Getting Principled on Digital Financial Services for Development

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Digital financial services (DFS) have emerged as complex and yet powerful tool for supporting economic development. Technology-enabled financial services comprise a fast-growing, dynamic sector at the very intersection of commercial and public sector interests, with an ever-expanding list of actors designing, developing, deploying, delivering and investing in services and channels–many with the intent, or at least the possibility of, enabling financial inclusion among low-income and excluded populations.
The question is: how can we collectively ensure that this new field remains focused on achieving our ultimate development goal of fostering economic growth?
Principles are one tool to help the wide variety of actors involved ensure that regulations, industry standards, and collective investments result in safe, affordable and relevant financial services. However, the devil, as they say, is in the details. We may have principles, but are they designed in a way that effectively supports all actors in this industry, including donors, private companies, not-for-profits, or public organizations, to actually employ a principled approach in our day-to-day work?
The many current standards
On paper, it would appear that the DFS sector is, in fact, quite ‘principled.’ Upcoming research from the Better than Cash Alliance reveals at least 26 sets of principles, standards and codes that aspire to govern various aspects of digital financial services. But in reality, many of these existing sets of principles don’t cover the various and growing complexities of DFS products, services and channels, and the variety of actors in the value chain.
For example, some are only relevant to mobile money products offered through mobile network operators, some apply only to the payments industry, while others cover only a narrow slice of DFS systems, such as data privacy and security.
However, digital financial services are now being offered through a wide range of providers including banks and start-up companies, and through a wide range of modalities including cell phones, prepaid cards, and near-field communication (NFC). And the expansion of digital services raises new questions and concerns around potential risks that are not covered by existing financial services principles, standards and codes.
Despite the current standards, many gaps remain.
Recent research from CGAP shows that the segment that suffers most from these gaps are the customers themselves. With each new actor and product, there is a new set of consumer protection issues, such as the need for redress mechanisms for customers when things go wrong.
The research, which reviewed consumer experiences with DFS in 16 emerging markets, revealed a variety of risks and challenges, from lack of agent network availability and liquidity that limit the ability to transact; ineffective customer interfaces that make mistakes and loss of funds likely; and inadequate transparency, fraud and data privacy protections. Not surprisingly, these challenges appear to be more acute among marginalized communities, such as women, those in rural areas, social payments recipients (typically the very poor and vulnerable) or those with a general lack of digital literacy.
A broad, high-level set of principles like the Digital Development Principles provide a valuable starting point that, in fact, applies to all products, channels and actors: just as with all digital development services, DFS are ideally designed with the user, address privacy and security, and are built for scale and sustainability. These high-level principles offer a valuable framework to guide the multitude of players forward toward higher value, more impactful and sustainable inclusive DFS.
At the same time, it is still necessary to develop guidance that applies to specific sectors and for reaching populations with unique needs, while still taking into account the complex and ever-changing nature of the industry. Ideally, principles are developed through a consultative approach, which ensures relevance to the organizations responsible for actually implementing the desired principled approach.
Standards for humanitarian response payments
To provide one example, USAID gathered key stakeholders with expertise in humanitarian response and financial inclusion to draft a set of principles that specifically address the question of how we can use humanitarian response payments to set the stage for financial inclusion, without hampering the response times that are so critical to meeting humanitarian needs.
The draft set of principles (forthcoming) that resulted echo many of the themes of the Digital Development principles, with the added value of having the buy-in of those who helped to draft them and who understand the specific needs of beneficiaries of humanitarian response payments.
Co-creating principles is one step in the right direction. However, drafting is still the easy part. Actually modifying our day-to-day to take a more principled approach is the real challenge. Whether specific or broad, the capacity to apply and enforce (even loosely) principles will likely make the difference between pointing in the right direction and actually traveling that way.
For more on adoption and enforcement of principles, check out the other presentations from the Digital Principles event on Following Through.
By Jamie M. Zimmerman, Bankable Frontier Associates, and Chrissy Martin, USAID.