and Stability in MENA: Evidence from Poverty and Inequality, available
at https://bit.ly/2LXmleW
13
Franklin, A, Demirguc-Kunt, A, Klapper, L et al. (2016) The Foundations Of Financial Inclusion: Understanding Ownership
And Use Of Formal Accounts, available at https://bit.ly/2LTBLRr
14
The G20’s Global Partnership for Financial Inclusion (GPFI) for example is an inclusive platform for all G20 countries,
interested non-G20 countries and relevant stakeholders to carry forward work on financial inclusion, including implementation
of the G20 Financial Inclusion Action Plan. The G20 has issued High-Level Principles (HLPs) for Digital Financial Inclusion.
See GPFI (2017) New G20 High-Level Principles for Digital Financial Inclusion, available at https://bit.ly/2yCCfGe
15
The World Bank Group and the Committee on Payments and Market Infrastructures (CPMI) of the Bank for International
Settlements’ (BIS) Payment Aspects of Financial Inclusion (PAFI) initiatives supports the World Bank’s Universal Financial
Access (UFA2020) program aimed at ensuring that all working-age individuals and businesses have access to at least one
transaction account operated by an authorized and/or regulated payment service provider to perform most, if not all, of their
payment needs; safely store some value; serve as a gateway to other financial services. See WB-CPMI (2016) PAFI, available
at https://bit.ly/2s4rYP8 ; World Bank (2017) UFA2020 Overview: Universal Financial Access by 2020, available at
https://bit.ly/1szzaBL
16
IMF (2018) IMF Releases the 2018 Financial Access Survey, available at https://bit.ly/2AoLKKv.
17
There is also the UN Secretary General’s Special Advocate (UNSGSA) for Inclusive Finance for Development. See
https://www.unsgsa.org. And, Her Majesty Queen Máxima of the Netherlands, who has served as the UN Secretary-General’s
Special Advocate for Inclusive Finance for Development since 2009. See UNSGA (2013) Queen Máxima as the UNSGSA,
available at https://bit.ly/2OY9U7K; UNSGSA (2018) Financial Inclusion, available at https://bit.ly/2qfOcNI; and also the
UN’s ‘Better Than Cash Alliance’ efforts at digitization of developing world financial access systems.
https://www.betterthancash.org/
18
World Bank Group (2018) The Global Findex Database 2017, available at https://globalfindex.worldbank.org/
19
See World Bank (2018) National Financial Inclusion Strategies Resource Center, available at https://bit.ly/2D2ur4l

6
The need for alternative means of access to financial services in many parts of the developing world has its genesis
in the needs, 20 challenges21 and constraints22 of predominantly cash-based economies using informal means of
financial access that do not involve bank accounts.23 Those without access to financial products are also variously
referred to as being ‘unbanked,’ ‘unserved’ or ‘underserved.’24

Exhibit 2: The IMF’s Financial Access Survey results of 2018 showing the encouraging growth of ‘mobile
money’ accounts in low and middle-income countries. Bank accounts reflect deposit accounts with commercial
banks while ‘mobile money’ accounts reflect registered accounts.25 Findings from other surveys however indicate
that usage levels are very low.26

DFS often fills a gap left by banks who have been unable or unwilling to service those at the BOP, and features
non-banks now providing the financially excluded with an alternative to reliance on cash as a means of payment
and transfer. The success of this transition is evident recent IMF data in Exhibit 2 which shows that DFS use has

20
For example, low-cost and proximate access to basic financial services.
21
For example, lack of an ID for DFS onboarding and usage purposes; affordability of access mechanisms such as even feature
phones; slow, unreliable or even non-existent mobile coverage; financial and technical illiteracy; and often significant gender
biases that preclude women from having direct access to financial services and even identity documents. For a recent gender
perspective on regulatory enablers for DFS, see Bin-Humam, Y; Izaguirre, J-C; & Hernandez, E (2018) Regulatory Enablers
for Digital Finance: A Gender Perspective, available at https://bit.ly/2PV4SFz
22
Differences may include often system-wide lack of ID documents and financial history for Customer Identification and
Verification (CIV) and Anti-Money Laundering purposes; use of a feature phones for access to accounts rather than (bank)
branches or full web-based interfaces; technological capabilities and financial literacy of of users; use of human agents rather
than bank branches; and the entry and proliferation of non-bank providers. See also Evans, O (2016) Determinants of Financial
Inclusion in Africa: A Dynamic Panel Data Approach, available at https://bit.ly/2sEiD0V
23
Since banks have traditionally been the front-line for the provision of financial services such as savings accounts and for
remittances, the financially excluded have also been referred to as being unbanked, unserved and underserved. Sahay, R, Čihák,
M, N’Diaye, P, et al. (2015) Rethinking Financial Deepening: Stability and Growth in Emerging Markets, available at
https://bit.ly/1K4Gb3d
24
For a discussion of these terms, see Lyman, T & Kate Lauer (2015) What is Digital Financial Inclusion and Why Does it
Matter?, available at https://bit.ly/1GX1xdJ; and Evans, O (2016) Determinants of Financial Inclusion in Africa: A Dynamic
Panel Data Approach, available at https://bit.ly/2sEiD0V; and Sahay, R, Čihák, M, N’Diaye, P, et al. (2015) Rethinking
Financial Deepening: Stability and Growth in Emerging Markets, available at https://bit.ly/1K4Gb3d
25
IMF (2018) IMF Releases the 2018 Financial Access Survey, available at https://bit.ly/2AoLKKv. Data is from the Survey
and IMF staff calculations and covers 2017 or the most recent 5-year period for reporting countries
26
See Section 3.2.3 on DFS activity levels; and GSMA (2018) 2017 State of the Industry Report on Mobile Money, available
at https://bit.ly/2IvPZ94

7
grown to outgrow bank account us e in many developing and emerging economies..27 Findings from other surveys
however indicate that usage levels are very low.28 ‘Findex’ survey data from the World Bank29 indicates that some
515 million adults opened new accounts in the last three years.30

The need for new financial access solutions has also manifested in new regulatory regimes, with the emergence of
what has become known as ‘enabling and proportional’ regulatory regimes that allow non-banks to enter a market
under a relaxed regulatory regime to collect customer funds through agents operating on behalf of non-banks,31
house these funds in ring-fenced accounts and ‘convert’ those funds into electronic money (e-money) to be stored
in customer stored value accounts (SVAs) for use for primarily transactional purposes.32

This study assumes some very basic knowledge of mobile technologies and payments and this primer will provide
deeper insight into how the DFS ecosystem has evolved, how it operates, and its challenges.

And similarly, for DFS practitioners, it will provide a refresh of the issues that still permeate the DFS environment,
including enabling laws and regulations, regulatory coordination, commercial models, technological challenges,
and interoperability between DFS systems.

For deeper insight into many of the issues raised in this primer, we encourage reading of companion papers authored
or coauthored by the author, including on the DFS/mobile financial services (MFS) scheme;33 DFS technologies;34
mobile coverage;35 regulatory technology36 (regtech),37 regulatory sandboxes;38 competition;39 coordination

27
The IMF’s Financial Access Survey results of 2018 showing the encouraging growth of ‘mobile money’ accounts in low and
middle-income countries. Bank accounts reflect deposit accounts with commercial banks while ‘mobile money’ accounts
reflect registered accounts. IMF (2018) IMF Releases the 2018 Financial Access Survey, available at https://bit.ly/2AoLKKv.
Data is from the Survey and IMF staff calculations and covers 2017 or the most recent 5-year period for reporting countries
28
See Section 3.2.3 on DFS activity levels; and GSMA (2018) 2017 State of the Industry Report on Mobile Money, available
at https://bit.ly/2IvPZ94
29
World Bank Group (2018) The Global Findex Database 2017, available at https://globalfindex.worldbank.org/
30
As noted by the UNSGSA, the power of the Findex lies in the details—the kind of details policymakers, financial sector
providers, and development organizations need to measure progress, understand impact, and plan for the future. See UNSGSA
(2018) Financial Inclusion, available at https://bit.ly/2qfOcNI
31
In some cases where risk is considered higher because of high potential transaction values, regulatory enablement of agents
is required for agents for banks, rather than for non-bank DFSPs. This is often known as ‘agent banking.’
32
Their transaction activity may include person-to-person payments, some merchant payments, receipt of social welfare (G2P)
payments; and increasing use of payments for e-government services. Credit provision by non-bank DFSPs is not ubiquitous,
and is often disallowed by regulators in a DFS context. On services, see McKinsey & Company (2018) Mobile money in
emerging markets: The business case for financial inclusion, available at https://mck.co/2qcWvtt
33
Perlman, L (2012) LLD Thesis: Legal and Regulatory Aspects of Mobile Financial Services, available at
https://bit.ly/2KGfC8k
34
Perlman, L (2017a) Technology evolution and innovation in DFS, available https://bit.ly/2CEufrm; and Perlman, L (2017b)
Technology Inequality: Opportunities And Challenges For Mobile Financial Services, available at https://bit.Ly/2r7nzny
35
Perlman, L & Wechsler, M (2018) The Role of Mobile Coverage on Digital Financial Services, available at
www.dfsobservatory.com
36
Emerging ‘regtech’ solutions using automated regulatory tools such as artificial intelligence (AI) to replace manual processes
are designed to assist regulators in coordinating extended remits caused by the complexity of DFS. See Exhibit 7 on ‘regtech’
and in more detail.
37
Perlman, L & Gurung, N (2018a) Use of Regtech by Central Banks and its Impact on Financial Inclusion, available at
www.dfsobservatory.com
38
Wechsler, M; Perlman, L & Gurung, N (2018) The State of Regulatory Sandboxes in Developing Countries, available at
www.dfsobservatory.com
39
Perlman, L (2017c) Competition Aspects of Digital Financial Services, available at https://bit.ly/2xxLcma

8
between regulators;40 in humanitarian crises responses;41 on the role of the national telecommunications authority
in DFS;42 the role of the central bank in DFS;43 on the role of the competition authority in DFS; 44 and on de-
risking.45

2 The Evolving DFS Ecosystem

2.1 Overview
As noted in the introduction, financial inclusion46 is the aspirational goal of national governments, supra-national
bodies and philanthropists to facilitate and promote the provision and use of formal accounts operated by regulated
entities that cater to those at the BOP47 in many markets. ‘Financial inclusion’ is often defined as the provision and
use of formal accounts operated by regulated entities that cater to those at the BOP.48 There are however variations:
‘Digital Financial Inclusion’ is said to be the enabling component for financial inclusion, described by Consultative
Group to Assist the Poor (CGAP) as ‘digital access to, and the use of, formal financial services by the excluded and
underserved population.’49

The goal is to migrate the excluded at the BOP away from cash50 and paper-based payment instruments towards an
integrated ‘formal’ digital financial ecosystem that facilitates sustainable, seamless and low-cost transactions. Some
country-specific ‘National Financial Inclusion Strategies’51 include in these goals as a broader suite of financial
services to enable customers to pay, save, borrow, insure against risk, manage their financial life. In many cases
these are coincident.

The first iteration in this transformation were what was known as ‘walled garden’ micro-payment systems for digital
value added services – and now known as Direct Carrier Billing (DCB)52 – where prepaid mobile airtime value

40
Perlman, L (2018) Model MOU Between a Central Bank and National Telecommunications Authority For Digital Financial
Services Regulation, available at www.dfsobservatory.com
41
Gurung, N & Perlman, L (2018b) The Role of Digital Financial Services in Humanitarian Crises Responses, available at
www.dfsobservatory.com
42
Perlman, L (2018a) The Role of the National Telecommunications Authority in DFS, available at www.dfsobservatory.com
43
Perlman, L (2018b) The Role of the Central Bank in DFS, available at www.dfsobservatory.com
44
Perlman, L (2018c) The Role of Regulators in Competition-Related Matters in Digital Financial Services, available at
www.dfsobservatory.com
45
Perlman, L & Wechsler, M (2019, forthcoming) Derisking and Its Impact on Financial Inclusion (draft title), available at
www.dfsobservatory.com
46
Financial Inclusion where there is a ‘digital’ component to it – that is using inter alia DFS - also known to some as digital
financial inclusion.
47
Franklin, A, Demirguc-Kunt, A, Klapper, L, et al. (2016) The Foundations Of Financial Inclusion: Understanding
Ownership And Use Of Formal Accounts, available at https://bit.ly/2LTBLRr
48
ibid
49
For a discussion of these terms, see Lyman, T & Kate Lauer (2015) What is Digital Financial Inclusion and Why Does it
Matter?, available at https://bit.ly/1GX1xdJ
50
Cash transactions present financial and personal risks for those unbanked, since individuals have no recourse if the funds are
stolen. Gross, M, Hogarth, J & Schmeiser, M (2012) Use Of Financial Services By The Unbanked And Underbanked And The
Potential For Mobile Financial Services Adoption, available at https://bit.ly/2Ld5NOF
51
See the collection of Strategies curated by the World Bank. World Bank (2018) National Financial Inclusion Strategies
Resource Center, available at https://goo.gl/xSgFsG
52
The original mobile wallet SVA was based on prepaid mobile prepaid airtime, first used in the mid-1990s. Use thereof for
non-telecommunications activity is highly restricted though by the NTA and/or CB because of systemic concerns. For example,
the airtime SVA could only be used for purchase of digital goods such as music and - unlike a DFS SVA – the airtime wallet
could not be redeemed for cash. Some intra-mobile network airtime value transfer are allowed, and some Russian MNOs are
allowing limited cash-out at their own stores. For an analysis of the evolution of the mobile airtime SVA to its DCB incarnation,
and its metamorphosis in some markets to ‘mobile money’ (as DFS), see Perlman, L (2017a) Technology evolution and
innovation in DFS, available https://bit.ly/2CEufrm; Perlman, L (2012) LLD Thesis: Legal and Regulatory Aspects of Mobile
Financial Services, available at https://bit.ly/2KGfC8k

9
stored in a mobile network operators (MNOs) customer’s prepaid airtime SVA was used to purchase digital value
added services (VAS) such as music. The SVA value was non-redeemable and access and use was controlled by
MNOs, with the VAS provided by what were known as Wireless Application Service Providers (WASPs). This
DCB-ecosystem soon evolved to more general purpose digital financial ecosystem now generally known as DFS,
and operated by non-banks and banks. Third parties providing DFS are called DFS Providers (DFSPs).

Core to this nexus between mobile phones and access to financial services is that while 1.7 billion adults do not
have a (formal) account with a financial institution, more than 1 billion53 of them have a mobile54 phone and are
within the coverage area – sometimes only low-speed ‘second generation’ (2G) mobile coverage55 - of a MNO.
Similarly, while around 230 million ‘unbanked’ adults work for businesses and get paid in cash, 78% of them own
a mobile phone.56 This to a degree also refers to those who received remittances or are recipients of government-
to-person (G2P) payments.

The early 2000s saw the emergence of the first iterations of low-cost financial and transactional methods that
allowed mobile phones to be used as general purpose payment instruments using value stored in a customer
electronic wallet – known as a SVA – provided and operated by non-banks.57

The first service to recognize the potential of this phone-finance nexus was ‘Smart Money,’ launched in 2001 in the
Philippines by MNO Smart Communications. The launch, however, of Safaricom Kenya’s M-PESA system in
2007, is seen by many as igniting global initiatives towards ubiquitous financial access provision and introducing
the term ‘mobile money’58 into the developmental lexicon as a financial service with a redeemable SVA provided
by an MNO.59

2.2 The DFS Scheme

As this mobile-based financial ecosystem has evolved, so too has the terminology: it has been known as ‘mobile
money’ and ‘mobile financial services’ but is now more formally known as DFS. Providers of DFS are known as
DFSPs.60

53
Gallup (2018) Global Findex: Technology Can Bridge Financial Inclusion Gap, available at https://bit.ly/2IhCoVE
54
The phones primarily use Global System for Mobile Communications (GSM) technology, a phone standard developed in the
1980s by the European Telecommunications Standards Institute to describe the protocols for second-generation (2G) digital
cellular networks used by mobile phones. Originally Groupe Spécial Mobile, the first GSM implementation was in Finland in
1991 on a network built by Telenokia and Siemens and operated by Radiolinja. These digital technologies have since evolved
to include second generation (2G) mobile technologies such as Unstructured Supplementary Service Data (USSD), Short
Message Service (SMS) and various low data speed capabilities. Together, these technologies constitute the enabling
infrastructure for DFS. The first SMS message was sent in 1992; while Vodafone UK and Telecom Finland signed the first
international GSM roaming agreement. See GSMA (2016) History, available at https://bit.ly/1sHjxSC
55
See on mobile coverage and DFS, Perlman, L & Wechsler, M (2018) The Role of Mobile Coverage on Digital Financial
Services, available at www.dfsobservatory.com
56
Some 100 million ‘unbanked’ adults worldwide receive government payments (G2P) in cash, including 67 million who have
a mobile phone. Gallup (2018) Global Findex: Technology Can Bridge Financial Inclusion Gap, available at
https://bit.ly/2IhCoVE
57
The value in the airtime SVA is non-redeemable. Each have separate licensing regimes, and primary regulators. In the case
of DCB, the NTA is that regulator, while it’s the CB for DFS.
58
‘M’ is for money, and ‘Pesa’ is the Swahili word for money.
59
For distinctions between these terms and between ‘digital money’ and ‘e-money,’ see Reiss, D (2018) Is money going
digital? An alternative perspective on the current hype, available at https://doi.org/10.1186/s40854-018-0097-x
60
DFSPs may provide payment services and/or e-money services, both of which may fall under different regulatory regimes
reflecting their relative risks.

10
DFS Accounts: DFS embraces themes of using low cost digital devices for low-cost access to and use of financial
services offered by banks and/or non-banks as DFSPs using prefunded Stores of Value (SOV) in SVAs holding
electronic value under prudential supervision and operated and controlled by a DFSP.

E-Money: For DFS, the SOV is electronic money (e-money) which is created when sovereign61 fiat62 currency
value is placed within an ‘e-money’ prudential regime.63 E-money issuance and storage however is highly regulated,
requiring the DFSP to hold an ‘e-money issuer’ (EMI) license from the Central Bank (CB). Any funds collected
from customers by DFSPs (acting as EMIs) to be used for e-money purposes must be placed (‘pooled’) in a
prudentially supervised bank account, the account – usually as a trust account 64 - itself subject to ring-fencing
protections that prevent the pooled funds from being used for operational or other non-prudential purposes. Often
the CB insists that a special financial services entity must be formed for operating as an EMI or for providing DFS.65
And to prevent potential inflationary and systemic effects[A1] of allowing more spending for value received, ‘e-
money’ is only issued if it is backed by an equivalent amount of fiat money in the pooled account - the so-called
1:1 ratio.

Depending on when they were formulated, definitions of DFS vary throughout developing market sector role players.66
We see DFS as an ecosystem providing low-cost, national access to a broad range of financial and related services
using primarily text and graphical based user interfaces, digital access devices such as mobile phones, and digital value
transfer channels. DFS can be offered by banks and non-bank providers – known as DFSPs - who may be licensed or
authorized by a range of regulators to provide these services, either on their own or in mandated partnerships. The
GSMA-popularized term ‘mobile money’ is now considered one of the components of the DFS ecosystem, itself a far
broader term beyond mobile-only (and MNO-only ) provision and may often include DFSPs and bank offering basic
accounts.

Some DFSPs may be classed as electronic money issuers (EMIs) and be allowed to issue e-money. Other DFSPs may
only provide payment services and thus be licensed or authorized as payment service providers (PSPs). MNOs in most
jurisdictions fulfil both roles as a DFSP. The central bank is usually the lead regulator in DFS, often seen to be
providing an enabling regulatory environment lowering barriers to entry for new participants and novel services.

Exhibit 3: Conceptions of DFS

61
Compared to national fiat currency, as national does not apply to for example the Euro.
62
Fiat means, in essence, currency (money) issued by a central bank and backed as a SOV by the state. Compare this to virtual
currencies such as mobile airtime value ‘issued’ by an MNO; or to crypto currencies - such as Bitcoin and Ether - which are
mostly cryptographically secured and derived, tradable currencies created and issued mostly without a central issuer. Digital
fiat currencies on the other hand are cryptographically secure versions of fiat currencies, issued by a central bank.
63
E-money is a prudential construct usually derived from a regulatory process. Examples of the unit of account of the fiat
currency may be for example the US Dollar, British Pound, Kenyan Shilling. In the DFS context, any fiat value received by
DFSP acting as an EMI from a customer directly or via an agent or super-agent must be placed in the ring-fenced current
account at a licensed and approved bank, or series of banks up to certain maximum percentage. E-money is created from this
placement.
64
Trust accounts are protected accounts where pooled customer funds are housed. It is however only known in common law
jurisdictions, with civil law jurisdictions using instead protective vehicles such as escrow accounts or some insurance bond.
See thereto, Perlman, L (2012) LLD Thesis: Legal and Regulatory Aspects of Mobile financial Services, available at
https://bit.ly/2KGfC8k
65
In India, these are called ‘payment banks.’ In Kenya, these are called ‘trust companies’ See Kumar, K & Raman, A (2015)
Did India’s CB get Payments Bank Approvals Right?, available at https://bit.ly/2stdae7; Perlman, L (2012) LLD Thesis: Legal
and Regulatory Aspects of Mobile Financial Services, available at https://bit.ly/2KGfC8k
66
See variations in definitions of key DFS (and ‘mobile money’)-related terms from the following: IMF (2018) Definitions for
FAS, available at https://bit.ly/2OOjxWg; World Bank (2018) Findex Little Book, available at https://bit.ly/2v04gWJ; GSMA
(2018) Mobile Money Glossary, available https://bit.ly/2qgSbK5; ITU DFS Focus Group (2017) DFS Glossary,
https://bit.ly/2yweHmK

11
In most jurisdictions, value placed in a SVA by a customer is not seen by the CB as constituting a deposit, and
correspondingly will not automatically earn interest, nor will it automatically attract deposit insurance.67 The
‘pooled’ customer funds placed by the DFSP as an EMI in a (trust) bank account is mostly - but not in all
jurisdictions - seen as deposit, and may be eligible for deposit-related insurance. In jurisdictions where trust
accounts are not available, EMIss must/may hold the pooled funds in the central bank or invest in other liquid assets
such as government bonds/treasury bills..

Cash-In, Cash-Out (CICO): Digital liquidity – the instantly accessible e-money value placed and stored in a SVA
- within a DFS ecosystem is usually facilitated by electronic-human combinations of human ‘agents’ of DFSPs and
banks. Agents provide what are known as CICO services, swapping cash for e-money and vice versa. Value in the
SVA is redeemable on demand and on par at these agents.68

Customer Identification and Verification (CIV) Schemes: The SVA is subject to an anti-money laundering
(AML) regime and CIV process69 requiring, in most cases, formal identity documents for signup to obtain a SVA
and for undertaking transactions. New biometric-type identities – known as electronic identification documents
(eIDs) – facilitate better CIV processes when using for evolving electronic know your customer (KYC)
systems.70Entry-level DFS SVAs operated and controlled by the DFSP have reduced forms of CIV, and must be
pre-funded by users. SVA are usually used for transactional activities such as bill payments and P2P transfers rather
than savings. There are often cash components to some channels, where cash is inter-convertible to regulated e-
money by agents in a scheme called CICO.

DFS-type Services: Service bouquets for DFS have grown,71 in many cases resembling basic transactional features
of a bank account but currently with primarily non-credit, transactional services at their core.72 For example, the
fiat-based DFS SVA can be used for paying for digital and physical goods and services as well as to undertake P2P
value transfers between recipients of the same DFSP,73 or where interoperability is present, between other DFSPs
and banks.74

67
This restriction appears to derive from concern that interest payments may be the prelude to intermediation. The usual scheme
is that the DFSP (as an EMI) does not pay interest to the customer for their SVA. Rather the DFSP/EMI may pass on the interest
revenue earned from holding the pooled fund in a bank account to the customer. DFSPs are usually not allowed to use the
pooled funds for investing in other instruments. The strict approach is however slowly changing: a recent World Bank report
indicates that 13% of EMI are allowed to pay interest on customers’ SVA. In 8% of cases, they are allowed to share profits
with their SVA customers. The first countries to allow interest payments on DFS SVA balances were Ghana (2017) and
Tanzania (2015) DFSPs are also now being allowed to provide credit in conjunction with a licensed bank, but usually not from
the ‘pooled’ funds. MFIs though have been able to provide credit as part of their founding charters, but different rules may
apply to their lending practices if they become DFSPs. See World Bank (2017) Global Financial Inclusion and Consumer
Protection Survey 2017 Report, available at https://bit.ly/2JrwFOJ
68
Withdrawal fees may be applicable however. To stimulate digital liquidity in a DFS ecosystem, in many countries cash-in at
agent to ‘buy’ e-money is free to the customer: the agent is paid by the DFSP for this however.
69
See Section 2.5.4.3
70
See Section 2.5.3.1 below on ID systems
71
See Section 3.3 on Services in DFS
72
Unlike the value in most bank accounts, no interest is provided on SVA balances in most DFS implementations. ITU (2016)
Digital Financial Services: Regulating For Financial Inclusion – An ICT Perspective, available at https://bit.ly/2w8ryfT
73
MNOs uniquely can operate both – but separate - mobile airtime-SVAs and fiat-based SVAs. The former, in the form of
DCB, can only be used for purchasing digital goods and services and doing mobile airtime-based airtime transfers. The CB
regulates the fiat-based SVA, while the NTA usually regulates the airtime-based SVA.
74
See Section 2.5.4.2 on Transaction Processing Ubiquity

12
2.3 Mobile Technology and User Interfaces
In countries where DFS is provided, the majority of phone usage in rural areas involve connections using low-speed
(narrowband) second generation (2G) GSM technologies, with third generation (3G) and fourth generation (4G)
technologies mostly only available in urban and peri-urban areas. Similarly, while there has been significant growth
in the smartphone penetration in developing countries, the GSMA report that majority of user access to DFS
worldwide is still via ‘basic’ or ‘feature phones’75 whose design – shown in Exhibit 4 – in the most part limits
access to DFS to primarily text-based types user interfaces (UI) such as Unstructured Supplementary Service Data
(USSD) and SIM76 Application Toolkit (STK). USSD transactions continue to be the choice for the vast majority
of (‘mobile money’) users.77 Lack of high speed mobile coverage is seen as embedding the need for feature
phones.78

The various DFS UIs appearing on different types of mobile phones have varying degrees of ease of access, ease
of use, efficacy, cost, security, and reliability. USSD can be used for transmitting information and accessing
standard services and VAS. Because USSD can be used across all generations of phones, it has been termed ‘The
Third Universal App.’79 USSD and STK, in particular, are very sensitive to a poor mobile coverage, affecting the
ability of DFS customers to reliably access and use funds in their SVA.80

USSD may however be required even with smartphone app use, for example by the use of Network Initiated
(NI/Push) USSD for 2 factor authentication for security in financial/banking applications. In Rwanda, the
smartphone DFS apps still use USSD, which the MNOs there say speaks to market demand for a ‘familiar’
interface. 81

Poor mobile coverage when using USSD may cause unexpected and instant termination of a USSD session and thus
untimely termination of a DFS transaction. Repeated instances of drop-off, may lead many users who are technically
or financially literate to retry a transaction thinking the transaction was not completed. Invariably, they may begin
to distrust the UI and whether their funds are safe and abandon their account usage, rather undertaking transactions
from the ‘safety’ of an agent in their village or town. A transaction where an agent does the full transfer of value as
payment or remittance to another use but without the use of the customer’s SVA is usually known as an Over-The-
Counter (OTC) transaction.82
These USSD-based UIs are also competition-sensitive, with gateways required to provide USSD and STK
controlled by MNOs who may compete with DFSPs.83

75
GSMA (2018) 2017 State of the Industry Report on Mobile Money, available at https://bit.ly/2CKPLqF. See data also from
Perlman, L (2017a) Technology evolution and innovation in DFS, available https://bit.ly/2CEufrm; and Perlman, L (2017b)
Technology Inequality: Opportunities and Challenges for Mobile Financial Services, available at https://bit.Ly/2r7nzny.
Feature phones include the voice, SMS, interactive voice response (IVR), USSD and STK capabilities of basic phones,
augmented though by features such as Bluetooth, and data-dependent Multimedia Messaging Service (MMS) and wireless
access protocol (WAP). A few feature phones have 3G and higher data capabilities but most lack built-in Near Field
Communication (NFC)-support. Basic phones are characterized by the total absence of any mobile data capabilities.
76
Subscriber Identity Module, a smart chip (card) issued and sold by MNOs directly or through agents. When placed in a
phone, a SIM card facilitates the basic access to MNO and other services. SIM cards also house small applets used for STK-
based access to DFS. For the role of the SIM card in DFS, see Perlman, L (2012) LLD Thesis: Legal and Regulatory Aspects
of Mobile Financial Services, available at https://bit.ly/2KGfC8k
77
GSMA (2018) 2017 State of the Industry Report on Mobile Money, available at https://bit.ly/2CKPLqF
78
ibid
79
Perrier, T, DeRenzi, B & Anderson, R (2015) USSD: The Third Universal App, available at https://bit.ly/2vA3Skc
80
For a comprehensive overview on the role of mobile coverage in provision of DFS, see Perlman, L & Wechsler, M (2018)
The Role of Mobile Coverage on Digital Financial Services, available at www.dfsobservatory.com
81
For technical details on NI-USSD, see Perlman, L (2017b) Technology Inequality: Opportunities And Challenges For Mobile
Financial Services, available at https://bit.Ly/2r7nzny
82
OTC means the transaction is entirely facilitated by an agent on behalf of a customer, who may or may not be identifiable or
have a SVA at a DFSP/PSP.
83
See also Perlman, L (2017c) Competition Aspects of Digital Financial Services, available at https://bit.ly/2xxLcma

13
 Exhibit 4: Primary Phone User Interfaces for direct customer access to DFS. An exception – and perhaps a growing
one84 – to the 2G-text-based UI nexus is the growing use of Kaios85 feature phone operating system designed as a
hybrid between a smartphone and feature phone operating system. 86 This OS has had huge uptake in India where
MNO Jio’s ‘JioPhone’ is given away virtually free. It has a feature phone form with the Kaios graphical UI. Feature
phone penetration in India doubled in 1Q2018 because of the release of the JioPhone in 2017.87

Large DFS deployments that rely primarily on USSD as the UI include bKash in Bangladesh, WING in Cambodia,
EasyPaisa in Pakistan, MTN Money and Airtel Mobile Money in Uganda, ZAAD in Somaliland, M-PESA and Tigo
in Tanzania, and EcoCash in Zimbabwe.88

2.4 Transformational Innovations in DFS

Key to the development of DFS are transformative innovations to catalyze the ecosystem that differentiate DFS
from traditional financial provision primarily by banks. These innovations include:

● Regulatory innovations for DFS provision

● Emergence of new actors89
● Technological improvements and innovations
● Economic enablers

84
Media Nama (2018) India’s feature phone shipments doubled in Q1 2018, smartphone market stayed flat, available at
https://bit.ly/2CR2bRH
85
MediaNama (2018) Facebook app now officially available on the Jio Phone, available at https://bit.ly/2JuCIP1
86
KaiOS is a Linux-based operating systems and derivative of the now shuttered Firefox OS. It powers a number of phones
and brands, and supports video calls over 4G; mobile payments through NFC and dual-SIM support. It has its own app store
and Google has invested in it. See Verge (2018) Google invests $22 million in the OS powering Nokia feature phones,
available at https://bit.ly/2EWhtHu
87
Media Nama (2018) India’s feature phone shipments doubled in Q1 2018, smartphone market stayed flat, available at
https://bit.ly/2CR2bRH
88
Hanouch, M & Chen, G (2015) Promoting Competition in Mobile Payments: The Role of USSD, available at
https://goo.gl/po24bd
89
These new actors could include non-banks and agents providing sign-up, bill payment, cash liquidity, and CICO services as
well as aggregators.

14
Each are described below.

2.4.1 Regulatory Innovations

DFS has stimulated the emergence of novel responses and innovations from regulators and lawmakers to facilitate
and supervise new mostly non-bank market participants. The innovations are not consistent across jurisdictions,
and may depend to a large degree on public policy imperatives and even a hint of regulatory capture90 in a country.
Overall however, DFS has seen changes that allow non-banks to provide similar transactional services to banks,
either alone or in a – sometimes mandated – partnership with a bank.

Enabling Environments: The regulatory environment allowing provision DFS is said to be ‘enabling’ or ‘non-
enabling,’ terms first used by the GSMA91 in relation to the impact of local regulatory regimes on provision of
DFS.92 The ‘enabling’ component refers primarily to whether any and all non-banks can independently provide
DFS without a (mandated, ‘non-enabling’) need to partner with a licensed bank for that purpose.93

Test and Learn: In many cases regulators have used regulatory forbearance – also known as ‘test and learn’94 – to
allow innovations to progress to operational commercial products even if there was no (direct) regulatory basis for
providing these approvals. In the early iterations of DFS where there was no direct and obvious law or regulation
allowing non-banks to provide bank-like financial services, many of the more progressive regulators used a
regulatory vehicle called a ‘letter of no objection’ (LONO) to allow non-banks to these provide services. A variation
of this approach using a system of published standardized requirements which is open to eligible qualifiers is now
known as a ‘regulatory sandbox.’95 In an even more direct approach, some regulators have themselves ‘become’
the third party, acting in catalytic role of financing and building the required financial infrastructure which is often
then handed over to market participants to operate.96 Often though, the regulatory innovations have been
incremental or perfunctory, leaving incumbent banks to provide the financial services but now allowing non-banks
or agents to provide frontline customer services sign as CICO and account signup.

Coordination: The overall complexity of DFS and its components – such as mobile access and new tiered forms
of KYC97 - has also necessitated closer cooperation between implicated regulators,98 for example between the CB

90
In Stigler’s ‘The Theory of Economic Regulation,’ the idea was introduced that regulators gradually begin to regulate their
industry in way that may benefit the regulated industry, rather than the general public the regulator is meant to serve. See
Stigler, G (1971) The Theory of Economic Regulation, available at https://bit.ly/2RczFO6
91
GSM Association. See www.gsma.org
92
For the GSMA view, see di Castri, S (2013) Mobile Money: Enabling Regulatory Solutions, available at
https://bit.ly/2kGPgqX
93
See further Section 2.5.5.3
94
This was the approach of the Bank of Tanzania (BoT) in allowing non-banks to provide DFS in the absence of an enabling
national payments law. A LONO was issued to them by the BoT and the NTA as an interim enabling measure. It is similarly
used in Uganda in the absence of a National Payments Law.
95
The first sandbox-like framework was set up by the US Consumer Financial Protection Bureau (CFPB) in 2012 as ‘Project
Catalyst.’ For an overview of sandboxes in developing countries, see Wechsler, M; Perlman, L and Gurung, N (2018) The State
of Regulatory Sandboxes in Developing Countries, available at www.dfsobservatory.com; and on their use for financial
inclusion, see Jenik, I & Lauer, K (2017) Regulatory Sandboxes and Financial Inclusion, available at https://bit.ly/2yDDGU0
96
The CB of Jordan built and operated the JoMoPay interoperable switch for DFSPs in Jordan. It is now co-owned by the CBJ
and the industry association in a vehicle called JoPAC.
97
For a recent sample list of KYC requirements for DFSP e-money accounts, see Staschen, S & Meagher, P (2018) Basic
Regulatory Enablers for Digital Financial Services, available at https://bit.ly/2s8b2YX
98
An interesting scenario encapsulating aspects of regulatory arbitrage in Bangladesh is based on the difference between MFS
and DFS: the Post Office’s NAGAD ‘Digital Financial Service’ is drawing regulatory scrutiny from the central bank adherence
to AML and Tier level requirements for what the central bank calls ‘Mobile Financial Service’ in its law. The Post Office says
its service is a DFS service, so the strict precepts of the ‘MFS-based’ provisions do not apply to it. See The Independent (2018)
Post office MFS under scanner, available at https://shar.es/a19J2p

15
and national telecommunications authority (NTA).99 Attempts to prevent any regulatory arbitrage many manifest in
Memoranda of Understanding between impacted regulators.100

Standard Setting Bodies:101 While the of the regulatory innovations that have emerged around DFS are mostly
organic, internal initiatives, they often reflect impetus of (top-level) inputs and strategies from Standard Setting
Bodies (SSB) such as the World Bank; Bank of International Settlements (BIS); the Committee on Payments and
Market Infrastructures (CPMI); the Financial Stability Board (FSB); International Telecommunication Union
(ITU); the Financial Action Task Force (FATF); 3rd Generation Partnership Project (3GPP); the International
Organization for Standardization (ISO); and from the Society for Worldwide Interbank Financial
Telecommunication (SWIFT).

2.4.2 Emergence of New Actors

The ‘enabling’ innovations of regulatory policy have allowed new actors to emerge to provide DFS and related
services, breaking the traditional hegemony of banks in provision of financial services. At the foundational level of
DFS, these new actors include DFSPs, PSPs, agents, master agents and super-agents:102

DFSPs: A DFSP may be a bank or, usually, a non-bank providing DFS within an ecosystem with or without
authorization to issue and store a customer’s e-money in a SVA. The SVA is almost always prefunded, thus reducing
any system risk due to non-payment of a counterparty. E-money can be created when the provider receives cash (a
cash-in) from the customer - typically at an agent location - or when the provider receives a digital payment from
another provider or bank. As noted above, issuers of e-money are often known as EMIs operating under a separate
authorization regime that features prudential safeguards and capital requirements.

If an entity does not have authorization - such as an EMI - to issue and store value as e-money, it is usually viewed
through a regulatory lens as a PSP offering services such as bill payment or remittances directly to customers. The
PSP usually draws on an e-money SVA provided by an authorized EMI or from fiat bank money stored in a bank
account as sources of value for a payment.103 PSPs often fall under a different and lighter regulatory regime than
EMIs, reflecting less risk posed to a national financial ecosystem. Some DFSPs – such as MNOs or their financial
subsidiaries – may act as both a PSP and an EMI either under one omnibus licenses, or under separate licenses if
the regulatory regime reflects the different roles and risks.

Agents: DFSP agents may be informal vendors or small but formal businesses - versus bank branches in non-DFS
environments - who provide frontline services to customers. Agents though may serve multiple principals, for
example banks and MNOs. They may often fall under different regulatory regimes (and restrictions)104 depending
on the services they provide. Services in the DFS domain include signing up customers,105 receiving (cash) value

99
Emerging ‘regtech’ solutions using automated regulatory tools such as artificial intelligence (AI) to replace manual processes
are designed to assist regulators in coordinating extended remits caused by the complexity of DFS, see Perlman, L & Gurung,
N (2018) Use of Regtech by CBs and its Impact on Financial Inclusion, available at www.dfsobservatory.com
100
For a model Memorandum of Understanding (MOU) between a CB and the NTA on DFS, see Perlman, L (2018) Model
MOU Between a central Bank and National Telecommunications Authority For Digital Financial Services Regulation,
available at www.dfsobservatory.com
101
The role of SSBs is further detailed in Section 2.5.5.2 on Factors and Components in Regulatory Development
102
Different terminology is used for similar agent actors in different countries and there may also be other actors depending on
the country context. For example, they may be master-agents, sub-agents, cash merchants, wholesale cash merchants, retail
agents, wholesale agents, agent network manager.
103
The regulatory regime for DFS is often bifurcated to reflect payment-related activities that do not necessarily involve the
provider accepting and storing value for an extended period, versus those undertaking such activities as well as storing customer
value as ‘e-money.’
104
For example bans on providing services to only one provider or their DFS role they may fall under the CB; any MNO-
related roles may fall under the NTA.
105
Agents and other third parties are usually permitted to verify the identity of customers.

16
to be converted and then stored as e-money in customer transactional SVA; and then to convert customer e-money
to cash. Others may undertake - where licensed and/or allowed OTC transactions such as remittance transfers and
bill payments. Agents may also be able to receive and submit to the DFSP or bank a deposit account application;
receive and submit to the institution a loan application; open a customer account following the institution’s policies;
open a basic account; analyze and approve a loan following the institution’s policies and limits; receive deposits;
and disburse loans.106 Often they also sell mobile airtime vouchers107 on behalf of MNOs. Thirty countries now
have ten times more active agents than bank branches.108

Super and Master Agents: In many cases, there are additional layers of agent services provided by what have
become known as ‘super agents’ and ‘master agents.’ Definitions vary across markets, but super agents usually
facilitate liquidity management and may be banks or specialized entities. Master agents can do some or all of the
following: recruit, train, monitor, or provide liquidity support to their agent network. At a prudential level, they may
act as principal agents for DFS agents in certain geographical areas whilst facilitating and managing cash liquidity
for these agents in rural areas.

2.4.3 Technology Improvements and Innovations

Mobile Phones: Improvements in mobile network technology and coverage have allowed the leveraging of features
of GSM mobile technology109 to act as both an access mechanism and a seamless UI for navigating DFS service
options. There is also greater reliability, affordability and sophistication of mobile handsets, particularly smartphone
use. Most DFS-focused countries though are primarily basic and feature phone based.110 While Android, Windows
and iOS-type smartphones dramatically improve the UI for DFS, many of the smartphones applications provided
by DFSPs around the world requite sufficient mobile data speeds to ensure an optimal user experience (UX).111

Mobile Coverage: With mobile phones as the primary access mechanism for services, access to DFS is highly
dependent upon the degree and quality of mobile coverage.112 UIs for access to DFS in particular are dependent on
the type of mobile coverage which, in many cases in the developing world, is via slower (narrowband) 2G
technology while faster broadband third and fourth generation (3G and 4G) mobile coverage is limited primarily to
urban and peri-urban areas and along national road corridors. The primacy of 2G coverage in developing countries
forces DFS customers to use non-intuitive, coverage-sensitive USSD. These UIs and resultant user experiences are
sensitive though to the quality of the mobile coverage and signal, and for now limit the suite of (all) potential
services to primarily basic transactional type of services. Inconsistent mobile coverage also forces users to have
SIM cards and prepaid accounts for all MNOs they anticipate can provide service at particular locations.

Identity Systems: Identity systems required for CIV are improving, driven by national standardized and online
mechanisms to identify and authenticate users using biometric data. 113

106
Staschen, S & Meagher, P (2018) Basic Regulatory Enablers for Digital Financial Services, available at
https://bit.ly/2s8b2YX
107
This valuable and entrepreneurial service was however banned in Uganda in July 2018, ostensibly for AML reasons. See
Flash Uganda Media (2018) UCC issue final deadline for selling airtime scratch cards, available at https://bit.ly/2ONXW0u
108
GSM (2018) 2017 State of the Industry Report on Mobile Money, available at https://bit.ly/2sdS85g
109
These include features such as voice, SMS and USSD.
110
For a study on the uses of phone types in DFS, see Perlman, L (2017b) Technology Inequality: Opportunities And Challenges
For Mobile Financial Services, available at https://bit.Ly/2r7nzny; and Exhibit 4 describing the evolution of these devices and
their use in digital access to financial services.
111
ibid.
112
See further Perlman, L & Wechsler (2018) Mobile Coverage and the Impact upon Digital Financial Services, available at
www.dfsobservatory.com
113
See Section 2.5.3.1 below for more detail on identity systems; as well as Perlman, L & Gurung, N (2018) Focus Note: The
Use of eIDs and eKYC for Customer Identity and Verification in Developing Countries: Progress and Challenges, available at
www.dfsobservatory.com; and ITU FG DFS (2017) Identity and Authentication, available at https://bit.ly/2KistMX

17
Customer-centric DFSP Platforms: Customer confidence in the new ecosystem is improved through new vendor
platforms that allow non-banks to safely store both fiat-backed and airtime-based user value, 114 including the ability
for a DFSP to provide immediate proof of transaction and advice of charge.

2.5 Aspirational Use Cases Benefits of DFS

As noted earlier, DFS has been touted by national governments, donors, SSBs and various aid agencies as a means
to reduce poverty by providing an inclusive system that provides a range of financial services facilitating nationally
accessible, low cost means to access and moving funds, grow capital, and reducing risk inherent in cash-based
economies.115

The digital ecosystem also promotes speed and transparency in transactions and is especially relevant in replacing
cash-transfer mechanisms such as hawala,116 as well as avoiding of fund ‘leakage’ through middleman fraud by
doing direct G2P payments into recipient SVA.

While it remains controversial,117 the growing body of user data generated through DFS and its component
ecosystems may have ancillary benefits in creating a profile of users that can be used for providing credit.118 There
is however concern that unbridled credit provision using this data to first-time applicants for credit119 may create
situations where customers overextend themselves and land on credit blacklists.120

It can also enable remitters to direct funds to savings, health, education fees or other types of targeted accounts that
ensures funds are being spent as intended.121

2.6 Factors Needed To Initiate and Catalyze DFS

2.6.1 Overview
The following factors can be seen as critical for the successful provision of ‘basic’ transactional services in DFS:

114
See ITU FG DFS (2017) DFS Vendor Platform Features, available at https://bit.ly/2L3wbL2; also see the open-source
Mojaloop payment system platform devised and funded by the Bill and Melinda Gates Foundation, at http://mojaloop.io and
https://leveloneproject.org
115
The integrated, low cost access ecosystem, it is hoped, will contribute to inter alia G20, World Bank UFA2020 and UN
SDG development goals of poverty reduction, economic growth, jobs, greater food security and agricultural production,
women’s economic empowerment and health protection. ITU FG DFS (2017) The Digital Financial Services Ecosystem,
available at https://bit.ly/2BiFoNK
116
Meaning ‘transfer’ or ‘trust’ in Arabic, the process of sending money remotely where cash is not actually sent and money
never enters the formal financial system, made possible through the use of intermediary hawala dealers at each remote location.
Perlman, L & Wechsler, M (2019, forthcoming) Derisking and Its Impact on Financial Inclusion (draft title), available at
www.dfsobservatory.com
117
In particular, MNO Call Data Record (CDR) data is being used to develop profiles of user based on mobile airtime recharge
values and frequencies, calling circles, location, and type of phone. The controversy relates to whether users are aware that
their CDR are being used for these purposes, and/or shared with third parties. Some smartphone-based credit providers gather
data on the user from smartphone use.
118
CDR data is being used in Kenya to create alternative credit scores. See thereto, Blechman, J (2016) Mobile Credit In Kenya
And Tanzania: Emerging Regulatory Challenges In Consumer Protection, Credit Reporting And Use Of Customer
Transactional Data, available at https://bit.ly/2x93hqE
119
Credit often begins with low-value amounts, and then increases as the borrower pays back amounts as per an agreement
with the credit provider.
120
On concerns about credit provision in DFS and recently reported massive increases in the number of low-income Kenyans
being added to credit blacklists, see Microsave (2017) Is Digital Credit A Silver Bullet?, available at https://bit.ly/2CdhJMU
121
ITU FG DFS (2017) The Digital Financial Services Ecosystem, available at https://bit.ly/2BiFoNK

18
 ● Market and Ecosystem Need
● Technology Infrastructure Readiness
● Enabling Regulatory Environment
● Ecosystem Service Providers
● Identity schemes fulfilling AML requirements

2.6.2 Market and Ecosystem Need

As noted above, the need for alternative means of access to financial services in the developing world because of
the large numbers of the population financially excluded through a lack of access to financial services. Since banks
have traditionally been the front-line for the provision of financial services such as savings accounts and for
remittances, and therefrom the inability of especially those in rural areas to find and use a bank in their area or
region, the financially excluded have also been referred to as being ‘unbanked’122 or ‘under-served.’123

A key driver of DFS is that G2P social payments are now being paid into DFS SVAs, increasing digital liquidity
for use in transactions and increasing efficiency in the payments system.124 With a number of countries developing
integrated e-government services, the ability to access and pay for any available services becomes a critical
development driver in poverty alleviation goals.125 These platforms have made DFS an attractive proposition for
users to pay school fees, utility bills, hospitals, taxes and fines. Increasing acceptance by merchants of electronic
payment instruments is also critical in moving from simple person-to-person (P2P) transactions to more economy-
wide use.126 Cross-border remittances are evolving, but AML concerns relating to beneficial ownership on recipient
accounts tempered regulatory approvals for outgoing remittances.

But despite the growth in account opening and what seem to be compelling use cases for DFS, recent surveys
indicate that this has not translated to active use of these accounts. This worrying trend is discussed below,127 but
often lack of use may be because of a user’s lack of confidence in their ability to navigate DFS systems – such as
the USSD menus - or they may have lost money through error or fraud; or mobile coverage needed is lacking.
Taxation128 on mobile airtime use and on transactions may also have a dampening effect on use. This often drives
poor people to limit or abandon their DFS usage and rather pursue OTC DFS services provided by agents.129

122
The unbanked are so referred because they do not have a bank account, usually because it is not profitable for a bank to
serve them, unless mandated to do so by a central authority. In Nepal for example, the central bank has mandated a certain
number of bank branches in newly re-crafted district areas. See Gurung, N (2018) Focus Note: Digital Financial Services in
Nepal, available at www.dfsobservatory.com
123
That is, they have a bank account but there are no conveniently located bank facilities for them to use the account, be that a
bank branch or ATM.
124
The World Bank estimates that by shifting payments directly into SVAs, governments can increase the number of an adults
with an account by at least 160 million - figures quoted in Stuart, G (2016) Government to Person Transfers, available at
https://bit.ly/2M1KUXh
125
See the UN’s 16 Sustainable Development Goals (SDGs) available at https://sustainabledevelopment.un.org/sdg16
126
See ITU FG DFS (2017) Enabling Merchant Payments Acceptance in the Digital Financial Ecosystems, available at
https://bit.ly/2IWZJ09
127
See Section 3.2.3 on DFS activity levels.
128
See Section 3.2.2.
129
OTC has been flagged by the CB in Bangladesh as a money laundering concern in so as unsatisfactory training of, and
supervisory checking on agents by service providers and banks has led to CIV deficiencies and the rise of anonymous
transactions the CB says it cannot trace. See Dhaka Tribune (2018) Anonymous transactions raise risk of money laundering,
available at https://bit.ly/2PU1nio

19
2.6.3 Infrastructural Components

2.6.3.1 Identity Systems

Identity is a set of attributes that uniquely describes an individual or entity. It has become apparent that a crucial
enabler of the DFS ecosystem is the need to identify users of not just DFS services, but also holders of mobile SIM
cards.130 Being able to do so at all or reliably is however dependent on a national identity system capable of
identifying, validating, authenticating, and attesting to a person’s claimed identity but also will also allow some sort
of authentication based on the presented identity.131 Many countries still do not have a national identify system at
all. Many countries however have sectoral IDs, for example under the control of a national transport department,
the national voting authority, or the central bank. Some of these ID’s are biometrically enabled, using so-called
eKYC processes of fingerprint or iris scans to validate identity.132 Some but not all of the sectoral IDs may be
acceptable for DFS and bank-related CIV purposes however.

Increased use of electronic identification over physical identification is also paving the way for the rollout in many
emerging economies countries of national IDs using biometrics to create eIDs. These systems have as their
overriding goals to advance a person’s access to services, reduce identity fraud, and to increase financial
inclusion.133 These eIDs are particularly important for those countries affected by international derisking134 resulting
from AML-related concerns about lack of identification of beneficial ownership of DFS SVA and bank accounts.

Biometric eIDs will be used for CIV using eKYC systems at merchants, DFS agents, DFS offices and banks that
have biometric capture devices, which may or may not be linked live to the national ID authority for instant
attestation of the holder’s claimed identity. Even with the noble intentions of uplifting the poor, often financial

130
SIM registration may sometimes be sufficient to simultaneously open a ‘basic’ DFS account that does not allow cash-out,
with additional CIV required for full SVA transactional functionality. In some countries, the number of DFS SVAs may be
limited. In Jordan for example, a user may only have 2 DFS SVAs, even though they may have multiple mobile numbers and
SIMs.
131
World Bank (2018) Principles On Identification For Sustainable Development: Toward The Digital Age, available at
https://bit.ly/2pZWkBY. The UN’s Sustainable Development Goals (SDGs) aims to achieve ‘legal identity for all, including
birth registration’ by 2030. See ‘Target 16.9’ of the UN SDGs, available at https://sustainabledevelopment.un.org/sdg16, with
financial inclusion and digitization of payments goals set by bodies such as Alliance for Financial Inclusion, the UN through
the SDGs and the UNSGSA; the Global Partnership for Financial Inclusion (GPFI), and that of the Better Than Cash Alliance
(BTCA). As the World Bank notes, identification is also a key enabler of Target 1.3 (implementing social protection systems),
1.4 (ensuring that the poor and vulnerable have control over land, property, and financial assets), 5a (giving poor women equal
access to economic resources, including finance), 5b (enhancing the use of technology, including ICT to promote women’s
empowerment), 10.7 (safe and responsible migration and mobility), 10c (reducing the cost of remittance transfer), 12c (phasing
out harmful fuel subsidies), 16a (strengthening the capacity to fight terrorism and crime), 16.5 (reducing corruption). Many
central banks signed what is now known as the ‘Maya Declaration,’ a statement of common principles regarding the
development of financial inclusion policy made by a group of developing nation regulatory institutions during the Alliance for
Financial Inclusion's 2011 Global Policy Forum held in Mexico. See AFI (2011) Maya Declaration, available at
https://bit.ly/2Dism4S
132
See the Aadhaar eID and eKYC system in India, considered the world’s largest biometric database. United Identification
Authority of India (2018) United Identification Authority of India, available at https://uidai.gov.in. In Jordan the identity-issuing
agency is the Civil Status and Passports Department. For an overview of eKYC implementations worldwide, see Perlman, L &
Gurung, N (2018) Focus Note: The Use of eIDs and eKYC for Customer Identity and Verification in Developing
Countries:Progress and Challenges, available at www.dfsobservatory.com
133
Aadhaar is part of the ‘JAM Trinity’ representing the government’s goal to link every citizen’s bank account number, mobile
number with Aadhaar number for better financial inclusion policy. There is: (J) - Jan-Dhan Yojana (universal access to banking
facilities – at least one per household); (A) - Aadhaar - Biometric identification/registration; (M) - Mobile Telephony – Service
for everyone, solving the last mile problem.
134
The termination of international correspondent banking relationships because of money laundering concerns. For a
comprehensive overview of derisking and its effect on financial inclusion, see Perlman, L & Wechsler, M (2019, forthcoming)
Derisking and Its Impact on Financial Inclusion (draft title), available at www.dfsobservatory.com

20
inclusion and financial integrity goals may be in conflict: for example, lack of coordination between the
internal/home affairs ministry developing policies and technical standards for national ID or the department or
agency responsible for issuing a standardized, national ID can have unintended and negative consequences for DFS
and financial inclusion and may lead to financial exclusion.135 Thus while SIM registration can provide access to
many services such as DFS, uncoordinated or overbearing regulations issued by regulators as part of their respective
mandates may unintentionally exclude vulnerable and socially disadvantaged consumers.

2.6.3.2 Transaction Processing Ubiquity

The ability to undertake seamless digital transfer of value between (DFS) accounts at different providers is known
as interoperability. This ability has been woefully lacking however, characterized more by ‘walled garden,’ siloed
approaches by large DFSPs around the world, often those with significant market power (SMP).136

Walled Garden: Within the DFS context, DFSPs may only provide transactional and value transfer services to its
own customers.137 That is, there is no ability to transfer value from one DFSP account to an account at another
DFSP. In some cases, a DFSP may implement what is known as ‘token interoperability,’ whereby an account holder
at DFSP-A may go to their local agent or use a value-transfer menu item on their phone to send value to a recipient
at DFSP-B. Instead of receiving that value directly into their SVA, the recipient on DFSP-B may receive a ‘token’
in the form of a text message, with specific instructions on how to obtain the value, and a one-time reference number
and linked PIN code that allows that recipient of DFSP-B to go to an agent of DFSP-A to perform a cash out of the
value.138

Bilateral Interoperability: In this method, bilateral agreements are negotiated between two DFSPs to create
interoperability. Two technical implementations of this method are possible: first, DFSP-A is allocated a virtual
‘agent’ account at DFSP-B and visa versa. If a DFSP-A customer sends to a customer of DFSP-B, DFSP-A’s ‘agent’
account is debited with the value to be paid out to the recipient of DFSP-B.139 In the second bilateral model, a third
party aggregator will ‘switch’ the transactions and do ‘agent’ account balancing.140

Centralized, Switched-based Integration: An interoperable DFS system requires the setup of an interoperable
scheme and a switch, defined by a switch scheme141 with overarching standards such as business rules, governance

135
The Ugandan SIM card registration process was affected during the course of 2017 by conflicts between the MNOs, the
NTA and the government over deadlines for registration and availability of required ID documents. Users were switched off
then on again following intervention by the president. New Vision (2017) Telecom Firms Given 72 Hours To Deactivate SIM
Cards, available at https://shar.es/1Pemkq
136
See further on competition issues in DFS, Perlman, L (2017c) Competition Aspects of Digital Financial Services, available
at https://bit.ly/2xxLcma
137
The net effect is that customers in a DFS ecosystem cannot undertake direct account-to-account ‘interoperable’ digital
transfers of value between DFSPs. A transfer from accounts within the same DFSP is known as an ‘on us’ payments. If it is
digitally between accounts at different DFSPs, this is known as an ‘off us’ payment.
138
The recipient need not have a DFS account at any DFSP though. They simply need to be able to receive using their mobile
phone an SMS with the token sent by DFSP-A.
139
Musa, O, Niehaus, C & Warioba, M (2015) How Tanzania Established Mobile Money Interoperability, available at
https://bit.ly/2H1UI0r
140
FSDU (2017) Market Research on Interoperability in Mobile Financial Services In Uganda, available at
https://bit.ly/2xw2sYW
141
A scheme is characterized by a set of rules agreed between participants. Visa and Mastercard for example have their own
credit card scheme rules.

21
models, technical standards, revenue splits between participants, common branding, and rules around disputes and
customer protection.142 A number of countries are implementing this switched-based approach at a national level.

2.6.3.3 DFS Vendor Platforms

Platforms provided by third party vendors have been critical to the initial development of DFS, and similarly to
DFS evolution. Consolidation and attrition over the past 20 years of ecosystem development has however left just
a handful of vendors to provide scalable solutions. Ideally, the vendor solution should be modular, using service
function interfaces based on standard protocols that render each layer independently from any other layer to make
it easier to integrate different provider modules and facilitate high availability.143 It could also support different
access channels including mobile and web applications,as well as support connections to third parties using open
application programming interfaces (API). 144 The Bill and Melinda Gates Foundation have developed open-source
software and design platform called Mojaloop145 for financial services companies, government regulators, and
others taking on the challenges of interoperability and financial inclusion. Their intent is to give existing payment
processors and providers a level playing field to connect to payment systems.

2.6.3.4 Ubiquitous Mobile Network Coverage

With mobile phones as the primary access mechanism for DFS, access to DFS is highly dependent upon the degree
and quality of mobile coverage offered by MNOs. UIs for access to DFS are dependent on the type of mobile
coverage which, in many cases in the developing world, is via slower (narrowband) 2G GSM technology. Faster
broadband 3G and 4G mobile coverage is currently mainly limited to urban and peri-urban areas and along national
road corridors.146 With 2G-only coverage – a feature of rural areas in developing countries – users are mostly
dependent on service and competition147 quality-sensitive, text-based UIs such as USSD and STK. The UX with
these UIs is poor and error-prone, often driving people to limit or abandon their DFS usage and rather pursue OTC
DFS services provided by agents. Regular DFS SVA usage has reportedly dropped overall worldwide, with OTC
use growing – a concern for regulators worried about traceability of transactions for AML purposes.148

142
For example the JoMoPay DFS switch in Jordan, and Modelo in Peru. See CFI (2017) Modelo Peru Brief, available at
https://bit.ly/2LelAgg
143
See https://leveloneproject.org. The BMGF made available Mojaloop open-source software for creating a payment platform.
The software is designed to provide a reference model for payment interoperability between banks and other providers across
a country’s economy. It is available free-of-cost, for software developers to adapt and banks, financial service providers and
companies to implement.
144
Data drawn from International Telecommunications Union Focus Group on Digital Financial Services (ITU FG DFS) (2017)
DFS Vendor Platform Features, available at https://bit.ly/2L3wbL2. See also the open source ‘Moja Loop’ platform reference
design from the BMGF Level 1 project: a number of vendors are producing APIs to connect to the Moja Loop platform. See
https://leveloneproject.org/
145
See also the open source ‘Moja Loop’ platform reference design from the BMGF Level 1 project: a number of vendors are
producing APIs to connect to the Moja Loop platform. See https://leveloneproject.org/. Mojaloop was designed in collaboration
with Ripple, Dwolla, ModusBox, Software Group, and Crosslake Technologies. The Bill & Melinda Gates Foundation provided
funding and support through its Level One Project.
146
For a detailed exposition of mobile coverage linkages to ubiquitous DFS provision, see Perlman, L & Wechsler, M (2018)
The Role of Mobile Coverage on Digital Financial Services, available at www.dfsobservatory.com.
147
On competition-related matters in DFS, see Perlman, L (2017c) Competition Aspects of Digital Financial Services, available
at https://bit.ly/2xxLcma. On the effect of mobile coverage on competition in DFS, see Perlman, L & Wechsler, M (2018) The
Role of Mobile Coverage on Digital Financial Services, available at www.dfsobservatory.com
148
On these concerns, see in greater detail ITU FGDFS (2017) Over the counter transactions: A threat to or a facilitator for
digital finance ecosystems?, available at https://bit.ly/2ywZrbA; and on AMl concerns in Bangladesh with OTC, see Dhaka
Tribune (2018) Anonymous transactions raise risk of money laundering, available at https://bit.ly/2PU1nio

22
2.6.3.5 Supporting Systems and Providers
As noted above, third party aggregators can fulfill a number of possible and important roles in DFS. In bilateral
interoperability they often ‘switch’ the transactions and do ‘agent’ account balancing.149 Technical Solution
Providers (TSPs) will provide ancillary services, such a connectivity to national ID systems for biometric
authentication; provide USSD and STK gateways and shortcodes; provide an ability for PSPs to link to MNO
airtime-based and DFS-wallets to withdraw customer funds on a pull-push basis;150 provide secure links between
providers; as well as to Automated Teller Machines (ATM), and Automated Clearing House (ACH) networks.151

2.6.3.6 User and Merchant Interfaces

With basic and feature phones dominating most DFS markets, DFSPs currently mostly facilitate access to DFS
systems via text-based USSD and the encrypted SMS-based STK – both UIs of which work on almost all GSM-
based handsets.152 Smartphones in these countries are usually only found in urban and peri-urban areas, which match
the 3G and higher mobile phone coverage available in those locations.153 India expects smartphones to be the
majority of phones in use by 2022,154 but this goal is also dependent on whether there is sufficient high-speed data
coverage to ‘power’ data-intensive smartphone applications, which in turn is largely dependent on
telecommunications policy.155

2.6.4 The Regulatory Environment for DFS

2.6.4.1 Overview
DFS implementations to date have highlighted the emergence of novel responses and innovations from regulators
and lawmakers to facilitate the entry, and then supervision of, new non-bank market participants.156

This evolving legal and regulatory environment usually include distinctions between the policy decisions, the legal
frameworks to execute on these policy decisions, and a sector or market conduct regulator to issue specific
regulatory instruments, and to enforce these instruments:

● Policy decisions by ministry, parliament or similar high decision-making body

● Laws that implement a decided policy framework

149
FSDU (2017) Market Research On Interoperability In Mobile Financial Services In Uganda, available at
https://bit.ly/2xw2sYW
150
See above for a description of pull-push.
151
As suggested by the IFC, where general-purpose financial infrastructure is lacking, there is an opportunity for incumbent
banks to leverage their position of already having payments, identity and trust assets in place to expand rapidly in partnership
with fintech companies that can help fill gaps in banks’ channels, product sets, and processing capabilities. See IFC (2017)
Digital Financial Services: Challenges and Opportunities for Emerging Market Banks, available at https://bit.ly/2H369oJ
152
Not all (Android) smartphones support STK.
153
A number of ‘contactless’ facilities such as NFC and linkages of fiat-backed DFS accounts to companion debit cards are
also spurring the growth of merchant payments. ITU FG DFS (2017) Enabling Merchant Payments Acceptance in the Digital
Financial Ecosystems, available at https://bit.ly/2IWZJ09
154
Financial Xpress (2018) Giant leap: India to have over 500 million smartphone users by 2022, available at
https://bit.ly/2PlOAIB
155
National telecommunication policies include shutting down analogue TV signals, and using the valuable long-range
spectrum for mobile data use especially in rural areas. NTAs and governments will usually sell or auction this newly available
spectrum as part of a ‘digital dividend.’ For a comprehensive overview on the role of mobile coverage in provision of DFS, see
Perlman, L & Wechsler, M (2018) The Role of Mobile Coverage on Digital Financial Services, available at
www.dfsobservatory.com
156
Often though the regulatory innovations have been incremental or perfunctory, leaving incumbent banks to provide financial
services directly but (now) allowing non-banks or agents to provide frontline customer services sign as CICO and account
signup.

23
 ● Normative acts within the remit of particular regulators such as regulations, circulars, and guidelines or
inter-regulator MOUs to second powers.157
● Methods to check on the market conduct of entities under the direct remit of the regulator, for example,
using oversight,158 supervision159 and market-monitoring tools.160
● Methods to monitor the market the market as a whole. These may include (new) regulatory technology
(regtech) tools.161

The extent to which a legislative framework exists for enabling DFS and its service and participatory components
varies greatly around the world. The regulatory exigencies of regulators differ though between the developed and
developing world, with the latter focused on laws and regulations that fit national inclusion strategies.162

Except for a few notable exceptions,163 in many of the early implementations of DFS (when also known as ‘mobile
money’), laws, regulations, supervision and oversight fastening on the DFS ecosystem followed what is known as
an institutional approach. Here specific sector regulators had supervisory oversight and rule-making capacity over
institutions within their regulatory domain. The traditional institutional164 approach to regulation of DFS that in
effect only allowed licensed banks to provide financial services under a bank license regime. Thus, for example,
banks were regulated by the national banking regulator and telecommunications-related entities by the NTA. If a
new non-bank market participant wanted to provide even basic transactional financial services that emulated basic

157
For an example of a model MOU between a NTA and CB, see Perlman, L (2018) Model MOU Between a central Bank and
National Telecommunications Authority For Digital Financial Services Regulation, available at www.dfsobservatory.com
158
Regulation is said to be prescriptive, often quantitative, and generally not very flexible. It may prohibit an activity or prevent
it. Definition from Federal Reserve Bank Of New York (1997) Patrikis: Supervision and Regulation, available at
https://nyfed.org/2kAeozL
159
Supervision is more qualitative and involves the safety and soundness of specific institutions. It depends upon the judgment
of an examiner or inspector, needing close, first-hand, observation and analysis. Definition drawn from Federal Reserve Bank
Of New York (1997) Patrikis: Supervision and Regulation, available at https://nyfed.org/2kAeozL
160
Oversight is considered much less intrusive than supervision and might be viewed as surveillance, normally conducted at a
distance. Definition drawn from Federal Reserve Bank Of New York (1997) Patrikis: Supervision and Regulation, available
at https://nyfed.org/2kAeozL
161
On the role of regtech in financial inclusion, see Perlman, L & Gurung, N (2018a) Use of Regtech by Central Banks and its
Impact on Financial Inclusion, available at www.dfsobservatory.com
162
Where the legal and regulatory framework for non-bank participation in DFS to catalyse financial inclusion goals does not
directly exist however, this has often required a novel response from regulators, described below.
163
For example in Kenya, where MNO Safaricom was given a Letter of No Objection (LONO) by the central bank in the
absence of jurisdiction of the banking law over the planned service.
164
The institutional and functional approaches are two broad approaches to the issue of regulation and which may also reflect
variations in legal frameworks. The functional approach places the focus on the service received by the consumer regardless
of the type of institution providing that service. This broad protection may be the remit of specific consumer protection agencies,
competition authorities, or ministries of trade and industry. The issue however, is that while this ‘catch-all’ appears to provide
recourse insofar as all institutional types are concerned, the reality is that these entities may ultimately lack the necessary
institutional capacity and specialized knowledge to pronounce on, for example, complicated aspects of financial consumer
protection. Thus, multiple regulators may have (ineffective) remit over the same entity for different reasons, and may result in
consumer ambivalence, corporate intransigence and posturing, and thus the effective maintenance of the status quo. A SRA
may be overwhelmed when obliged to address financial sector complaints in addition to other economy-wide consumer
protection issues. In contrast, the institutional approach focuses not on the service per se, but on the institutions providing any
financial service. It supposedly leaves the regulation in the hands of specialized bodies, for example, the central bank (CB),
which may implement consumer protection provisions in relation to regulated financial institutions. However, this approach
may distort market dynamics by fragmenting responsibilities amongst too many regulators to the extent that some entities like
nonbanks are not captured. Implementation may also be challenging insofar as multiple regulators with varying levels of
capacity may be required. There is often, however, no one-size-fits-all solution to the design of a legal framework for financial
consumer protection, and for coherence and maintenance of the financial system generally. It should reflect the structure of the
financial system and the nature of each economy’s overall legal framework. This may take the form of specific, single,
dedicated agencies to deal with consumer protection issues relating to specific or general aspects of retail financial services.

24
bank account functions, they would invariably not fit into the institutional categorization described in the laws and
regulations and thus invariable would not be able to independently offer DFS services, with a banking partner often
required. Banks though saw the low-cost model of DFS as cannibalizing their account base, and often limited their
resources in partnering with non-bank DFSPs.

As the dampening effects of the institutional (bank-centric) approach to DFS enablement became evident,165 a
functional166 approach to regulation has been embraced by many regulators. Here regulation is focused on the
service offered rather than the entity providing it. The effect was to allow non-bank entities such as MNOs and
DFSPs to offer banking-like financial and transactional services through DFS, subject to a proportional regulatory
regime that matched the perceived risk of these services to the degree of required regulation and supervision. In
this new disruptive formulation, the evolving regulatory environment in relation to facilitating DFS provision by
non-banks is said to be ‘enabling’ or ‘non-enabling,’167 with the institutional approach restricting DFS to a ‘bank-
centric’168 approach seen as non-enabling.169 Aspects of a foundational ‘enabling and proportional’ regulatory
environment for DFS ignition and catalyzation are discussed below.

2.6.4.2 The Regulators of DFS

DFS is an emerging and evolving ecosystem, with a similarly dynamically evolving170 regulatory environment.171
Generally, the DFS-related regulators may include prudential regulators; financial integrity regulators; sector
regulators and market conduct regulators.172 The core regulatory authorities required then to provide a
‘foundational’ enabling environment for DFS include the country’s CB, its NTA, and its financial intelligence unit

165
See Exhibit 10 which shows World Bank Findex 2017 comparative data demonstrating account growth of DFS markets
using enabling or non-enabling regimes.
166
See on the ‘regulating by function’ rather than by the institution providing that function (service), Schwarcz, S (2014) The
Functional Regulation of Finance, available at https://bit.ly/2CTCDDq; Cunningham, L & Zaring, D (2009) The Three or Four
Approaches to Financial Regulation: A Cautionary Analysis Against Exuberance in Crisis Response, available at
https://bit.ly/2PD26rq; G30 (2008) The Structure of Financial Supervision Approaches and Challenges in a Global
Marketplace, available at https://bit.ly/2QaQgSl; Greenacre, J (2018) Regulating mobile money: a functional approach,
available at https://bit.ly/2CXs4zi; Perlman, L (2012) LLD Thesis: Legal and Regulatory Aspects of Mobile Financial Services,
available at https://bit.ly/2KGfC8k, and also CDG (2016) Financial Regulations for Improving Financial Inclusion, available
at https://bit.ly/2shcPL9. CDG define this approach as functional approach (to financial services regulation) where ‘services of
the same nature are regulated in the same way, rather than, for example, according to the type of provider.’
167
These were terms first used by the GSMA in relation to the impact of local regulatory regimes on provision of DFS. See di
Castri, S (2013) Mobile Money: Enabling Regulatory Solutions, available at https://bit.ly/2kGPgqX. An ‘enabling’ regulatory
environment is described in inter alia Gutierrez, E & Singh, S (2013) What Regulatory Frameworks are More Conducive to
Mobile Banking? Empirical Evidence from Findex Data, available at https://bit.ly/2JV1WsF. See also Porteous, D (2006) The
enabling Environment for Mobile Banking in Africa, available at https://bit.ly/2JxtOzz. For an assessment of how enabling
environments have evolved and whether they have worked to enhance financial inclusion, see Staschen, S & Meagher, P (2018)
Basic Regulatory Enablers for Digital Financial Services, available at https://bit.ly/2s8b2YX
168
The notion of a licensed bank being the primary pivot (by regulation) in DFS provision – originally termed ‘bank-led’ - was
introduced in CGAP’s 2008 study of what was then commonly known as ‘branchless banking.’ See Lyman, T, Pickens, M &
Porteous, D (2008) Regulating Transformational Branchless Banking, available at https://bit.ly/2LORgdn
169
See di Castri, S (2013) Mobile Money: enabling Regulatory Solutions, available at https://bit.ly/2kGPgqX. The non-bank
DFSP may be restricted from providing any DFS services other than as a supportive agent network for a bank.
170
For a recent gender perspectives on regulatory enablers for DFS, see Bin-Humam, Y, Izaguirre, J-C & Hernandez, E (2018)
Regulatory Enablers for Digital Finance: A Gender Perspective, available at https://bit.ly/2PV4SFz
171
Laws, regulations, supervision and oversight though have traditionally followed an institutional approach, whereby specific
regulators have had supervisory oversight and rule-making capacity over institutions within their regulatory domain. Thus, for
example, banks have traditionally been regulated by the national banking regulator and telecommunications entities by the
NTA.
172
Regulators may ‘extend’ their remits over DFS and its enabling components even and especially where there is no direct
legal basis for doing so: this reach is usually achieved by using omnibus powers in that regulatory bodies’ establishment statute.

25
(FIU) on AML matters. This ensemble reflects the primarily transactional iterations of a DFS ecosystem in its
foundational stage, and the number of impacted regulators will increase as service offerings evolve.173

In particular, as service offerings, competition-based complexities increase and the DFS ecosystem generally
evolves, additional regulators - outlined in Exhibit 5 - will be impacted and become part of the regulatory
ecosystem for DFS. These may include other prudential regulators, other sector regulatory authorities (SRAs);
and market conduct regulators. There may be co-jurisdiction between regulators over a similar domain or issue,
for example on AML and competition issues.

Central Bank: In most jurisdictions, the CB as the apex bank in the country is the lead regulator in DFS. It will, at
a minimum, set licensing and authorization criteria for DFSPs and e-money issuance; establish consumer protection
mechanisms; set safety and soundness guidelines including schemes for safeguarding of pooled funds and user
accounts; set AML/CIV policies for SVA use; establish quality of service (QOS) and risk management guidelines
for services; set agent standards; and many often also set interoperability standards and policies. In some cases it
may also act in a catalytic role of establishing or building a national interoperable platform or switch that integrates
a DFS ecosystem with its e-money-based SVA and agent networks with ‘traditional’ financial ecosystems such as
those involving ATM and card networks.

National Telecommunications Authority: The NTA primarily acts in supporting role to the CB in DFS with its
jurisdiction usually limited to issues related to the modalities surrounding access to primary DFS bearer channels
such as USSD and STK. The NTA also regulates critical SIM card registration process. If the provider is a licensed
MNO,174 the NTA may be directly involved in regulating that DFSP through some type of authorization for
provision of DFS-type services as a value added services (VAS) license.175 It may also insert itself in discussions
on interoperability between DFSPs and other participants.176 And while it is usually the NTA or a technology
ministry’s primary competency, the CB may include security and risk management requirements for use of bearer
services such as USSD in its licensing requirements for DFSPs.

Financial Intelligence Unit: The FIU - also known as a ‘financial intelligence authority’ or AML Unit - will
usually specify minimum standards to be followed for CIV and AML activities, as well as for specifying DFS
transaction tier limits. The FIU policies – sometimes granular, but more often than not principles-based - would
then ‘trickle down’ to the other regulators to apply in more granular form any rules based on a risk-based
approach (RBA) to their own supervised entities. A RBA is generally based on guidelines and principles –
rather than rules - for addressing a particular risk, so as to lead to a desired outcome.177

173
Service offerings and capabilities in DFS 2.0 and beyond may include bilateral interoperability between DFSP and
independent credit provision by DFSPs.
174
It may also intervene if there are competition-related concerns on that licensee not providing access to scare resources at
FRAND terms.
175
See on the role of the NTA, Perlman, L (2018) The Role of the Telecommunications Regulator in Digital Financial Services,
available at www.dfsobservatory.com
176
The NTA in Kenya for example threatened to split up MNO Safaricom if it did not integrate its dominant M-PESA DFSP
subsidiary with other DFSPs in Kenya for interoperability purposes. Quartz (2018) Kenya Won’t Force A Spin-Off Of The
World’s Leading Mobile Money Service After All, available at https://qz.com/1212396
177
A feature of a RBA is that compared to a normative, rules-based approach, the supervisory entity does not specify the precise
steps required to achieve the desired outcome, rather leaving it to the implementing entity to address the risks outlined in
guidelines by implementing procedures and rules that are contextually relevant to it. The rules and procedure of each entity
may thus differ, although the net effect of each variation is to address the risks outlined in the guidelines. On the use of a RBA
for Customer Due Diligence (CDD), see FATF (2017) Anti-Money Laundering and Terrorist Financing Measures and
Financial Inclusion with a Supplement on Customer Due Diligence, available at https://bit.ly/2taubZM; and Lyman, T & de
Koker, L (2018) KYC Utilities & Beyond: Solutions for AML/CFT Paradox?, available at https://bit.ly/2OqOgso

26
Competition Regulator: A market conduct regulator such as the competition authority – if there is one as an
independent entity - may for example set parameters for provision of access to scarce resources such as USSD
and STK or at fair, reasonable and non-discriminatory (FRAND)178 terms. It may in some jurisdictions have
the power to order the ‘break up’ of entities who through a market study, have been found to have and SMP
abused this dominance.

Additional Regulators: There are of course specialized laws and regulators who may have an omnibus remit
over an entity, no matter the institution and service offered. These regulators, agencies, or government
ministries may and usually are eventually be drawn into regulation, oversight, and policy-making of other
components of the DFS ecosystem. These – where there are specific regulators formed - may include tax
authorities; data protection regulators for use of customer information; technology ministries for technology
standardization; consumer protection regulators; and home/internal affairs for ID document issuance and
verification.

Memorandum of Understanding: The overall complexity of DFS and its components has also necessitated
closer cooperation between implicated regulators, usually codified as bilateral or multilateral memoranda of
understanding (MoUs).179

Remit/Authority Competition FIU Data Consumer CB NTA Tax

Protection Protection
Authorization To Operate Yes Yes Yes
Services
Data Privacy Yes Yes Yes Yes Yes
Consumer Protection Yes Yes Yes Yes Yes
Quality of Service Yes Yes Yes Yes
Competition Yes Yes Yes Yes Yes
CDD/KYC/CIV - Yes Yes Yes Yes Yes
Security - Yes Yes Yes Yes Yes
Taxation - Yes Yes Yes
Transaction Data Yes Yes Yes Yes Yes Yes Yes
Monitoring

Exhibit 5: Cross-jurisdictional remits in DFS for DFS-impacted regulators and their direct and extended remits
over DFS and its enabling components. Core foundational DFS -related regulators will include the CB, the NTA,
and FIU.

178
See on FRAND policies and its effect on DFS, Perlman, L (2017c) Competition Aspects of Digital Financial Services,
available at https://bit.ly/2xxLcma
179
For a model MOU between a CB and the NTA on DFS, see Perlman, L (2018) Model MOU Between a central Bank and
National Telecommunications Authority For Digital Financial Services Regulation, available at www.dfsobservatory.com

27
2.6.4.3 Factors and Components in Regulatory Development
Organic growth in capacity, internal learnings, technical assistance from external donors180 and entities,181 peer
interactions,182 and an evolution of outlook/thinking by key policy makers within regulatory bodies has facilitated
regulatory reforms and innovations that to a large degree have allowed DFS and new participants to emerge to
challenge the primacy of licensed banks as exclusive providers of financial account services.

Ultimately, unless a regulator uses creative methods183 to extend their remit to regulate evolving components of
DFS ecosystem, there may be no legal basis for their regulations and enforcement such that any activity in the DFS
ecosystem may be subject to court review184 and regulatory arbitrage.185

An emerging trend in the tools of central banks and other regulators is the creation of what are known as
‘regulatory sandboxes,’ as flexible frameworks to facilitate beneficial innovation in the financial sector while
still managing risks of newer technologies. Specifically, regulatory sandboxes can address regulators’ challenges
to understand existing and emerging innovations, as well as fintech innovators challenges to understand complex
regulations and regulatory expectations. Innovations are housed in controlled, safeguarded environments to live
test innovations which would ordinarily be stifled by regulatory uncertainty or incompatibility under the
regulator’s supervision for a limited duration. As of 3Q 2018, over 50 countries had operational or proposed
regulatory sandboxes.186

Exhibit 6: Regulatory Sandboxes and their Role in Financial Inclusion

And while many of the regulatory innovations that have emerged around DFS are mostly organic, internal
initiatives, they often reflect impetus from (top-level) inputs, guidelines and strategies from banking and payment-
oriented supra-national SSBs such as FATF or the BIS noted earlier.187 Most CBs for example will in some form
implement recommendations from these SSBs in national law, regulations or directives, guidances, by-laws, or

180
See Section 2.6 on the Role of Donors and Supporting Organizations
181
There are many example of TA: for example in Nepal, United Nations Capital Development Fund (UNCDF) assisted the
Nepal Rasta Bank to implement a GIS system to map all financial points in Nepal. Gurung, N (2018) Focus Note: Digital
Financial Services in Nepal, available at www.dfsobservaory.com. In Tanzania in 2014, the IFC through interaction with the
central bank and industry, helped facilitate the introduction of the first effective interoperability in DFS in the world. See Musa,
O, Niehaus, C & Warioba, M (2015) How Tanzania Established Mobile Money Interoperability, available at
https://bit.ly/2H1UI0r. This author was the legal and regulatory consultant on the IFC project.
182
The Alliance for Financial Inclusion (AFI) is a peer body of global financial regulators and DFS market participants. It holds
regional workshops and an annual global policy forum. See https://www.afi-global.org/
183
Such as through their establishment statutes, a method used in relation to LONOs.
184
As occurred in Uganda, described above.
185
Kenya’s high court for example struck down a legal amendment as part of the omnibus Statute Law (Miscellaneous)
Amendment Act that required the NTA to consult the Competition Authority of Kenya before punishing any operator for abuse
of dominance. The court ruling restored these powers to the NTA. See Telegeography (2017) Court Restores Market
Dominance Powers to CA of Kenya, available at https://bit.ly/2ssQIkj
186
For more insights into the use of sandboxes for developing countries, see Wechsler, M; Perlman, L and Gurung, N (2018)
The State of Regulatory Sandboxes in Developing Countries, available at www.dfsobservatory.com
187
See Section 2.3.1

28
instructions. An overarching coordinating body – such as a national financial inclusion secretariat, agency or
ministry – may also be established.188 Often the CB will have its own financial inclusion department.189

There is a growing use of innovative technology for compliance and regulatory purposes by regulators and the
entities they supervise, manifesting in the relatively new but rapidly evolving field of ‘regtech’ – or ‘regulatory
technology.’ Initial uses of regtech have revolved around use by market participants such as financial institutions,
and emerging fintech companies to reduce compliance costs by automating typically manual information
gathering and reporting processes. For regulators, regtech may improve their efficiencies by automating
components of their supervisory and regulatory tasks while significantly enhancing their internal reporting
processes. Understanding and then adoption of regtech can however be challenging in many developing countries
that have technology and capacity constraints. Even though the goal may be to introduce and use regtech
solutions, legacy internal processes, lack of policy insights and lack of capacity may in of themselves handicap
this goal.190

Exhibit 7: Use of Regulatory Technology – ‘regtech’ – for Financial Inclusion Purposes

2.6.4.4 Aspects of a Foundational DFS Enabling and Proportional Regulatory Environment

What is known as an ‘enabling environment’ for DFS may relate to an activity of appropriate regulators to set down
conditions for participation in a sector, but may also relate to the legal ability (enablement) of the regulator itself to
produce any enabling laws for market participants in the DFS ecosystem.191

‘Enabling and Proportional’ Licensing: The watchwords in respect of DFS and financial inclusion have involved
the terms enabling and proportional regulatory regimes, generally referring to a regulator creating ex ante
regulations192 and an environment that allows for the entry of new – usually non-bank – market participants to
provide innovative solutions for financial inclusion.193 Many supranational bodies have championed an ‘enabling
and proportional’ approach to regulatory enablement for DFS. For example, ’Principle 3’ of the G20’s ‘High-Level
Principles for Digital Financial Inclusion’ of 2016 encourages regulators to:

188
See for example Banca de las Oportunidades, a program to enhance financial inclusion in Colombia run by the Bank for
Foreign Trade, Bancoldex. See Banca de las Oportunidades (2018) Who We Are, available at https://bit.ly/2ymk8Xy. Nigeria’s
National Financial Inclusion Strategy mandated the creation of a ‘Financial Inclusion Secretariat’ supervised by the Financial
Services Regulation Coordinating Committee, which reports to the National Economic Council. See CBN (2018) Financial
Inclusion, available at https://www.cbn.gov.ng/devfin/fininc.asp; See also World Bank (2018) National Financial Inclusion
Strategies Resource Center, available at https://bit.ly/2D2ur4l ; World Bank (2015) Overview: National Financial Inclusion
Strategies, available at https://bit.ly/2LXjB0m
189
Jordan for example has a financial inclusion department overseeing the implementation and use of its JoMoPay switch.
190
For further insights into the use of regtech use by central banks, see Perlman, L & Gurung, N (2018) Use of Regtech by CBs
and its Impact on Financial Inclusion, available at www.dfsobservatory.com
191
See further Section 2.5.5.2 on Factors and Components in Regulatory Development.
192
A CGAP report of 2008 of 7 jurisdictions of what was then commonly known as ‘branchless banking’ but which is
functionally equivalent to what we call today DFS, scored the enablers to be (i) the authorization to use retail agents and (ii)
risk-based AML/CFT rules as necessary, but not sufficient, preconditions for inclusive DFS, and classified several others as
“next generation” issues, including (iii) regulatory space for the issuance of e-money particularly by nonbanks; (iv) effective
consumer protection; and (v) policies governing competition. See Lyman, T, Pickens, M & Porteous, D (2008) Regulating
Transformational Branchless Banking, available at https://bit.ly/2LORgdn
193
For a distinction within financial sector between ex ante and ex post regulation, see CDG (2016) Financial Regulations for
Improving Financial Inclusion, available at https://bit.ly/2shcPL9

29
 ‘Provide an enabling and proportionate legal and regulatory framework for digital financial inclusion,
taking into account relevant G20 and international standard setting body standards and guidance.’194

Lawmakers and regulators then usually craft rules that allow these new market participants, at a regulatory level
‘proportional to’ – that is, commensurate with - the perceived risk of allowing that new participant, to provide
services. Generally, according to the FATF RBA, if the user and the services they use reflect comparatively less
risk, then surrounding regulations – especially for CIV process – may also be relaxed.

At a more granular level, an ex ante ‘enabling environment’ has evolved marginally from initial implementations
thereof to now address195 whether there is:

● Defined, transparent and predictable rules and regulations

● Functional,196 non-discriminatory approach to regulation that facilitates non-banks197 being able to offer
payment services and undertake e-money issuance as EMIs
● Support of a risked based approach (RBA) to CIV and Customer Due Diligence (CDD) based on FATF
principles; and
● Consumer protection that involves consumer redress mechanisms and safeguarding of customer funds
placed with DFSPs and banks as custodians of DFSP funds.

How these regulations are formulated is also a measure of how enabling they are. That is, regulations should
establish a fair, non-discriminatory - and open - level playing field for market participants where similar rules apply
for functionally similar services regardless whether or not the provider of these DFS is a bank, an MNO, or another
DFSP. As noted above, this new approach to regulation is known – as noted above - as the functional approach, a
pivot from the traditional institutional approach to regulation of DFS that in effect only allowed licensed banks to

194
G20 (2016) High-Level Principles for Digital Financial Inclusion, available at https://bit.ly/2c9V0WB
195
These ‘updated’ criteria to determine whether a jurisdiction is enabling were identified by CGAP in an important 2018 DFS
regulatory study. The authors see these criteria though as basic, but not sufficient for enabling DFS. See Staschen, S & Meagher,
P (2018) Basic Regulatory Enablers for Digital Financial Services, available at https://bit.ly/2xmi8y2. They compare their
identified enabling criteria to that of the GSMA, UNSW and CDG. The GSMA criteria for what it terms ‘mobile money’ is
considered enabling if (i) nonbanks are permitted to issue e-money; (ii) capital requirements are proportional to the risks of the
e-money business; and (iii) mobile money providers may use agents for cash-in and cash-out operations. See di Castri, S (2013)
Mobile Money: Enabling Regulatory Solutions, available at https://bit.ly/2kGPgqX
196
Non-discrimination may refer to not just applying a functional approach to regulation, but to allowing international fintechs
to provide services be on par with local players. Constructive barriers may include local ownership criteria, localization criteria
requiring servers to be housed in the licensing country, and well as required references from local partners vouching for the
international entrant. Similarly, entities owned in full or partly by the state may be given unfair access or pricing. For a
discussion on barriers to entry, see ITU DFS FG (2017) Interoperability, available at https://bit.ly/2LfZv0N
197
This may also include banks, although banks mostly have de jure ability to undertake these activities due to the omnibus
nature of bank licensing regimes. In some countries – such as Colombia, Ghana, and Rwanda - banks require
authorization/approval by the CB to offer separate e-money accounts as an additional product. Another exception are
specialized ‘payment banks’ introduced the Reserve Bank of India in 2015. These are specialized financial entities for provision
of DFS and related transactions. Credit and interest is not provided to customers. The first Payment Banks are operated by
entities linked to MNOs, for example Airtel Payments Bank. See www.airtel.in/money. See Kumar, K & Raman, A (2015) Did
India’s CB get Payments Bank Approvals Right?, available at https://bit.ly/2stdae7. In Bangladesh, even though non-banks
cannot independently provide DFS, they can however provide DFS by partnering with banks as shareholders of a bank
subsidiary that provides DFS.

30
provide financial services under a bank license regime. The latter scheme is known as a bank-centric (also known
as ‘bank-led’)198 model of DFS and is said to be ‘non-enabling.’199

Many of the less or non-enabling rationales are rooted in combinations of the political economy in the country
where traditional institutional thinking is engrained in political considerations,200 regulatory capture where banks
successfully lobby their regulators to restrict non-banks from providing bank-like (non-credit) services.201 Similarly,
on the assumption that different providers do not necessarily entail the same risks.202 The regulatory journey then
to an ‘enabling’ environment, though, has featured some interesting carve-outs that often represent the local political
economy, for example, allowing all non-banks except MNOs to provide DFS203 or requiring formation of specific
financial entity vehicles to provide DFS.204 Restrictions on independent, direct provision of DFS by non-bank
DFSPs without a mandated (and thus effectively ‘non-enabling’) need to partner with a licensed bank to provide
DFS still exists in some markets but are increasingly becoming the exception.205

AML-related Provisions: CDD requirements often act as barriers to financial access for the poor, especially in
environments where there is no national ID or where IDs are hard to obtain. FATF’s RBA to AML in DFS206 has
allowed some, but not all, relaxation of ID requirements for CIV purposes.207 This is especially so where money
laundering (ML)/terrorism financing (TF) risks have been assessed to be relatively lower for financial products and
services in so far as they provide appropriately-defined and limited services to certain types of customers.208 Because
DFS involves lower transactional value and volumes,209 it may be styled as ‘low risk’ compared to that for opening
and use of bank accounts (as higher risk) where regular, large-value transactions can take place, often across borders.
The RBA concept then has resulted in what is known as a ‘tiered’210 CDD approach in DFS: where the ML risk is
assessed to be low, there are lower CIV processes. The more ID and authentication of ID provided by a customer,

198
The notion of a licensed bank being the primary pivot (by regulation) in DFS provision – originally termed ‘bank-led’ - was
introduced in CGAP’s 2008 study of what was then commonly known as ‘branchless banking.’ See Lyman, T, Pickens, M &
Porteous, D (2008) Regulating Transformational Branchless Banking, available at https://bit.ly/2LORgdn
199
See di Castri, S (2013) Mobile Money: enabling Regulatory Solutions, available at https://bit.ly/2kGPgqX . The non-bank
DFSP may be restricted from providing any DFS services other than as a supportive agent network for a bank.
200
For example in Moldova, where the author has seen very little political will to embrace DFS-type activities. Some politicians
in Uganda have (unsuccessfully) to date, tried to foreclose on the ability of non-bank DFSPs to provide services. Daily Monitor
(2017) MPs pin BoU on unregulated mobile money transactions, available at https://bit.ly/2AvvuaA ; and Blizz Uganda (2018)
MP drags MTN, UCC and Bank of Uganda to Court, Seeks an Injunction against MTN License Renewal, available at
https://go.shr.lc/2Smqr3x
201
There is anecdotal evidence of this happening in developing and emerging economies. In Kenya soon after the launched of
Safaricom’s M-PESA, major banks approached the Minister of Finance to shut down M-PESA, accusing it of being a Ponzi
scheme. The minister reportedly approached the central bank on their behalf, but clearly the approach had no effect. On
regulatory capture in banking in the US, see Igan, D & Lambert, T (2018) Bank Lobbying: Regulatory Capture and Beyond,
available https://ssrn.com/abstract=3128829
202
See CDG (2016) Financial Regulations for Improving Financial Inclusion, available at https://bit.ly/2shcPL9
203
For example in Nigeria where MNOs to date have not been allowed to directly offer DFS, instead allowed only to provide
frontline agent CICO and sign-up services. This now appears to be changing in favor of a full enabling environment with the
advent of ‘Payment Services Banks.’ See Tech Point (2018) CBN Oks Telecom Operators For Payment System In New MoU,
available at https://bit.ly/2qnGCjE
204
For example the need in India noted above for MNOs to form ‘Payment Banks’ to provide services.
205
Liberia, Ghana, Colombia and possibly also Nigeria have or are moving away from the bank-centric model of DFS provision.
206
FATF (2017) Anti-Money Laundering and Terrorist Financing Measures and Financial Inclusion with a Supplement on
Customer Due Diligence, available at https://bit.ly/2taubZM
207
See on IDs and CIV, Section 2.5.4.1 above.
208
FATF (2013) Guidance For A Risk-Based Approach Prepaid Cards, Mobile Payments And Internet-Based Payment
Services, available at https://bit.ly/2jEAiAl
209
MicroSave (2017) Progress and Challenges with KYC and Digital ID, available at https://bit.ly/2teQXAN
210
Also called a progressive approach.

31
the higher their tier to allow them to store more in their SVA and undertake higher value and more frequent
transactions.

The RBA principles are usually set at a national level by a FIU, then often codified as ‘Tiers’ by the CB as rules for
DFSPs to follow, and then implemented by the DFSP. CDD usually also applies to agents. And depending on the
risk profile of the customer and the service they are using, even ‘lighter’ CDD process may be allowed: known as
Simplified CDD (SDD).211 SDD allows access to the basic, first level sets of DFS using just minimum
identification.212 Some countries have implemented SDD practices in lower risk cases that successfully align
financial integrity and financial inclusion policy objectives.213 In 2015 in Peru for example, SDD measures were
authorized by the banking supervisor (SBS)214 for specific product and services. Providing only the national ID
number is sufficient for opening a basic DFS account.215

2.7 Role of Donors and Supporting Organizations

Many of the initiatives describe above to catalyze DFS in emerging and developing markets have been supported
by a number of donors, supporting organizations, implementation partners and those engaged in capacity building.
Donors – mostly philanthropic organizations, corporate foundations, and some G20-member government aid bodies
– provide critical funding and thought leadership, and often direct technical assistance

211
SDD is characterized by a simplified CDD process for customers with a low risk profile. Less information or less robust
verification of the customer’s identity and their intentions behind the business relationship may be required or verification may
be postponed. It can ease difficulties for people to access financial services. FATF (2014) Guidance for Risk-based Approach:
The Banking Sector, available at https://bit.ly/1thpYyY. The 2017 FATF Supplement provides country examples of simplified
CDD (SDD) measures adapted to the context of financial inclusion. Those examples illustrate how SDD can support both
financial inclusion and financial integrity policy objectives, especially where supported by alternative forms of identity
verification, for example the use of e-identity tools. See FATF (2017) Guidance On AML/CFT Measures and Financial
Inclusion, With A Supplement on Customer Due Diligence, available at https://bit.ly/2wLMObN
212
FATF (2017) ibid
213
South Africa in 2008 implemented an SDD for banks providing low value products. Known as ‘Exemption 17,’ it was
intended to simplify identification and verification requirements for low value products. It was withdrawn in 2017 ostensibly
because SDD-type procedures are included implicitly in the modifications to AML legislation which requires a risk-based
approach that allows an accountable institution to determine which business relationships or transactions pose a lower ML/TF
risk and apply the necessary CDD requirements as described in the institution’s risk management and compliance policies. See
FIU (2017) Draft Withdrawal Notice Of Exemptions In Terms Of Financial Intelligence Centre Act, 2001, Published For Public
Comment, available at https://bit.ly/2Pg8aG4
214
La Superintendencia de Banca, Seguros
215
Providers had only to collect the full name, type and number of ID document of the customer, with the verification done
though the National ID or passport for foreigners. The conventional CDD involved provision of their nationality, residence,
phone number and/or e-mail address, occupation and name of employer of that person. SBS Resolution N° 2660-2015
implemented the integral risk management system for enterprises under the supervision of the SBS. This Resolution is
applicable to all banking and financial institutions under the scope of the SBS. See PwC (2016) Know Your Customer: Quick
Reference. Guide, available at https://pwc.to/2ijumjA

32
 Name Donor International Body Capacity Building Implementation Partner
AFI Yes Yes
AFR Yes Yes
Bill & Melinda Gates Yes
Foundation
Cambridge Centre Yes
CENFRI Yes
CGAP Yes Yes
Columbia DFSO Yes
DFID Yes Yes
Financial Sector Deepening Yes
Fletcher School Yes
GIZ Yes Yes Yes
GPFI Yes
International Finance Yes Yes Yes
Corporation
Mastercard Foundation Yes
MEFMI Yes
Mercy Corps
Mercy Corps Yes
Metlife Foundation Yes
Microsave Yes
Omidyar Network Yes Yes
Rockefeller Yes Yes
Foundation/Advisors
Toronto Centre
UNCDF Yes
UNDP Yes Yes Yes
UNSGSA Yes
USAID Yes Yes
World Bank Yes Yes Yes Yes

Exhibit 8: Role of selected donors, international bodies and implementation partners in the development of DFS
ecosystems worldwide. Note that IFC and the Bill & Melinda Gates Foundation act as donors and investors in DFS-
related companies.216

3 Selected DFS Results and Challenges So Far

3.1 Overall Ecosystem

The GSMA reports that as of October 2018, there were 276 DFS offerings live in 90 countries,217 providing DFS to
some 690 million people, many of whom live in rural areas.218 There were 5.3 million registered agents219 and some
USD 1.8 billion in transactions done over the reporting period. The IMF reported in its Financial Activity Survey
(FAS) in October 2018 that on average, the number of DFS-type accounts in a low-income economy is more than

216
Some data in this Exhibit is derived from CGAP (2018) Donors and Investors, available at
https://www.cgap.org/topics/donors-investors#.W9IrLXuDObo.twitter
217
GSMA (2018) 2017 State of the Industry Report on Mobile Money, available at https://bit.ly/2CKPLqF
218
ibid
219
It is not clear if these refer to individual agents and also super- and/or master-agents. GSMA (2018) 2017 State of the
Industry Report on Mobile Money, available at https://bit.ly/2CKPL

33
twice the number of bank accounts per 1,000 adults.220 The IMF’s FAS data also confirms that low-income countries
are leading the way in DFS adoption.

But as noted below, customer and agent activity is however very low. Interoperable schemes though are growing
and morphing into full integration into national payment systems and growing numbers of e-government services.
A number of countries have also recently implemented eKYC systems for CIV purposes.

3.2 Effect of DFS-related Regulatory Regimes:

3.2.1 Licensing
Ultimately all these regulatory efforts should percolate into actionable regulations and laws.221 As noted above, four
broad types of DFS operational models have evolved through regulation and policy.

Exhibit 9: Findex 2017 data showing the growth (in percentage) of adults with DFS [mobile money] accounts
in sub-Saharan Africa.222

Again, while reasons are more complex than a simple binary ‘enabling’ or ‘non-enabling’ and that each of these
models have their own complexities and challenges and varying success and efficacy for financial inclusion,
globally it is the non-bank-only DFS model223 that appears to be the most successful, simply because they are able
to serve the ‘unbanked’ population in (rural) areas that banks were unwilling to pursue. Of these, data suggests that
open licensing regimes for DFS provision are the most ‘enabling.’

220
IMF (2018) IMF Releases the 2018 Financial Access Survey, available at https://bit.ly/2AoLKKv
221
In Uganda however, an ‘enabling’ national payments law has been in the works since the 2000s. The DFS ecosystem is
reliant on LONOs, which have been challenged in court.
222
World Bank Group (2018) The Global Findex Database 2017, available at https://globalfindex.worldbank.org/
223
The majority of the non-banks providing DFS are MNOs.

34
 2011 2014 2017
Colombia 30% 39% 46%
Ghana 29% 41% 58%
Liberia 19% No data 36%
Nigeria 30% 44% 40%

Accounts (% age 15+)

Exhibit 10: World Bank Findex 2017224 comparative data showing account growth of DFS markets using
enabling or non-enabling regimes. Boxes in black show the bank-centric regulatory regime for DFS.
Boxes in gray show an open, enabling regime for DFS.

For example, while more indicative than conclusive of these transitions, the World Bank Findex 2017 comparative
data shows larger growth of DFS markets where an enabling regulatory regime is employed by regulators.225 For
example, Ghana and Colombia transitioned from bank-only approaches, as did India which in 2015 launched a
‘Payment Bank’ approach.226 Exhibit 10 also suggests that the CB of Nigeria’s (CBN) long-standing prohibition
on MNOs providing DFS may be the primary reason for low volumes of DFS use in Nigeria and high rates of
financial exclusion.227 The CBN though is reportedly now on a journey to a ‘Payment Service Bank’ approach.228

3.2.2 Taxation
A number of countries – many recently in East and Southern Africa – introduced significant taxes on DFS and
general payment transactions as well as on data mobile charges and social media use.229 These taxes are expected
to have a largely dampening effect on DFS usage. In Uganda in particular, implementation of a tax on DFS
transactions in mid-2018 led to an immediate decline in DFS transaction volume, with a drop at MNO Airtel of
33%. The controversial tax was initially set at 1% but after a public outcry about the tax itself and a procedural
anomaly in the amount set, it was reduced it to 0.5% and only applicable to withdrawals.230 Taxes were also
introduced on social media use.231 The Bank of Uganda had initially pushed back232 on any taxes on transactions

224
World Bank Group (2018) The Global Findex Database 2017, available at https://globalfindex.worldbank.org/
225
ibid
226
Payment Banks ate financial inclusion-focused, providing a limited amount of services such as small savings accounts,
payments and remittance services to migrant labour workforce, low income households, small businesses, other unorganized
sector entities and other users. They cannot accept fixed or recurring deposits and in for savings accounts, the maximum deposit
is USD 1,364. The central bank gave in-principle approval to 11 entities to start payments bank. Airtel Payments Bank was the
first one to launch, with Paytm Payments Bank, Fino Payments Bank and Aditya Birla Payments Bank are also operational.
See Livemint (2018) How payments banks are different from regular banks, available at https://bit.ly/2Je1Euf
227
Leadership NGA (2018) NCC, CBN Sign MoU On Mobile Money, Financial Inclusion, available at https://bit.ly/2JAqRP8
228
See ProShare (2018) CBN Publishes Guidelines For Licensing and Regulation of Payment Service Banks in Nigeria,
available at https://www.proshareng.com/news/42108
229
See generally on the taxes and their impact, Muthiora, N & Raithatha, R (2017) Rethinking mobile money taxation, available
at https://bit.ly/2IyvAmF
230
Uganda Business News (2018) Museveni calls 1% mobile money tax a mistake, orders for refund of deductions, available
at https://bit.ly/2yI54Bo; Kapo, N B (2018) Forget Mobile Money tax refund, the 1% was already spent- Gov’t, available at
https://bit.ly/2D9PhyY; Africa News (2018) Uganda removes taxes on 'depositing and sending' mobile money, available at
https://bit.ly/2qaP7Pj; and Bitcoin.com (2018) Wave of Mobile Tax Hikes Squeeze Africa’s Poor to Indulge Governments,
available at https://bit.ly/2CKMwTX
231
The taxes require daily payment of 200 Ugandan shillings (USD 0.05) to enable use of Facebook, WhatsApp, and Twitter.
232
Observer Uganda (2018) Telecoms, Bank of Uganda want mobile money tax scrapped, available at https://bit.ly/2ERMOuI

35
but later dropped its objections when the tax was lowered. In Kenya in mid-2018, a tax was placed on fees charged
on money transfers by banks, agencies, and other financial providers, increasing it from 12% to 20%.233 There is
also a proposed tax of 0.05% for transfers of Sh 500,000 (around USD 5,000) or more sent through banks or other
financial institutions. A court has however suspended the implementation of the tax. In Tanzania, there is a 10%
excise duty for sending and withdrawing money using DFS.234 In Zimbabwe, in taxes were increased in July 2018
on DFS transfers to effectively USD 0.02 for every dollar transacted.235 If the 2% on every dollar is applied, state
coffers will reportedly get a boost of USD 1.28 billion. In Nigeria, Nigeria is seeking about USD 2 billion in back
taxes from MTN,236 another potentially devastating blow to its commercial viability.

3.2.3 Ecosystem Activity Levels

DFSPs: The DFS ecosystem is relatively new and is still evolving. Starting and maintaining a DFSP is costly and
involves new technical systems, internal process, treasury management, and new compliance requirements that
DFSPs – even for established MNOs – have to finance and maintain. Agent networks are often the most expensive
components for a DFSP’s activities, especially as it involves training, liquidity management and in some cases,
security.237 The GSMA says that margins in the payments business are being squeezed by both increased
competition and a downward pressure on fee-based revenue in particularly a squeeze on margins in both EMEA
and North America.238 There are also other disruptive players – particularly those using QR codes for merchant
payments – such as Alipay and SnapCash.239

Some DFSPs have closed down or, as is often characterized as being the result of ‘consolidation’ of their MNO
parents. DFSP closures occurred recently in Rwanda,240 Ghana,241 and South Africa.242 Airtel in Kenya243 has said
often its operations there are unprofitable and affect the viability of its telecommunications and DFS activities,
although with the advent of interoperability and frequency expansion in Kenya, closure of its operations appears
less likely.

233
This will reportedly also apply to statement requests, monthly account fees, and new debit cards. / As an amendment to the
Excise Duty Act of 2015. See Bitcoin KE (2018) A Look at the New Tax on Mobile Money and Banking in Kenya and Existing
Alternatives, available at https://bit.ly/2AqXz2O; and Bitcoin.com (2018) Wave of Mobile Tax Hikes Squeeze Africa’s Poor to
Indulge Governments, available at https://bit.ly/2CKMwTX
234
GSMA (2017) Taxation and mobile money in Tanzania, available at https://bit.ly/2EKN3aU
235
In 2016, a 5% health tax was levied on airtime and mobile internet top-ups. See ITWeb Africa (2018) Zimbabwe slaps
tax on mobile money, online transactions, available at https://bit.ly/2PUpTQF ; and Bitcoin.com (2018) Wave of Mobile
Tax Hikes Squeeze Africa’s Poor to Indulge Governments, available https://bit.ly/2CKMwTX
236
The Nigerian government also ordered MTN to refund some USD 8.1 billion in what it said was from illegally repatriated
funds. Bloomberg (2018) MTN says Nigeria is seeking to recover $2 billion in back taxes, available at https://bloom.bg/2CprITo
237
Mobile World Live (2018) Ghana to step up mobile money regulation, available at https://mwl.me/2RljbDI
238
In Bangladesh, MNOs have complained that the value they receive for USSD use in DFS by banks and DFSPs is
unprofitable. The NTA and CB have different views on whether to increase USSD pricing for DFS, with the NTA siding with
MNOs, while the CB says pricing should reflect financial inclusion priorities. The NTA pricing proposal submitted to
government is four times higher than the proposal of the central bank. Daily Sun (2018) Session-based USSD price to raise
mobile banking cost, available at https://bit.ly/2z7uGHm
239
The GSMA also say that government-backed programs can exert a downward pressure on pricing.
240
Airtel (2018) Airtel Appoints New MD to Run the Combined Entity in Rwanda, available at https://bit.ly/2D77o8H
241
Reuters (2017) Bharti Airtel and Millicom announce deal closure to combine operations in Ghana, available at
https://reut.rs/2idQxYJ
242
Tech Financials (2017) MTN versus Vodacom – Who is the Biggest Provider of Mobile Money in Africa?, available at
https://bit.ly/2qe2ZIA
243
Capital FM (2017) Airtel not exiting Kenya but looking to consolidate operations, available at https://bit.ly/2OcPxhQ

36
Customers: Activity level reports at a high-level vary and depend on the reporting agency, be it the data from the
World Bank Findex,244 the IMF,245 or the GSMA and its annual SoTIR.246 Whatever the source though, trend lines
show large inactivity levels. Data from the World Bank’s 2017 Findex Survey suggest that while DFS accounts
have grown from 2014,247 activity levels have fallen.248 Analysis from the Center for Financial Inclusion at Accion
of Findex data found that roughly half of the new accounts — nearly 235 million — have not been used in the last
year. The number of active account holders only increased by 285 million, much less than the overall growth, they
say, in account ownership from 2011–2014. Similar trend lines have been reported by the GSMA, whose SoTIR
2017249 highlighted that of the 690 million ‘mobile money’ accounts opened, active account use within a 90 day
period was at disappointing 35.8% and active account use within a 30 day period at a worrying 24.3%.

Exhibit 11: Adults with accounts percentage use. World Bank Findex 2017 data showing shares of account
owners using ‘digital payments.’250 There are significant variations across developing countries.251

Agents: GSMA report that agent activity globally is also at 54.7%.252

3.2.4 Service Bouquet Expansion

As DFS becomes more embedded in a country’s financial ecosystem and in the daily activities of customers, more
service and permutations of access and use have evolved. These include integration into merchant payments and
ability to send value across networks and systems. Similarly, the mobile phone and DFS systems are moving from
standalone, to interoperability, and now increasingly into national switches, providing an opportunity for a fully
ubiquitous (national) payment system. Catalyzing this in many respects are e-government services, where taxes,
electricity, water, fines and many others can be paid directly from a mobile phone-based DFS SVA. DFS is also

244
See Accion-CFI (2018) Financial Inclusion Hype vs. Reality: Deconstructing the 2017 Findex Results, available at
https://bit.ly/2JAyB3n
245
IMF (2018) IMF Releases the 2018 Financial Access Survey, available at https://bit.ly/2AoLKKv
246
GSMA (2018) 2017 State of the Industry Report on Mobile Money, available at https://bit.ly/2CKPLqF
247
Some 515 million new financial accounts were opened around the world. World Bank Group (2018) The Global Findex
Database 2017, available at https://globalfindex.worldbank.org/
248
See Accion-CFI (2018) Financial Inclusion Hype vs. Reality: Deconstructing the 2017 Findex Results, available at
https://bit.ly/2JAyB3n
249
GSMA (2018) 2017 State of the Industry Report on Mobile Money, available at https://bit.ly/2CKPLqF
250
Findex refers to digital payments as ‘using mobile money, a debit or credit card, or a mobile phone to make a payment from
an account, or report using the internet to pay bills or to buy something online.’
251
World Bank Group (2018) The Global Findex Database 2017, available at https://globalfindex.worldbank.org/
252
ibid

37
now an important tool in humanitarian crises responses,253 with disbursements paid directly into SVAs rather than
only through cash or in-kind goods, and similarly for payments to crises responders.254

As the GSMA notes,255 MNOs (acting) as DFSPs may be able to expand or redefine their top-line growth by
considering new ‘adjacent revenue streams’256 closely linked to their core payments product offerings and which
extend beyond the traditional transaction fee-based revenue model. Many of these new service offerings – such as
credit and investments – may however depend on regulatory approvals257 as they may potentially pose financial
ecosystem and consumer risk. Credit, as noted above, is being offered by DFSPs in conjunction with banks. The
most well-known mobile-centric credit product is M-Shwari, a savings and credit product provided by MNO
Safaricom in Kenya to existing customers of its M-PESA DFSP with bank partner KCB.258 Multi-national MNO
MTN in 2016 introduced its MoKash credit offering in Uganda and Zambia:259 loans are financed by its lending
partner, the Commercial Bank of Africa. The role of MTN is to market, originate and disburse the loans and collect
the loan repayments using MTN Mobile Money. The use of customer CDRs for building credit scopes remains
controversial however,260 while concerns raised about large increases in large-scale blacklisting of DFS customers
using credit facilities offered on their mobile phone for the first time.261

3.2.5 Interoperability of DFS Platforms

As noted above262 on transaction ubiquity, a majority of DFS systems operate as walled gardens, meaning DFSPs
only provide transactional and value transfer services to their own customers and do not allow transfer of value to
other DFSPs. There is however a momentum towards interoperability of some sort, be it bilateral interoperability
or effective integration into switches, allowing value to be transferred and spent ubiquitously. In 2017-2018 alone,
interoperability initiatives have been introduced in Uganda, Malawi, Rwanda and Kenya. In most cases there is no
additional fee for transactions to other DFSPs, although in some cases there may be fees for transfers to and from
bank accounts.

3.2.6 Effect of AML and Security Concerns

National regulators take their AML policy cues from FATF, which in a 2017 Guidance263 endorsed the use of lower
forms of CDD based on a risk assessment by DFSPs and regulators. DFS activity though is low, and in decline in
some places. As noted above, while the reasons appear to be complex, one of the factors suggested for the decline
may be restrictive CIV and KYC regulations that make it harder for customers to transact beyond a basic account

253
See Gurung, N & Perlman, L (2018) The Role of Digital Financial Services in Humanitarian Crises Responses, available
at www.dfsobservatory.com
254
Kourgialis, J (2018) Learning From Ebola: How Mobile Money Can Prevent Health Crises, available at
https://bit.ly/2qbFwbh
255
Gidvani, L and Shulist, J (2016) Rethinking the mobile money business model to capitalise on adjacencies, available at
https://bit.ly/2OSjqZX
256
ibid. The GSMA define ‘adjacent revenue streams’ broadly, to include all opportunities where the (mobile money) service
can leverage its key assets such as the agent distribution network, customer base, and/or customer transaction data, to offer new
services to existing and new customers and businesses. These streams they say may include offering digital credit or simple
investment products.
257
Reuters (2018) Kenya's central bank governor calls for regulation of fintech lenders, available at https://reut.rs/2spyhgl
258
M-Schwari is operated by M-PESA and KCB and facilitates access to micro credit loans of a minimum of KSHs.100 any
time charged at a ‘facility fee’ of 7.5%. See Safaricom (2018) M-Shwari & KCB M-PESA, available at https://bit.ly/2t5LpZL
259
Tech Financials (2017) MTN versus Vodacom – Who is the Biggest Provider of Mobile Money in Africa?, available at
https://bit.ly/2qe2ZIA
260
Blechman, J (2016) Mobile Credit In Kenya And Tanzania: Emerging Regulatory Challenges In Consumer Protection,
Credit Reporting And Use Of Customer Transactional Data, available at https://bit.ly/2x93hqE
261
Microsave (2017) Is Digital Credit A Silver Bullet?, available at https://bit.ly/2CdhJMU
262
Section 2.5.4.2 on Transaction Processing Ubiquity
263
FATF (2017) Anti-Money Laundering and Terrorist Financing Measures and Financial Inclusion with a Supplement on
Customer Due Diligence, available at https://bit.ly/2taubZM

38
level, or even to get access to a DFS account. In particular, AML-related restrictions on SIM card registrations,
DFS use and phone use and use may also have a dampening effect on DFS use by even legitimately registered users.
For example, and as noted above, lack of regulatory coordination between the ID-issuing authority, the NTA and
the CB in Uganda resulted in millions of customers not being able to fully use their DFS accounts.

And then in July 2018, the NTA in Uganda banned the sale of airtime scratch cards by street vendors exclusively
in favor of electronic sale points.264 In Bangladesh in October 2018, the NTA forced MNOs to obtain prior
permission for selling SIM cards to corporate users.265 Similarly, anti-fraud initiatives by NTAs have resulted in
mobile phones suspected of being fake or stolen being blacklisted from national use, resulting in lack of access to
DFS.266 In 2016 in Nigeria, the NTA fined MNO MTN over SIM card registration violations.267

3.2.7 Competition Issues

Besides limiting progression to richer and more interactive DFS services and providing a poor UX, there are also
downstream competition and security related effects of not expanding or enhancing beyond the 2G-only coverage.
Specifically, access to DFS via existing 2G-based UIs may be restricted by competing MNOs who control critical
USSD and STK gateways. With 2G-only coverage likely to be the default coverage for a number of years yet in
rural areas in the developing world, competition issues are likely to manifest concurrently and will require
regulatory intervention and not as it is often now, forbearance.268

3.2.8 Security Concerns

Security concerns relate to the inherent insecurity of 2G technologies, such as USSD in use for DFS provision, such
their use as a primary UI poses risks to the security of the DFS ecosystem as is currently configured.269

264
All retailers had to return unused and unsold stock of airtime scratch cards for refunds. Flash Uganda Media (2018) UCC
issue final deadline for selling airtime scratch cards, available at https://bit.ly/2ONXW0u. Also in Uganda, an unexpected
directive from the President citing a ‘threat to national security’ just before the February 2016 national elections, MNOs had
to shut down key social media sites and disable DFS platforms during voting, with users remaining without access to funds for
nearly four days. See Bold, C & Pillai, R (2016) The Impact of Shutting Down Mobile Money in Uganda, available at
https://bit.ly/2CJEp9W
265
Daily Star News (2018) Corporate SIM sale now needs prior BTRC nod, available at https://bit.ly/2qaShmj
266
In Tanzania in 2016, some 2 million phone were electronically barred from use on all networks following an instruction
from the NTA. See All Africa (2016) Two Million Fake Mobile Phones Blocked in Tanzania, available at https://bit.ly/2D7vCjf
267
Vanguard News Nigeria (2018) SIM fine: MTN pays N165bn out of N330bn – NCC, available at https://bit.ly/2RiE5TA
268
See further, Perlman, L (2017c) Competition Aspects of Digital Financial Services, available at https://bit.ly/2xxLcma
269
On security of the USSD UI and bearer and the impact on DFS, see Butler, K; Perlman, L; & Makin, P et al (2017) Security
Aspects of Digital Financial Services (DFS), available at https://bit.ly/2HH6Jtn

39
4 Conclusions
We recognize that many countries where DFS has been established are still in the ‘ignition’ phase, although fewer
jurisdictions have connections on the (foundational) enabling environment. This may be because of key learnings
of the benefit of a foundational enabling environment where previous methods have not worked; the desire to evolve
beyond foundational transactions components to a more integrated financial ecosystem where the type of
instruments and storage matter less than in a means ultimately to providing national services; from peer, regional
and international groupings and learnings – such as through AFI, ITU, and other donor-sponsored collegial events
and organizations.

While there are encouraging numbers of account signups seen in the latest Findex data, account activity levels are
worryingly low. This may be because of technical and literacy levels of users, with many preferring to conduct DFS
activity as OTC transactions through local agents. Not only may these trends affect the viability of DFSPs, but it
also has money laundering implications as these transactions largely cannot be tracked. Indeed, there has been a
wave of consolidation of MNOs, many of whom act also as DFSPs. While smartphones use is growing, there is still
a majority of feature phone and thus USSD as the User Interface use in DFS worldwide, and even growing in India.
Competition-related issues regarding access to USSD gateways and pricing of access are still of concern to
regulators who must balance commercial concerns against financial inclusion priorities, a true ‘regulator’s
dilemma’.

We view the enabling environment criteria as still fundamentally focused on the foundational, transactional DFS
1.0 ecosystem. Rather, we believe some ‘ignition’ is required in thinking and writing as systems and transactions
types become more complex – evolving to DF2.0 and beyond – as the differentiators between instruments, systems
and participants decrease and the interactions between regulators, and between participants become more complex,
we see these ‘foundational’ enablers as insufficient regulatory tools. For enabling DFS 2.0 and beyond, we see the
need for cooperation between market participants to provide interoperable, or integrated services and improved
mobile data coverage.

Hence, tracking the evolution of DFS (which itself tracks technology innovations), the enabling environment needs
to evolve, and rapidly. Capacity, regulatory automation, and cooperation become part of this enablement, fitting
into more of broad national strategy that include financial inclusion, electronic commerce, data protection,
telecommunications, payment systems, banking, AI, investment schemes. Technology companies are rapidly
lowering the barrier to entry to these facilities, often leaving sector regulators scrambling to understand the new
technologies and facilities, but also exposing weaknesses in cooperation needed to enable these ecosystems.

Similarly, strict CIV relating to Anti Money Laundering concerns may hinder account signups. Financial integrity
concerns must then be balanced against national financial inclusion agendas. New biometric IDs and eKYC systems
being established in many developing countries may provide some solution to these CIV challenges. Similarly,
evolving regtech solutions may assist many regulators in their compliance and supervisory challenges, potentially
freeing up valuable regulatory capacity. Innovation can also be developed through embracing regulatory sandboxes
to test new products in a controlled environment.

An important component of properly regulating the DFS ecosystem is the importance of collaboration between
central banks, NTAs and competition authorities for them to understand each other’s markets and their feedback
loop effects which should include exchanges of data and analysis where allowed. Donors, SSBs and implementation
partners play an increasingly important part in peer exchanges between regulators, and between regulators and
industry, as well as providing critical technical assistance.

Security concerns relate to the inherent insecurity of 2G technologies, such as USSD in use for DFS provision, such
their use as a primary UI poses risks to the security of the DFS ecosystem as is currently configured.

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