Digital Ecosystem

CERTIFIED EXPERT IN
DIGITAL FINANCE
UNIT 1: THE DIGITAL FINANCE ECOSYSTEM
Certified Expert in Digital Finance
Unit 1: The Digital Finance

Ecosystem
Symbols
 Definition
 Further Reading
! Key Message
 Example
 Exercise
 Video
1. edition 08/2018
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Content
1 Historical Evolution: From Finance and Technology to Fintech
............................................................................................ 5
1.1 Introduction .......................................................................... 5
1.2 Banking is necessary. Banks are not .................................. 6

1.2.1 The early stages of finance ................................................. 6
1.2.2 Financial services today .................................................... 15
1.3 Impact of new technologies and digital finance: Differences in

developed and developing markets ................................... 16
2 Digital Finance for Financial Inclusion ............................... 22
2.1 Current situation and opportunity ...................................... 22

2.2 Benefits for providers and customers ................................ 27
2.3 Key Terminology ............................................................... 28

2.4 Impact for Financial Inclusion ............................................ 30
2.4.1 Quantifying the impact ....................................................... 32
3 The Digital Ecosystem ....................................................... 35
3.1 Regulatory framework ....................................................... 36

3.2 Delivery infrastructure ....................................................... 37
3.3 Delivery channels .............................................................. 39
3.4 Providers ........................................................................... 42
3.5 Digital Financial Services .................................................. 50
3.6 Customers ......................................................................... 51
3.7 Support services ................................................................ 53
4 Key trends ......................................................................... 56
4.1 Big Data, Big Potential ...................................................... 56
© 2018 Frankfurt School of Finance & Management 1

Certified Expert in Digital Finance | Unit 1
4.2 Customers in the Centre ................................................... 60
4.3 Interoperability in Mobile Money ........................................ 64
4.4 Partnerships & open APIs ................................................. 67
5 Types of Fintech, Domains and products .......................... 72
5.1 Introduction ........................................................................ 72
5.2 Money Transfers and Payments........................................ 73

5.3 Personal Finance Management and Financial Planning ... 76
5.4 Savings and Investment .................................................... 77

5.5 Borrowing and Capital Raising .......................................... 80
5.6 Insurance ........................................................................... 86
6 Regulation and Digital Finance.......................................... 89
6.1 Introduction: Why is regulation key?.................................. 89
6.2 Stakeholder in Financial Regulation .................................. 92
6.3 Who is being regulated ...................................................... 94
6.4 Example: Branchless Banking in Brazil ............................. 95

6.5 Risks in Digital Finance ..................................................... 96
6.6 Regulatory Sandboxes ...................................................... 97
6.7 RegTech ............................................................................ 99
7 Exercises Solutions ......................................................... 102

Abbreviations
ADC Alternative Delivery Channels
API Application Programming Interface
ATM Automated Teller Machine
B2P Business to Person
CBA Commercial Bank of Africa
DFS Digital Financial Services
FSP Financial Service Provider
G2P Government to person (payments)
IFC International Finance Corporation
KYC Know Your Customer
MNO Mobile Network Operator
MVNO Mobile Virtual Network Operator
OTC Over the counter
POS Point of Sales
P2P Person to Person
SMEs Small and Medium Enterprises
Telco Telecommunication Company

Learning Outcome
Welcome to the first Unit of the Certified Expert in Digital Finance!
The last decade has seen a wave of innovative financial services aimed at serving the
unbanked populations in emerging markets. Low-income individuals, micro- entrepreneurs
and rural populations that were previously left out of the market due to the high-costs of
physical expansion are now accessing financial services through digital channels. Unit 1
will give you a general introduction to digital finance, its stakeholders and the ecosystem.
Learning outcomes of this module will be:
 Overview of development of finance and technology

 Understanding of the importance of digital finance for financial inclusion
 Introduction to the digital ecosystem, major digital products & services and key
technological trends
 Learning about the role of regulation in digital finance
Key Skills to be learned

 Learn key terminology
 Understand technological concepts laying the foundation in digital finance
 Learn about the actors in the digital ecosystem and the role they play

1 Historical Evolution: From Finance and
Technology to Fintech
1.1 Introduction
Cynthia works as a Business Development Manager at a microfinance institution in Kenya.
She is in charge of observing market trends and analysing how her MFI can respond to
them. Digital finance has brought lots of benefits to her market. Through new technology,
customers in remote areas can be more easily reached thanks to lowered cost of access
barriers.
At the same she is worried that the traditional way of doing business with her bank will
become increasingly obsolete. Blockchain, for example, can provide a way for two parties
to do business with each other without the need for a trusted third party - like a bank.
She remembers an old quote from Bill Gates saying “Banking is necessary, banks are
not.” Is his vision finally becoming true? How has banking been transformed in the last
years? How will it look like in the near future?

1.2 Banking is necessary. Banks are not
In 1994, Bill Gates made a provocative and still controversial statement that in the future,
banking would be needed, but banks themselves would not.1 With every passing year, this
statement seems to ring more true.
Disruptive technologies force virtually all industries to fundamentally revise their business
models, or define new ones. Successful companies are characterised by strong
technological awareness and utilise the interplay of social media, mobile IT, analytics and
cloud computing for the creation of their service offering.
Surprisingly, traditional banks, which have been using IT to support and automate
business processes for a long time, are lagging behind digital innovation. With their
business model based on physical money and bank branches, they have not been able
reach all of the population with a need for financial services.
Before we take a deeper look at the opportunities and impact of financial inclusion in
Chapter 2, we need to take a look at the history of financial services and why financial
services are where they are today.
 Further Reading:
KPMG: The future of banking
1.2.1 The early stages of finance

Finance and financial services developed as a field dealing with assets and liabilities and
the potential spread income that is earned when accepting deposits and granting loans.
The word “interest” first appeared in the Sumerian language back in 2000 BC. The word
used for “interest” was “Mas”, which also meant lamb. Why were the words the same?
Historians speculate that Sumerians farmers who owned land left fallow rented it out to
shepherds who used it for animal grazing. As compensation, they were paid in kind, with
sheep.
1 Banking is necessary, banks are not

When was banking born?
Banking services were born when humans started to settle down during the agricultural
revolution. With farming came a diversification and a multiplication of goods which needed
an efficient method to exchange value. With the need to store and exchange value, the
need for banking services was born.
For the first finance activities, money was not necessary: goods were exchanged in a
barter system. Yet, the introduction of physical money allowed the financial industry to
develop further. The first forms of physical money appeared as shells in coastal regions,
before government issued coins were introduced
Figure 1: Assets
 Three functions of money

Store of value
Money enables the store of value. Stability of currencies are elementary for
the storage of value.
Exchange of value
Money enables the transfer of value between people and legal bodies.
Measure for value

Money is also used as a unit of account to measure the value of goods and
services.2
Today, currencies are issued and actively managed by governments and their regulatory
bodies. Nevertheless, a currency does not necessarily need a government. In Unit 2 we
will introduce you to digital currencies, like the Bitcoin, a new concept of independent
currencies.
With an increasing demand for liquid assets thanks to economic activities following the
agricultural revolution, the business model of banking further developed in Europe and
Asia. Merchants offered banking services not only to other merchants but to society at
large. The first temples in Greece offered not only the storage of value, but also granted
loans and learned about the assessment of risk.
 Basic concept of banking and finance
Liquid assets
Liquid assets are defined as assets that can be quickly converted into cash
with no significant impact on the market price. An example for highly liquid
assets are government bonds, money market instruments or stock markets
with high scale of supply and demand reflected in high trading volumes.
Spread Income
Spread income is defined as the income from granting loans and accepting
deposits at different interest rate levels. Banks manage to convert short term
deposits into long term loans and gain the spread between the two interest
rates. This source of income remains the most important for traditional
universal banks today, even if various new services are offered to customers.
The business model was based on being the intermediary of those having excess liquid
assets, and those having insufficient liquid assets. It has grown into the global banking
system which we have today.
2 Functions of Money

Figure 2: Value chain of banking services
In this role, banks have owned the entire value chain of financial services. No other
industry has such an ownership of the value chain with hardly any outsourcing. At different
points in history, this ownership went as far as having the power to issue their own
currency.
The creation of money

Another core element of banking is the creation of money. The ability to create money was
discovered in medieval Europe by goldsmiths, and has had significant impact on the
existing banking industry and the economy as a whole:
 Money creation and the goldsmiths
During the middle ages, people deposited

their savings in the form of gold with
goldsmiths. The local goldsmiths were the
only people with a reliable strong-room or
safe to keep savings securely. The
goldsmith would give a receipt in exchange
for a deposit. Usually depositors called the
goldsmith to reclaim their coins whenever they wanted to make a payment,
but as time went on some of them found it was more convenient to transfer
the goldsmith's receipts instead. As a result, receipts frequently had the words
'or bearer' on them after the depositor's name. As coins were heavy and risky

to carry around, the new receipts quickly became the preferred method for
making payments.
With this developing practice, the goldsmiths noticed that they had many coins
in their vaults which were never taken out. Goldsmiths then realised that, as
it was unlikely that all customers would present receipts and demand their
coins at once, they could make money by lending out a proportion of the coins
entrusted to them and charging the borrowers interest on them.
The only risk involved for the goldsmiths was that several receipt-bearers
would come in a short period of time, leading to insufficient gold and silver to
pay the customers.3
This goldsmith practice laid the foundations of our modern fractional reserve banking
system. Today, banks create money in the same way, just not based on the gold in their
vaults but by the minimum reserve banks have to keep at the central bank. The impact on
the overall global economy was remarkable: banking now allowed growth on top of
reallocation of existing assets. Without the ability to create money, banks would only be
agents who reallocate assets between borrower and depositors.
However, with this practice, trust and regulation have become fundamental elements of
banking and financial services. In the last chapter of this Unit you will learn more about the
regulation of financial services, since compliance with regulations is a key success factor
for a digital finance provider.
Financing and transformation functions of banking

You have learned that the core function of banks is to provide liquid assets and the
services around them. Involved in the provision of those services are 5 transformation
functions.
3Rhodes University, Money Creation, Goldsmith-Bankers and Bank Notes, 2013

Banking operations include 5 different transformation functions:
Figure 3: Different transformation functions
The transformation of amounts: Banks need to be able to convert amounts between

borrower and lender according to their requirements. Some banks are typically cash rich
and need to deposit at the central bank. Banks who are short on deposits borrow from the
central bank.
The transformation of terms: To transform between the maturities of deposits and loans
is a core function of banking. The transformation of short term deposits into long term loans
involves a highly developed risk management system.
Transformation of risk: Banks need to manage the risk between depositors and lenders.
Depositors require the bank to be able to provide the deposits at any time, irrespective if
a borrower on the other side is able to repay the loan. Since banks lend much more money
than they owe in deposits (see money creation) the trust depositors have towards banks
is key to keep the system operating.
Transformation of information: Banks transform heterogeneous market information into

a homogeneous information base to manage risks.
Transformation of locations: Banks need to accept and grant loans/ deposits in different
locations.

Digital finance is making use of new technologies to operate the above functions. Let’s
take look at how new technologies can impact each transformation.
Digital Finance today and impact on transformational functions
Transformation of amounts:
In order to transform loan and deposit amounts it is necessary to have a banking license.
Digital finance providers without a banking license can nevertheless transform amounts
on platforms. Crowdfunding platforms, for example, involves investors with many small
amounts and one larger project that needs financing. The selection process and risk is
taken by the investor, not by the platform. If customers don´t wish to invest all their liquidity
into one project, they need to diversify the portfolio.
Transformation of terms:
The transformation of short term deposits into long term loans is a core business in
banking. In order to run this transformation a banking license is again needed. Digital
finance platforms or agencies can only match investors and borrowers, but not transform
the asset terms themselves.
Transformation of risk:
Digital Finance providers need a banking license in order to manage asset risks on their
balance sheet. However new technologies significantly impact the process of risk
management. The availability of data can be used for risk assessments, and risk
management monitoring and processes can be digitised and automated. In this area,
digital finance providers become partners or suppliers to banks.
Furthermore, the entire process of risk evaluation can be reinvented in the digital age.
Traditional risk models are based on available data during the industrial age: that available
data was mainly limited to financial track records in the existing banking arrangements as
well as financial information from balance sheets and profit and loss statements. Risk
models are based on the analysis of assets and cash flows in order to access the
creditworthiness of a borrower. Assets like machinery were very relevant during the
industrial age when mass production was invented. In the digital age, the age of Facebook,
Airbnb and Google, those assets are less relevant. Employee talent, client relationships
and customer data will become more relevant to credit scoring models (and this does not
only apply to the business of banking). Digital finance providers like Tala (see chapter 5,
credit scoring) score retail customers based on data available on the customers hand
phone. The track record shows that non-performing loan rates are in line with loan
portfolios of traditional banks.

Transformation of information:
Information has traditionally been costly to obtain and required expertise to separate
relevant from irrelevant information. This lead to the necessity on the one side to acquire
information on market risks, and to deeply know the borrower. The risk analysis
undertaken by the risk manager would involve having the information necessary, and
knowing how to use it in a targeted, specific way.
Today’s large availability of data largely shows that this expertise may not be as efficient
as thought. The asset management industry has already changed remarkably since it
became clear that the majority of fund managers are not able to beat overall market
performance by selecting investments based on their opinion. New products without an
active selection of assets have taken over a significant market share. It is likely that we
are going to see similar trends in banking. With access to a very large amount of data,
digital finance providers can become experts in data analysis and thus automate the
lending process.
Transformation of locations:
This function reflects the interconnection of the traditional baking business model of the
past. This business model was based on physical currencies which needed to be
“transported” from one location to another. During the 20th century, money had already
become “half” digital with the introduction of cards and e-money. Today, the use of physical
money like coins and paper money is decreasing in many countries. Digital finance
providers have great opportunities in digital payments and transaction banking. Fully digital
currencies with similar characteristics to cash just reached the global community and it is
yet unclear what the economic role of Bitcoin (to name only the most known) will be.
! Digital Finance is not changing the nature of products or concepts of finance.

The impact on finance is happening on the level of distribution channels and
process improvements making use of the mobile, big data and further new
technologies.
The exercise below should give you a first introduction to the transformation of the financial
industry, and how and where it is happening. A major take away from this chapter should
be that the basic concepts of finance and banking do not change, but new technologies
disrupt existing technologies, processes and business models that provide financial

services. Additionally, those new technologies create entirely new markets that former
technologies could not reach.
 Chapter 1: Exercise 1
We have learned that Digital Finance is not changing the concepts of finance and
value exchange, but the delivery methods and technologies being used. Let´s
reflect and take a look at traditional finance providers and new digital finance
providers:
1. What are their main competitive advantages?

2. What are the main challenges of traditional and digital service provider?
Think of elements like number of client relationships, talent, access to funding or

future ready technology. Please make yourself a list of those advantages and
challenges for each service provider. Now what can you see when you compare
those lists? Would you see new digital service providers more as a threat, or a
partner, for traditional banks?
For more information please take a look at the report from World Bank in the
further readings below.
 Further Readings:
The Fintech revolution: A threat to global banking? World Bank, 2018
Top financial services issues of 2018, PWC
How data on mobile phone usage can power digital lending in the Philippines

1.2.2 Financial services today
Digital financial service provision is emerging at a particular time in the history of the
financial sector, with some trends starting a century ago and some only a decade in the
past.
1. The rise of the universal bank

Formerly, banks were specialised in a certain business field (retail banking,
investment banking, or mortgages services for example). Over the last century,
those specialised banks expanded their businesses until the advent of the
universal bank which serves all kinds of customers (retail, corporate, institutional).
The universal bank is the dominant business model in the market.
2. The global bank
Banks have not only expanded their business fields, but with globalisation and
the elimination of market barriers between nations, some banks now operate
worldwide.
These two evolutions have had the effect of reaching a large number of clients with a
standardisation of products and processes.
1. The erosion of equity ratios
In the beginning of the 20th century, banks were organised as partnerships with
full liability of the shareholder. After some bankruptcies in the UK that resulted in
personal insolvencies for the shareholder who had to pay for the banks liabilities,
the private limited company became the dominant legal form in banking. As a
result, equity ratios in banking fell over time until the financial crisis in 2008.
2. The loss of trust
The financial crisis of 2007-2008 has led to a significant loss of trust in the banking
sector by its own customers. As a result, customer loyalty in banking has
decreased significantly.
These evolutions have had the twin effect of (1) reducing margins (banks must hold back
more of their profits to increase capitalisation, and to meet global competition) and (2)
shrinking portfolios (as clients look for more trusted financial partners).
Further, the global recession that followed the financial crisis led central banks to greatly
reduce (in fact in some cases eliminate) interest rates4.
4 Negative Interest Rates , accessed 21 August 2018.

At the same time as these trends, both positive and negative, were having their effects,
information technology (IT) innovations have allowed new market players access to
niches: RegTechs are digital finance provider who simplify processes in compliance,
monitoring and regulatory reporting5, and FinTechs can expand market reach of financial
products and services.
In summary the following challenges describe the situation of banks in the beginning of
the 21st century, allowing for disruption and competition from new service providers:
Reduced income and profitability:

 Pricing pressure due to increased global competition
 Decreased customer loyalty
 Low interest rate environment is further reducing margins
 New market entrants (banks and non-banks) access the financial service sector
Increasing costs
 Significant investments in the IT infrastructure needed
 Losses from financial and debt crisis
 Need to increase equity ratios due to new regulations
 Large investments necessary to meet requirements of new bank regulations6
1.3 Impact of new technologies and digital finance:

Differences in developed and developing markets
Now, you have been introduced to the recent development and challenges of the financial
services sector. The impact of technologies on those markets are very different in
developed and in emerging countries with a lower penetration of existing service providers.
The below table gives you an overview of those differences:
Status of financial sector in different markets7
Developed countries Emerging countries
5 Investopedia - Regtech
6Global banking outlook 2018: Pivoting toward an innovation-led strategy
7 Digital Financial Services: Challenges and Opportunities for Emerging Market Banks

 Existing large financial services  Limited financial service infrastructure
infrastructure (e.g. branch network)
 Less than 5% of citizens lack an  Large proportion of the population
account lacks access to financial services
 Highly competitive market
environment
Opportunities of Digital Finance and new technologies
 Disrupts existing traditional business  Digital finance providers reach un-
models and underserved customers
 Sets of new standards in business  Due to the lack of existing
processes and automation infrastructure, the mobile is an
 Fintechs become partner und supplier important distribution channel
to existing banks  DF providers create social and
 Fintechs have to compete or economic impact by giving access to
collaborate with banks to reach the basic financial services: they are
customer expanding the market, rather than
 New technologies are lowering costs increasing competition to existing
for the provision of financial services services
 Fintechs are driving innovation
forward, also for existing providers
Table 1: Status of financial sector in different markets
This course places more attention on the impact of Digital Finance in developing countries.
What are the new technologies with transformational power?

The following technologies have already significantly changed the banking industry and
some will continue to be both a threat and an opportunity.

Mobile technology
• The smart phone has changed our banking behaviour. We can now bank from our pockets,
without visiting a bank branch.
Biometrics
• Biometrics enable secure access to apps and online identity verification. This technology
further enables the mobile as main distribution channel for financial services in order to achieve
higher financial inclusion.
The Blockchain technology
• The idea of the distributed ledger has not only created digital currencies like the Bitcoin. The
technology itself can have disruptive impact on various business fields like in payments or
lending.
Articificial intelligence and data analytics
• Big data describes the exponential growth of data and it´s availability over the past decade.
Data analytics and artificial intelligence are making use of this data: giving us advice, insight
and automated processes.
Cloud Computing
• Data has not only grown, it has also moved. Data and software and applications have moved
from local drives to the cloud. Cloud computing makes data, infrastructure and software
available at any time and any place.
Open source technology and API
• Open source technology describes a technology that is accessible and can be modified by
users. Open banking describes the trend that banks start to offer access points to third party
provider like Fintechs in order to offer their products via their own platform to the client base.
Those access points are called API (application programming interface). Banks providing
fintechs with access to their client base is one of most relevant developments for digital finance
providers, since scability and customer access are the most difficult problems to solve for
fintechs.
The opportunities for Fintechs to leverage those new technologies are significant. Large
universal banks not focused on their business model lack the speed of innovation. Fintechs
are offering solutions in specific product niches. For example, Transferwise has disrupted
cross border payments by offering a service that is convenient, often faster, but mainly
much cheaper than services of existing providers (please see Chapter 5 below for more
details on Transferwise).
Fintechs are setting the new standards of what customers expect from their banks in terms
of service, convenience and pricing.
Digital finance is unbundling the universal bank8
8 Deloitte - Bank of the Future, November 2017

In our short journey through banking history, the banking industry was the owner of the
entire value chain in finance: asset owners and asset borrowers alike had to talk to a bank.
Digital finance providers are breaking up this monopoly of the customer relationship. The
below table summarises the main differences between traditional banking and banking in
the digital age.
Traditional Banking Digital Banking
 The bank branch is the main point of  Fintechs provide particular services
contact for all banking needs and are experts in a specific solution
(generalist concept).  Customers maintain relationships to
 Customers usually only maintain a multiple banks and service providers
relationship with one or two banks where the particular service is best
 The main bank owns the customer provided
relationship throughout the entire  The mobile is the main touchpoint
product value chain between banks and customers
 Changing the bank relationship  Banks are developing open source
includes a long administration platforms to collaborate with external
process service providers (eg via API)9
Table 2: Traditional Banking vs Digital Banking
The phenomena of “unbundling” describes the trend in which banks are no longer the only
solution provider to their customers. In the digital age customers would use a fintech or an
international transfer because it’s cheaper and faster. Loans are requested via comparison
platforms and the best provider wins the deal, instead of the customer’s primary bank.
The unbundling is not only happening on product level. The production value chain is also
broken up since banks used to cover the entire chain from product development, over back
office and infrastructure to front office and sales.
In essence, fintech companies ‘attack friction’ and leverage innovative technologies to

address convenience, user experience and functionality gaps that result from traditional
banking products and services in finance. This technology development enables new
companies to apply a ‘narrow finance’ strategy, to assess specific parts of the business
9 The Future of Banking Depends On Open Banking APIs

model and provide a superior alternative. This would not be a problem to bank giants,
however the number of fintech players is so big and their pace of innovation so high it has
become like ‘sandblasting’: one grain of sand does not have much impact, but many of
them targeting a specific point at high velocity cuts right through any material.
The market for financial products in emerging markets is very different: competition is less
intense and with new services or product applications Digital finance providers reach
clients who are little or not served. The following chapter will draw more attention to the
enormous potential of this market segment and its influence on both social and economic
wellbeing.
Key messages chapter 1 – History of finance and technology

!
 The financial industry is moving from into the digital age with significant changes
in the business model of banking
 In this process the core functions and services of banking do not change,
but the way those services are processed and provided change substantially.
 The banking system of the past is based on physical money and a
physical distribution network in a localised network. The future of financial
services is about digital money and a digital distribution network using the
global internet
 This change process is mainly driven by new technologies. Opportunities for
those provider who embrace new technologies are huge. However it is
expected that up to 50% of banks will not succeed in this
transformational process10
10 BBVA, Davos 2018 Highlights


IBM: The five biggest technology trends affecting FinTech today
CBInsights: Disrupting Banking: The Fintech Startups That Are Unbundling Wells
Fargo, Citi and Bank of America
CGAP: Vision of the Future: Financial Inclusion 2025

2 Digital Finance for Financial Inclusion
Cynthia’s MFI hopes that by introducing a new delivery channel- the mobile phone- they
will be able to massively increase their outreach to clients. It shall allow existing customers
and potential new ones to access their financial services through their phone, without the
need to drop by a branch. Customers can now repay loans through their device or apply
for a new loan. She has seen the successes in other financial institutions across the
country, where they were able to dramatically reduce operational costs by moving away
from a model which is based on personal, one-on-one relationships that imply high
operational costs.
She wonders, what impact does technology actually have for access to finance? How can
poor people benefit from access to finance and how can technology foster the process?
2.1 Current situation and opportunity

In the previous chapter, you learned about the history of finance and the role technology
will be playing for banking in general. In this chapter, we will shift the focus to the impact
of digital technology for economic development in emerging countries, namely giving
access to finance to previously unbanked people and making financial markets more
inclusive.
Financial inclusion is crucial for economic development. Having access to formal financial
services such as loans, insurances or savings can help escape poverty by facilitating

investments in businesses or manage financial emergencies such as job loss or crop
failure. Yet, over 1.7 billion adults globally lack access to formal financial accounts.11
They transact exclusively in cash, are not able to save or invest money safely and have
no access to formal credit. Instead they need to rely on informal sources, such as
moneylenders or personal networks. Access to formal financial institution is nearly
universal in high income countries (94% of adult populations) and nearly all of the
unbanked adults (37% of adult population) live in developing countries.12
 Financial Inclusion
Financial inclusion means that individuals and businesses have access to

useful and affordable financial products and services that meet their needs –
transactions, payments, savings, credit and insurance – delivered in a
responsible and sustainable way.
Source: World Bank

World Bank: Financial inclusion on the rise
ADBI: Financial inclusion in India
AFDB: Financial inclusion in Africa
There are several reasons for this market failure, but first and foremost it is because
African
serving the poor has not been a profitable business for banks. The cost of setting up
and maintaining sufficient physical (brick and mortar) bank branches, as well as the cost
of delivery in light of the small transaction sizes is often prohibitively high, especially in
rural locations. At the same time, low income customers mostly cannot afford the minimum
balance requirements and regular charges of typical bank accounts. Microfinance
institutions have filled part of the gap, but often struggle to scale due to their high
operational cost. So the challenges remain: how to make providing and serving low income
customers profitable, yet affordable, and reach significant scale? We will go into more
details on the barriers to financial inclusion in Chapter 3.
These economics have changed, as mobile and digital technology have given rise to a
new generation of financial services. Digital technology has emerged as a game-
changing enabler across many industries and is now beginning to disrupt financial services.
11 Global Findex Database 2017 (World Bank)

12 Ibid

Technology can make it affordable and convenient for poor customers to access and use
formal banking services.
As we are now focusing on financial technology in emerging economies, we refer to them

as digital financial services (DFS). But what do we mean by DFS? You might have heard
about mobile banking, branchless banking or agent networks. These are all essential parts
of DFS. In a nutshell, DFS describes a broad range of financial services, such as payments,
credits or savings, that are accessed and delivered through digital channels. Such
channels can be the internet, point of sales (POS) terminals or mobile phones. The
provision of digital finance involves the participation of different players such as
banks/financial institutions, mobile network operators (MNOs), financial technology
(fintech) providers, regulators, agents, chains of retailers, clients, and donors.13
 Digital Financial Services
Digital Financial Services (DFS) describe a broad range of financial services

(such as payments, credits, savings or insurance) that are accessed and
delivered through digital channels. Digital channels can be the internet, mobile
phones, ATMs, POS terminals, tablets and any other digital system.
Source: AFI (2016)
While there are various digital channels, the mobile phone presents the greatest
opportunity to reach the unbanked population. Mobile phones have spread quickly in
developing countries and bypassed state-owned phone companies that offered landline
connections people had to wait years for. Mobile phones instead are cheap, easy to obtain
and do not require much literacy for basic use. While 1.7 billion adults lack access to formal
financial services, 1.1 billion (or two thirds) among them own a mobile phone.14
Against the backdrop of a high mobile penetration in the unbanked population, providers,
especially MNOs, saw the opportunity to leverage the mobile technology to offer financial
products. Mobile money enables customers to send, receive, and store money using their
mobile phone. The underlying funds are typically held by a bank in a dedicated stored
value account or a linked current account.
13Digital Financial Services: Basic Terminology

14 ibid

Between 2014 and 2017, the share of adults around the world making or receiving digital
payments rose from 41% to 52%. The share of adults in developing countries using digital
payments increased from 32 % to 44%.15
Figure 4: Use of digital payments
Mobile money is now available in two thirds of low and middle-income countries and
registered mobile banking accounts surpassed a half billion in 2016. Africa is by far the
global leader in mobile money: just over half (135) of the 276 mobile money services
operating worldwide are located in Sub-Saharan Africa. This by far exceeds customer
adoption in East Asia and South Asia, the second and third biggest region for mobile
money in terms of market share.16
 Mobile Money
A type of electronic money that is transferred electronically using mobile
networks and SIM-enabled devices, primarily mobile phones.
Source: AFI (2016)
15 ibid
16 GSMA: State of the Industry Report on Mobile Money (2017)

140
120
100
80
135
60
40
20 41 40 34
18 8
0
Sub-Saharan East Asia & South Asia Latin Middle East Europe &
Africa Pacific America & & North Central Asia
Carribean Africa
Figure 5: Live mobile money deployments in 2017

Source: GSMA Mobile Money Deployment Tracker (2017)
Furthermore, mobile money is a pathway to wider formal financial service that can be
accessed with the mobile phone, e.g. interest-bearing saving accounts to protect assets,
digital credit to invest in their livelihoods or insurance products to manage risk.
Yet, technology behind digital financial services is just one side of the equation,
distribution is another. To access digital financial services, it is equally important that
customers are able to convert cash into digital money and convert it back into cash (cash-
in/ cash-out). This is because money is still mostly handled in cash in emerging countries,
and often the primary way of payment at merchants. While remote payments are
increasingly transferred digitally (such as P2P transfers), retail payments are often handled
in cash, and salaries are rarely paid electronically (we will discuss these use cases and
challenges separately). In order for customers to be able to convert money from a digital
form into cash and vice versa, financial service providers have established widespread
agent networks. Such agent networks enable customers to transact, acquire new
customers and keep them satisfied. Agents may be individual shop owners, or businesses
with multiple outlets, like grocery stores, petrol chains, courier services or MFI branches.
They have access to funds, both physical cash and electronic funds, enabling them to take
in and give out cash. There are over 2.9 million agents globally, mostly responsible for
signing up 690 million accounts worldwide.17
17 ibid

As agent networks constitute such a critical component to provide an access channel for
digital financial services, we will discuss the key elements of successfully building agent
networks at greater length in Unit 3.
 Agent
An agent is a person or business that is contracted by an institution providing

digital financial services to facilitate transactions on their behalf, including
cash-in/ cash-out services.
 CGAP: Mobile Money
2.2 Benefits for providers and customers

DFS offer several benefits for providers and customers alike. Let us summarise the key
advantages:
 Providers can significantly lower their operating costs of delivering financial

services, compared to traditional channels. For example, a mobile banking
transaction can be done at 10-15% of the branch banking cost.
 More cost-effective channels allow providers to expand their customer base

exponentially, as it gets profitable to serve new (mainly low-income) customer
segments.
 Alternative mobile banking channels allow providers to generate revenue from

multiple sources by adding new products via mobile channels.
Customers can benefit from various advantages:
 For customers it becomes affordable and convenient to use formal financial

services. Previously they might have been forced to travel long distances to the
next bank branch or wait in long queues for hours.
 By gaining access to formal financial services, customers build up a financial

history. Every transfer or payment transaction done through mobile money is
recorded. This allows banks to better understand financing needs and spending
patterns and create products that matches customer’s requirements. At the
same time, customers can get access to further financial products, such as loans,
as their credit eligibility can be scored.

 Eventually, the hitherto unbanked customers get access to the formal financial
system for the first time. The benefits of financial inclusion are not only
significant for them (e.g. secure alternative to cash, price transparency and
market information) but also for the economy as a whole.
 Digital Financial Inclusion
Digital financial inclusion refers to digital access to and use of formal financial
services by excluded and underserved populations. Such services should be
suited to customers’ needs, and delivered responsibly, at a cost both
affordable to customers and sustainable for providers. There are three key
components of any such digital financial services:
 A digital transactional platform enables a customer to use a device

to make or receive payments and transfers and to store value
electronically with a bank or nonbank permitted to store electronic
value.
 Retail agents armed with a digital device connected to

communications infrastructure to transmit and receive transaction
details enable customers to convert cash into electronically stored
value and to transform stored value back into cash.
 The customer device that is a means of transmitting data and

information can be digital (e.g., mobile phone) or an instrument (e.g.,
payment card) that connects to a digital device (e.g., POS terminal).
2.3 Key Terminology

Now let’s dive into key terminologies to help you become familiar with the main concepts
in DFS.
Term Explanation
Branchless banking includes all methods

that allow customers to conduct banking
Branchless Banking
activities (balance inquiry, deposit,
withdrawal or funds transfer) through

alternative delivery channels, such as
ATMs, POS devices, the Internet or
mobile phones.
The process by which a customer

exchanges cash for electronic value
Cash- in/ Cash out (cash-in) or electronic value for cash
(cash-out).
Source: AFI, 2016

Electronic banking refers to all types of
bank transactions that are conducted
electronically through electronic channels,
Electronic banking
including mobile banking, internet
banking, ATM or POS banking
transactions.
A type of monetary value electronically
stored and generally understood to have
the following attributes: (i) issued upon
receipt of funds in an amount no lesser in
value than the value of the E-Money
issued and in the same currency, (ii)
stored on an electronic device, whether or
Electronic money
not it is SIM enabled (e.g. a chip, pre-paid
card, mobile phone, tablet, phablet or any
other computer system), (iii) accepted as
a means of payment by parties other than
the issuer and (iv) convertible into cash.
Source: AFI, 2016
e-Wallet is an account that stores value

and can be used to conduct electronic
payment transactions, similar to a bank
e-Wallet
account or a prepaid card. It is reusable
and has more limits than a bank account.
Non-banks are able to offer e-wallets.
The use of a mobile phone to access

Mobile Banking banking services and execute financial
transactions. This covers transactional
services, such as transferring funds, and

non-transactional services, such as
viewing financial information on a mobile
phone.
Source: AFI,2016
Table 5: Key Terminology
2.4 Impact for Financial Inclusion
Digital finance offers a transformational solution for financial inclusion. Large

advancements in access to finance in the last years could be attributed to DFS: Worldwide
account ownership has increased from 62% to 69% of the adult population between 2014
and 2017. Over 515 million adults have opened an account at a financial institution in just
3 years.18
The advancements and the fast uptake of DFS reveal massive opportunities in helping
accelerate access to finance and closing gaps in financial inclusion. But how exactly do
DFS contribute to financial inclusion and tackle the major barriers that prevent people from
accessing formal financial services? By looking at the key barriers for financial inclusion,
it becomes clear how DFS can overcome them.
Supply-side entry barriers: Last mile distribution is a key challenge for financial inclusion.
Financially excluded are often unable to access formal financial services through
traditional channels, such as branches or ATMs. These are often too far away from where
they live. It would require them to travel far away and wait in line to conduct basic services,
such as withdrawing cash.
Digital technology can significantly alter the supply side by addressing the problem of last-
mile distribution and servicing. Through alternative platforms and channels, for example
mobile phones, POS devices or the agent network, providers can lower their costs of
providing and servicing basic financial services. It was estimated that alternative last-mile
delivery channels could reduce the distribution costs of lending and insurance products by
15 to 30%19.
Demand-side entry barriers: Another key barrier that prevents financial inclusion are the
lengthy and strict Know Your Customer (KYC) procedures that unbanked customers are
often unable to comply with. KYC procedures are a crucial part of formal financial services,
as they verify the identity of the client. It is important for financial institutions to reduce
fraud, prevent money laundering and scams. However, customer identification can be a

19 CGAP & McKinsey: Protecting Impact of Non-Traditional Data and Advanced Analytics on Delivery Costs. 2014

challenge when there is no unique, universal customer ID. Unbanked people often lack a
proof of identity and fail to meet the KYC requirements. At the same time, customer
verification can be a barrier if the existing infrastructure does not allow for an efficient,
timely process. Prospective customers may need to appear in person at the bank branch
just to open a basic savings account, which again, might take several weeks to be
completed. These cumbersome processes prevent them from accessing formal financial
services.
Digital technologies have enabled alternative approaches: Digital forms of identification
(such as electronic or biometric electronic ID) are gradually replacing paper-based
national identification documents. Also, automating the KYC process and integrating it
with public records significantly increases efficiency and convenience for the customer. A
customer can be enabled to submit an identity proof remotely to a financial service
provider. The captured data could then automatically be verified in real-time through links
to the national database.
Product-market fit: Another common friction is that existing financial products often do
not address the needs of the currently unbanked or underbanked population. Such
products were initially targeted and designed for salaried workers, with a stable income.
Low income people, on the other hand, have more volatile incomes and expenditure, and
require more flexible products and services. At the same time, accessing formal financial
services is often coupled with a number of requirements, such as minimum balance for
current accounts or credit scores that the financially excluded cannot meet. And pricing
terms often do not accommodate the capabilities of the potential users: bank charges are
not only too high, but also set and charged in a way that is too inflexible.
Digital technologies and capabilities, such as mobile phone, social media or cloud
technologies offer new opportunities in understanding, serving and engaging with
customers. They lead to a new set of digital data (or big data) that can be used to improve
insights on who the customers are (e.g. their behaviour patterns) and what the actually
require. These insights can help to design customer centric products that are needed and
eventually used by low-income customers. It allows financial service providers, on the
other hand, to acquire new customers and deepen existing relationships.
 Impact of DFS on Sustainable Development Goals (SDGs)

A widespread adoption of DFS can help countries to make significant
progresses in achieving their 2030 Sustainable Development Goals. An
uptake in digital payments and other financial services could have an impact
on at least 10 out of 17 major goals:
SDGs Impact from Digital Financial Inclusion

1: No Poverty  Poor people and small businesses are
able to invest in their future
 More government aid reaches the poor as
leakage is reduced
2: Zero Hunger  Farmers are better able to invest during
planting seasons and smooth
consumption between harvests
 More food reaches the poor as leakage is
reduced
3: Good Health and Well-  Increased government health spending
being as leakage is reduced
 Financial inclusion for women can
increase spending on healthcare
4: Quality Education  Digital payments to teachers reduce
leakage and absenteeism
 Micro tuition payments increase
affordability
5: Gender Equality  Digital reduces women’s physical barriers
to gaining an account
7: Affordable and Clean  Mobile pay-as-you-go schemes create
Energy access to clean energy
8: Decent Work and  Greater pool of savings increases lending
Economic Growth capacity
 Data history of poor and small businesses
reduces lending risks
9: Industry,  Digital Finance enables new business
Innovation and Infrastructure models and products
10: Reduced Inequalities  Financial inclusion gives greatest benefits

to very poor people
 More government aid available, as fraud
and theft are reduced
11: Peace, Justice and  Digital records of financial transactions
strong communities increase transparency and enable better
monitoring of corruption
(Source: UN Sustainable Development Goals, McKinsey Institute analysis)
2.4.1 Quantifying the impact

How large of an impact a widespread adoption of DFS could have for economies in
emerging countries? A study by the McKinsey Global Institute20 has calculated the effects
for all stakeholders in the ecosystem and the economy as a whole.
20
McKinsey: Digital Finance For All: Powering Inclusive Growth in Emerging Countries. (2016)

Overall, they find that a widespread use of digital finance could provide access to finance
for more than 1.6 billion previously unbanked people in emerging countries by 2025, of
which more than 50% would be women. MSMEs would get access to an additional USD
2.1 trillion in credit, thanks to the efficiency gains that allows providers to expand their
outreach. At the same time, the data trail that digital technologies leave behind allows
lenders to assess the creditworthiness of the borrowers and reduces information
asymmetry.
Financial service providers can significantly increase their efficiency: The cost of offering
digital accounts can be 80% - 90% lower than having physical branches. It would allow
providers in emerging countries to save over USD 400 billion annually. And as more people
will shift from informal to formal sources (as predicted 1.6 billion additional people) the
financial sector would gain USD 4.2 trillion in new deposits.
Finally, governments could save over USD 110 billion due to reduced leakages in
spending and increased tax revenue. With more people moving away from informal
sources of finance, the size of the informal economy decreases, and more tax can be
collected.
Overall, economies in emerging markets could largely benefit: The study calculates that
the GDP of all emerging countries could grow by 6% or USD 3.7 trillion by 2025, if DFS
are widely adopted.
Yet, a widespread adoption of digital finance is not easily accomplished. Some countries
have made significant progress (such as Kenya or India), while others are struggling,
especially the ones that need it the most. To capture the potential value of digital finance,
several building blocks have to be in place, including a robust digital infrastructure or an
enabling regulatory environment. In the next chapter, you will learn about these
components of the ecosystem in order to allow DFS to grow and tap its full potential.
ADB: Accelerating financial inclusion in South-East Asia with Digital Finance.

(2017)
ADB, Financial Inclusion in Digital Economy. (2016)
AFI, Digital Financial Services - Basic Terminology. (2016)

CGAP & McKinsey, Protecting Impact of Non-Traditional Data and Advanced
Analytics on Delivery Costs. (2014)
EIB – UNCDF, Digital Financial Services in Africa: Beyond the Kenyan Success
Story. (2014)
GSMA, State of the Industry Report on Mobile Money (2017)
Helix Institute, Redesigning Digital Finance for Big Data. (2016)
Janine Aron, Leapfrogging: A Survey of the Nature and Economic Implications of

Mobile Money. (2015).
McKinsey, Digital Finance For All: Powering Inclusive Growth in Emerging

Countries. (2016)
World Bank Group, The Global Findex Database 2017. Measuring Financial
Inclusion and the Fintech Revolution. (2018)
Have a look at study “Leapfrogging- a Survey of the Nature and Economic

Implications of Mobile Money” and answer the following questions:
1. How would you describe Financial Inclusion (page 14-15)

2. How does mobile money impact the economy from a micro perspective? (page
26-30)
Solutions: Please refer to the last chapter.

3 The Digital Ecosystem
Initial scenario
New Competition
Despite all the benefits and promises for providers, customers and the industry as a whole,
Cynthia is afraid that her MFI eventually becomes side-lined by all the technology focused
new actors that are entering into the market. Even though her MFI has leveraged
alternative channels, they seem to be slower and less responsive to market changes than
their new competitors. First, there are these Telcos that are also large actors, but often
have a huge agent network in their back and a large customer base, especially at the base
of the pyramid. And then there are these innovative fintech companies that often start from
scratch but are very fast and agile. And customers seem to love their new, fresh products.
The market is getting more diverse but complex at the same time. How to make sure that
users are not exploited and that new entrants have the financial muscle and license to act
as a financial intermediary?
In Chapter 2 you learned about the impact digital financial services can have for financial
inclusion, the economy as a whole and the various stakeholders in the ecosystem.
Yet, the success for DFS to tap its full potential depends on various components that jointly
shape the development of digital financial inclusion, including policies and regulations, a
delivery infrastructure and a widespread agent network.
The figure below depicts a digital finance ecosystem from a macro-level perspective: An
enabling regulatory framework and a widespread delivery infrastructure build the
foundation of a sustainable ecosystem. Through alternative delivery channels, such as
mobile or internet banking, customers can access a wide range of financial services
(including payments, credits and insurances) that are provided by financial institutions,
MNOs and third-party providers. Processes are further enhanced and modernised through
support service providers that help increase efficiency or gather and analyse the
increasing amount of data. Let us now take a closer look at each component.

Regulatory framework Delivery infrastructure
Alternative
Delivery
Channels
Providers Digital Financial Services Customers
Agent
Banks Payments Credit banking Individuals/ Households
Internet
MNOs International Savings banking Businesses
Remittances
Mobile
Fintechs banking Government
Insurance
Mobile wallets
ATM
Call center
Support Services
Extension
Process services
optimization Data analytics
Modified from KfW: Digital Finance: die Zukunft des Finanzsektors- Empfehlungen für die Finanzielle
Zusammenarbeit (2017)
Figure 6: The Digital Finance Ecosystem
3.1 Regulatory framework

An enabling regulatory framework is a prerequisite for digital finance to progress. The
responsibility of policymakers and regulators is to account for the changing landscape with
new market participants and risk allocation. The right balance between innovation and
risk is crucial.
On the one hand, policymakers need to encourage and nurture innovation to harness the
benefits for the unbanked or underbanked population. One crucial aspect is the elimination
of market entry barriers for fintechs, to set a level playing field in which everyone has equal
changes of succeeding. Regulation and supervision should be proportional and intervene
only where the public would otherwise be at risk from market failure.
On the other hand, the regulator has to recognise and limit the associated risks. Customer
protection is particularly important as poorer population often has no experience with
technology and formal financial services. What’s more, data retention and use must follow
clear data protection rules.21
A comprehensive set of guidelines that takes into account the international lessons and
best practices can help DFS to expand its scope and scale. There are already leading
digital financial services markets, such as Kenya or India, that provide relevant lessons for
21 Policy Making and Digital Financial Services

other regulators, e.g. when it comes to e-money issuances, agent exclusivity or consumer
protections.
 The ‘Watch and learn’ approach of Kenyan Central Bank
Kenya, where M-Pesa took off, is known globally as THE success story in
digital financial inclusion.
One key reason for M-PESA’s huge success in Kenya was the role of the
regulator during the process. The Central Bank offered Safaricom, the
dominant mobile network operator in the country, a ‘no-objection’ letter that
allowed the company to innovate and pilot its services without the confines of
strict regulations. This ‘watch and learn’ approach was an intentional move to
first observe the effects of such innovations and then introduce appropriate
regulations.
You will learn more about the M-Pesa story and what set them apart in Unit
3.
 CGAP: Kenya’s digital credit revolution
3.2 Delivery infrastructure

An efficient delivery infrastructure, which all providers can use, is decisive for the rapid
and sustained expansion of the digital finance market. Crucial components for the DFS
markets are secure and widespread mobile & internet connectivity, robust digital payment
networks and widely accepted IDs:
 Widespread mobile & internet connectivity: Around 90% of people in emerging

economies already have mobile network coverage, increasingly at 3G standard
or greater.22 Yet, especially in rural areas there is a lack of coverage as providers
have little incentive to expand their network to these areas- potential revenue is
limited and operational cost are too high.
What’s more, to enable broad access to digital financial services, mobile phone
ownership is crucial. Everyone must be able to afford a mobile phone and use it
wherever they are. Although phone manufacturers are competing fiercely on the
price, certain groups continue to have limited or no access to mobile phones.
22 GSMA Database, 2016

While great strides have been made in mobile connectivity and ownership,
governments, NGOs, and the private sector need to continue making efforts to
ensure that markets are inclusive. Examples of such interventions include public-
private partnerships or targeted co-investments.
 Robust digital payment infrastructure: A robust digital-payment infrastructure

is vital to support digital finance. First, a robust, low-cost and interoperable
payment backbone connecting banks, MNOs and third-party providers is needed
to clear and settle payment transactions. Often national level payment systems in
emerging economies are inefficient and costly, connecting only limited number of
users. This results into limited interoperability, which is crucial for financial
inclusion to progress (you will learn more in Chapter 5).
Second, it is critical to enable people to cash-in and cash-out when required.
Therefore, a wide agent network is critical. Digital finance coexists with cash.
Instead of relying on traditional bank branches, agent networks can reduce costs
and, correspondingly increase reach.
Third, countries need widespread POS terminals, so that customers can pay
electronically e.g. at merchants and replace cash. Uptake of digital payments is
strongly linked to widespread merchant acceptance.
 Widely accepted personal IDs: People cannot use formal financial services
without some form of identification. Providers need to verify their identity in order
to minimise fraud and comply with KYC regulations. Yet, over 20% of individuals
in emerging countries remain unregistered. In Africa the share of people without
a proof of identity is highest, amounting to 38%.23 Even when people have an ID,
they cannot register remotely for financial products (such as opening a transaction
account) if that ID cannot be authenticated digitally. A national ID system and
digital authentication are thus essential for enabling digital finance to take off.
 The India Stack
India has made extensive efforts to expand its digital infrastructure and
increase access to finance. As part of the Digital India programme, which was
formally launched in 2015, the Government of India has embarked on several
initiatives to facilitate digital financial inclusion. The ‘India Stack’ focuses on
removing barriers to financial access, including limited access to bank
branches, agents or access to formal ID documentation. The ID programme
23 Identification for Development Initiative: Global dataset 2014-2015 (World Bank, 2016).

is one instance of success. Just over USD 1 billion has been spent since
2010, and more than one billion people, nearly the entire adult population,
had signed up by 2016.
The programme has resulted in a significant increase in the number of

individuals with access to digital transaction accounts and other financial
services. At the same time, it has enabled the Government to digitise
subsidies and social welfare payments. Until now, it has resulted in estimated
savings of around USD 750 million.
For further reading visit:
What is India Stack?
3.3 Delivery channels

In DFS, delivery channels are customer’s access points to formal financial services. Such
access points can be traditional channels, like bank branches, or, thanks to advancements
of technology, alternative delivery channels (ADC). ADCs include ATMs, internet
banking, call centre, agency banking, extension service (such as POS terminals that
equip staff with technology solutions), mobile banking, and mobile wallets. Through
these channels, customers can access financial services anytime from anywhere through
technology solutions that are built on web, mobile or bespoke platforms (e.g internet
banking runs on the back of a web application).

Source: IFC, Software Group: Alternative Delivery Channels and Technology (2015)
Figure 7: Alternative delivery channels
One can distinguish between self-service channels, where the customer interacts with a
device (e.g. ATM, mobile phone, PC) or over the counter (OTC) channels, where the
customer interacts with bank staff (e.g. in the case of call centres) or third-party
representatives (e.g. in the case of agent banking).
The ADC technology meanwhile enables the provision of financial products and services
through ADC. It is important to distinguish between alternative channels and the underlying
technology: If a retail agent conducts transactions via a POS device, the channel through

which the customer can access basic banking services is the agent/agent banking,
whereas the underlying ADC technology is the POS device. However, there are cases
where the channel and the technology are the same, such as with ATMs and internet
banking.
ADC technology consists of four components:
 A physical device, such as a mobile phone with which the user interacts
 An application layer running on that device consisting of a front-end application,
back-office applications and the integration between these systems into the back-
office systems of the financial institution (e.g. a core banking system)
 A communication channel to exchange data between the device and the FSP
 A mode of authentication to confirm identity of the user
Agent banking is of particular importance for distributing digital financial services. A

widespread agent network allows customers to access their accounts and conduct
transactions in its immediate environment. At the same time agents play a critical role in
acquiring and educating new customers and retaining existing relationships.
The core functions of agents can be summarised as follows24:
 Agents are the face of the service—agents can explain how to use the service,
provide an opinion about a specific product or help when problems arise. It is
therefore important that they are adequately trained and have sufficient marketing
capacities to manage customer relationships.
 Agents must enable clients to make transactions. Accordingly, they must keep
adequate stocks of both cash and electronic value (e-float). If they are unable to
do so, customers may see the service as unreliable, and will stop using it.
 Agents have to verify the identity of the customers. This is necessary when clients
sign up or make subsequent transactions. In this way, agents are compliant with
the KYC standards set by the regulator and help to protect the system against
fraud. Providers must prudently manage agents to make sure they conduct this
process diligently.
Due to their importance for branchless banking activities, we will discuss them in more
detail in Unit 3.
24 Investopedia: Agent Bank

 Zoona: Technology and Entrepreneurship for Access to Finance
Zoona provides financial services to underserved communities through its

large network of thousands of agents. Since
its launch in 2009, Zoona has set up a
network of over 1,500 agents in Zambia,
Malawi and Mozambique and processed over USD 2 billion in transactions.
The large success and outreach is even more astonishing as Zoona is ‘only’
a third-party provider that lacks the reach of an MNO or the expertise and
legitimacy of a bank.
Yet, Zoona has recognised the importance of agents as the face of the
provider. Zoona considers agents to be more than just a means to an end, as
they are often perceived by financial institutions. Instead, they are considered
primary customers and emerging entrepreneurs. Zoona’s entrepreneurs are
provided with the technology, capital and business support to start their own
business as an agent. Crucially, end users are not required to sign up to their
own mobile wallet. Instead, they can transfer money across the mobile
platform via their local Zoona agents. The money is then transferred between
entrepreneurs’ mobile wallets and collected by the end recipient.
Their ultimate goal is to bring safe and reliable financial services to

underserved communities all over Africa.
3.4 Providers
In general, providers of DFS can be categorised into banks, MNOs and third-party
operators.
Banks refer to all financial institutions that have offered financial services even before the
digital transition and are usually licensed by the central bank. The term includes
microfinance institutions, post banks and cooperatives. Banks are often referred to as
"traditional" financial service providers or ‘incumbents’ in the area of digital finance.
Understanding the potential of DFS to improve their business, banks start offering digital
finance services, usually focusing on agent services to extend reach and improve
customer convenience.
Mobile Network Operators (MNOs, or Telcos for Telecommunication Companies) are

another major DFS provider, especially in emerging countries, due to low bank and high

mobile penetration. In many countries, they have led a digitisation process via mobile
money products. MNOs in the DFS market are typically large foreign companies that have
launched DFS in several countries, for example Orange (France) and Vodafone (United
Kingdom). A major incentive for MNOs to enter into the financial market was to offer
additional services to their customer base and thereby reduce churn. It also allows them
to tap into additional revenue sources and improve brand positioning. Yet, it takes time
until MNO products break even.25
 Mobile Network Operators (MNO)
An MNO is a company that has a license to provide telecommunication

services through mobile devices. They are a critical player in providing mobile
financial services, due to their experience in high volume and low value
transactions and a large network of airtime suppliers.
Third party providers, or Fintechs, refer to digital finance providers that combine
financial services with modern and innovative technologies. In the wake of the global
spread of digital technology, they have become dramatically important. Fintechs often
have no or only a limited banking license and set up their entire business model around
digital technologies and redesigning the distribution of banking products. Their capital and
management structures encourage them to undertake research and risk-taking activities.26
 McKinsey: Mobile financial services in Africa
 Fintech companies
Fintech companies (or Fintechs, from financial technology) combine financial

services with modern and innovative technology. Fintech companies consist
of both start-ups and established companies to replace or enhance the usage
of financial services as provided by traditional providers.
All DFS providers function via the following three main components:
 A digital transactional platform that allows customers to send and receive

payments and to store the value electronically.
25 Mobile Network Operations

26 Investopedia: Fintech

 A network of retail agents that enables customers to convert cash intro e-money
and vice versa.
 A device, such as a mobile phone or a payment card that connects to devices, that
allows customers to access the service.
With these three components in place, payments and transfers, as well as credit, savings,
insurance, and can be offered digitally to under-served customers.
Providers of DFS need to achieve significant scale in order to become profitable. It was
calculated that the break-even point for providers can be as high as USD 2-3 billion in
annual transactions, which corresponds to 20-30 million in revenue27. The graph below
illustrates this relationship:
Source: McKinsey & Company (2018)

Figure 8: Mobile money providers
Why does it take that long to break even? While less costly to run than brick and mortar
bank branches, the provision of mobile money requires large fixed investments in the
beginning, for the IT backbone, personnel or real-estate costs (e.g. for setting up the agent
network). As more value flows through the system, the cost per transaction decreases. At
the same time, with increasing transactions providers can reap network effects, as less
money needs to be spent on sales or marketing. However, providers need to invest heavily
27 McKinsey: Mobile money in emerging markets: The business case for financial inclusion. (2018)

at first to reach that scale, either by drawing on their own reserves, finding long-term
investors or partnering up.
On a market level, high volume of payments can drive massive adoption of DFS.
Digitising Government-to-person (G2P) payments, for example, has the potential to
increase efficiency within the network and lower transactions costs for other providers. At
the same time, recipients can build up trust and familiarity with digital payments. In many
cases, such payments provide recipients with their first accounts that they open in their
name and under their control. However, digitisation of G2P payments at large scale
requires governments to make significant up-front investment in physical infrastructure that
often constitutes a challenge.
In terms of business models, the market has diversified as it has matured. There is now
a range of business models under which providers are operating. Models can be
distinguished according to what sections of the value chain the business owns or controls:
• Who is responsible for user accounts? Which brand does user see?
Accounts
• Who sees and controls user and transactional data?

Data
Who controls the communication channels?

Comm.
channels
Who controls physical channels, such as agent network or ATMs?

Physical
channels
Source: CGAP Business models in DFS (2016)

Figure 9: DFS Value Chain
Bank-led model: Under such a model, DFS are provided by banks, either through adding
additional digital channels to existing product lines or by launching new digital offerings.
The bank owns and controls the entire value chain, in some cases with some restrictions,
e.g. when it comes to ownership of communication channels (such as USSD, SIM, data)
that is often owned by MNOs. Such a model allows the banks to significantly reduce cost
of traditional physical infrastructure and move away from expensive branch structure. The

lack of control over the communication channels can be a major challenge though, as it
might lead to significant additional cost.
 Equity Bank in Kenya becomes a Telco
A well-known example of a bank-

led model in mobile money is
Equity Bank in Kenya: Equity
Bank was the most prominent
challenger to M-PESA and
Safaricom. Early on they started
focusing on alternative delivery
channels to reach low-income customers, and dispatched mobile banking
vans to villages and rapidly expanded its ATM network. In 2010, when the
Central Bank permitted agency banking for banks, Equity Bank started rolling
out a massive agent network with currently over 22,000 agents across Kenya.
Initially, Equity Bank relied on MNOs to use their communication channels,
mainly the ones of Safaricom which is also a key competitor for Equity Bank
in the mobile money space. That was also the reason why in 2014 Equity
Bank obtained a mobile virtual network operator (MVNO) license. The
decision was rather driven by necessity than opportunity: Equity Bank wanted
to regain control over their digital channels, ensure security of their
transactions, better impact the customer experience over its mobile banking
services and not rely on the infrastructure of their main competitors. Under
the Equitel brand it started issuing SIM cards and overlays allowing
customers to send money from their accounts to any bank account in Kenya,
take out loans, and maintain deposits. Equity Banks owns the entire value
chain, also the physical channels, providing access to its large agent network.
Read more here: CGAP: Why Equity Bank Felt It Had to Become A Telco-
Reluctantly. (2014)
MNO-led model: Under such a model, the MNO carries out most activities, including
customer acquisition, account management and managing the agent network. The role of
the bank is typically limited to ensuring safekeeping of funds in a pool or trust account.
Initially, mobile money was created and driven by MNOs to reduce customer churn as
competition in the voice market was getting increasingly fierce. MNOs can leverage their
existing agent and cash distribution networks (used for distributing airtime) and achieve

lower costs for setting up agent networks than banks. On the other hand, MNOs who have
no banking license are often prevented by the regulator to issue mobile banking services.
 Bank-led vs. MNO-led models in Pakistan
Nonbanks have a crucial role to play in a DFS ecosystem, as they can often
reach the mass market better than banks. However, in many countries, they
are prohibited from issuing e-money as an independently licensed entity.
Pakistan is one of these countries: In 2008, the State Bank of Pakistan issued
regulations that clearly positioned financial institutions as the responsible
party for DFS implementations, making only bank-led model of branchless
banking services allowed.
However, MNOs were motivated to enter into the space to generate additional
revenue, reduce customer churn and leverage their communication channels
and existing distribution network. Rather than waiting for regulations to
change, MNOs started acquiring microfinance institutions and banks, either
partially or fully.
The first one was Telenor that purchased a 51% stake in Tameer
Microfinance Bank. In 2009, they launched their joint service called
Easypasia, a mobile banking platform offering a range of services such as
P2P transfers, OTC transactions or airtime top-ups- now one of the biggest
mobile banking service in the country. From a partnership perspective the set-
up was interesting, because Tameer and Telenor both have specific roles and
responsibilities and their revenue split is based on these roles. Telenor had
the financial muscle and distribution capability to reach large numbers of
clients that Tameer was still too small to reach, and Tameer had the
regulatory advantage of its banking license. In 2016 then, Telenor acquired
the remaining 49% stake of Tameer Bank- making Tameer a solely Telenor
owned entity and renamed it into Telenor Microfinance Bank in 2017.
In Pakistan, all MNO-owned banks in Pakistan today are microfinance banks

as their capital requirements are lower than for commercial banks, which
makes it feasible for MNOs to enter into the space. Overall, this example
shows that nonbanks, such as MNOs have found ways to play a leading role
in mobile financial services in Pakistan, despite the regulatory framework.
Read more here: CGAP: Bank-led Digital Finance- Who’s Really Leading?
(2018)

Third-party led model: MNO and bank-led models have strengths, but also a number of
weaknesses, such as s lack of customised services, slow product development processes
and no interoperability. Under a third-party model, often led by a fintech start-up company,
with little brand recognition and experience in the financial sector, scalability and time to
market are major differentiators. Fintechs are equipped with agility and specialised
expertise in technology that are beyond the core competencies of banks and MNOs. There
are a range of benefits in favour of a bank-fintech partnership, yet, there are also examples
of standalone models, where third parties are owning (almost) the entire value chain.
 bKash – fail fast, learn faster
An example for such a standalone model is bKash in Bangladesh, a private

limited company under the BRAC group,
that was created to specifically provide
mobile financial services. Being a start-up
(backed by a commercial bank), bKash did
not have an existing customer base that it could leverage and had to acquire
each client on its own. However, bKash is now the market leader in
Bangladesh, managing over 80% of mobile money transactions in the
country.
Why did it get so successful so quickly? Besides an enabling regulatory
environment that facilitated investor’s readiness, bKash succeeded because
as a standalone business it could bundle its efforts to deliver mobile money
services. This is in stark contrast to banks that treat mobile financial services
often as just another delivery channel and rotate staff in and out of that
department.
What’s more, scaling has been a core aspiration for bKash. Instead of pilot
testing, they were driven by a ‘learn as you do’ approach that allowed them
to grow their agent network and customer base quickly.
Read more here: CGAP: bKash Bangladesh- A Fast Start for Mobile
Financial Services. (2014)
The pros and cons of these business models can be summarised as follows:
Pros Cons
MNO led > Proven ability in managing > Lack of familiarity in the financial
agent networks services sector
> Large customer base > Often closed-loop services

> Well-developed distribution > Tendency to pursue customer
market through voice clientele numbers at the expense of service
> Brand recognition and trust quality and security
Bank led > Brand and name recognition > Often unexperienced in managing
> Large customer base agents
> Licensed to provide regulated > Dependency on legacy
financial services technology
> Risk management > Often slow in decision making
experience leading to bank centric instead of
customer centric products
Third party led > Independent player: faster > Unexperienced in managing
decision-making processes agents
> Culture of innovation: > Lack of brand recognition and
Creative and agile product market power
development > Lack of distribution network
> Lean setup and modern IT > Lack of capital
systems
> Technology expertise
Table 7: Pros and Cons of Business models
Towards partnerships and disaggregation of the value chain:

Growing and sustaining a profitable mobile money system requires a set of diverse
capabilities, including broad marketing and distribution, management of an agent sales
force, IT systems and analytics, rapid product development, and financial intermediation.
As you see from the table above, no single type of provider—be it banks, mobile network
operators or fintech providers—has all of these skills.
Against this background, new partnerships between MNOs and banks, and between
fintechs and financial institutions, have arisen based on specialisation and interconnection.
They demonstrate the role of building on the core competencies of each providers. But
getting partnerships right is a challenge- many have failed, e.g. because arrangements
were sub-optimal or partners were ill-equipped. To be successful, MFS partnerships must
enable the partners to generate value for their respective companies.
You will learn more about partnerships in DFS and best practices on how to run them, in
Unit 5.

3.5 Digital Financial Services
As you have learned, DFS include a broad range of financial services that are accessed
and delivered through digital channels, from payments to credits over savings or
insurances.
Generally, payment products are the starting point for DFS to evolve. They are an optimal
gateway product for the financially underserved. Having a secure transaction account
allows to hold transaction funds, make specific transactions, such as sending money to a
relative, receiving salaries or paying at a merchant. More complex products such as loans
or savings all involve payments and build on the ability of storing money and making
transactions. What’s more, payment networks and the data generated from payment
transactions can be used to assess a customer’s risk profile and further help to increase
access to credits, savings and insurances. Figure 10 depicts this relationship:
Figure 10: DFS hierarchy
Transaction accounts & digital payments: Digital payments enable customers to make
transactions to and from their own account via digital channels. A precondition for a digital
payment transaction is a transaction account, which makes it possible to securely store
money electronically. Transaction accounts include both bank accounts in which
customers hold monetary assets as well as accounts and virtual purses in non-banks.
Basic payment services include transfers from end customer to end customer (person-to-
person, P2P), from customers to businesses (P2B), or transfers from companies to a large
number of individuals (B2P). Eventually, there are also payment services from and to
government authorities, e.g. for social transfers or taxes (G2P and P2G).

Digital credit: Digital credits are lending products leveraged via digital channels that
involve limited in-person contact. One can distinguish between existing credit products
that only use digital channels as additional access points and credit products that are only
made possible through the use of technology. In the case of the latter, the digital data trail
that customers leave behind e.g. through the use of mobile payment (payment history,
airtime top-up) is leveraged, to assess the eligibility for a loan. In most cases, loan seekers
can apply for the loan remotely (online or via mobile phone) and loan decisions are
automated.
Savings and financial planning: Digital savings and financial planning products allow
customers to manage their personal finances via alternative distribution channels. On the
one hand, digital payment networks can provide alternative distribution channels for
existing savings products. In addition, there are savings products that have been explicitly
developed for digital distribution channels and sold primarily through them.
At the same time, with the help of technology some of the restrictions that hamper broad
access to deposit and investment products can be addressed. For example, strict KYC
regulations make it often hard for low-income customers to open an account as they lack
some of the formal documentation needed. Yet, fintech companies have found alternate
methods to ensure appropriate identification and authentication of the account holder and
help streamline the account opening process.
Insurance: Digital technology can play a crucial role in distributing insurance and
awarding or calculating premiums. Alternative distribution channels can replace traditional
broker networks or be used to complement the traditional channels to deliver products for
the financially excluded. The mobile phone especially is a major channel to reach the
underbanked.
You will learn more about the different types of digital financial services and some
prominent examples in Chapter 6.
3.6 Customers
Potential customers of digital financial services are:
 Households and individuals
 Businesses (MSMEs and large corporates)
 Governments and NGOs

Providers need to understand their customer needs, preferences and behaviours and offer
solutions based on that notion.
Generally, financial needs of people across all income levels can be classified into four
major categories28:
 To manage short term liquidity
 To accumulate a large lump sum of money (for investment purposes)
 To deal with unforeseen expenses
 To make and receive payments
Well-tailored products and services need to respond to those needs. They need to help
customers in meeting their daily needs, investing in their businesses or protecting
themselves against risk. These needs are universal, i.e. independently of how much one
earns. Yet, priorities differ. For people with little income, managing short-term liquidity and
dealing with unforeseen expenses is more crucial than for people with high-income. This
is because they have less financial resiliency and are forced to focus more on financial
stability. Accordingly, different behaviour patterns arise that financial solutions need to
account for:
Different spending: Low-income families spend a relatively high portion of their income
on basic needs. At the same time there are also various differences depending on the life
stage or gender. Young adults may want to invest in education and household set-up,
mature families focus on business investment, and older adults might need to pay for
health care. Providers need to carefully examine their various customer segments.
Need for consumer protection: Low-income customers are especially vulnerable to

shocks, due to their irregular, unpredictable incomes. At the same time, they lack
experience with formal financial services and can be easily exploited. Consumer protection
is therefore crucial.
Irregular incomes: Underbanked individuals are more likely to obtain their income from
irregular and informal activities. And since informal sources tend to be irregular and
unpredictable, families often put together multiple sources and interlace business and
family finances.
28 From Helix Institute: Finclusion to Fintech. Fintech Product Development for Low-Income Markets. (2017)

Relationships with financial service provider: Financially excluded people indeed use
financial services, but through informal arrangements such as with their family, friends or
moneylenders. Therefore, it is important that formal financial service providers create a
greater value for such customers, so that they are willing to switch.
3.7 Support services

Fintechs are not only engaged in providing financial services themselves, but also provide
a wide range of support services that streamline current banking processes. They can be
clustered into two categories:
Process optimisation. Several support services focus on optimising sales and back-
office processes. For example, the efficiency of the field personnel can be increased by
using tablets that feed data to customers directly into the vendor's customer databases.
In the area of alternative access points, ICT support services can facilitate and improve
the management and monitoring of agents.
Data processing and analysis: Data collection, processing and analysis are the basis
for certain digital finance services such as digital credit. The data and data sources go
beyond the traditional records of financial institutions and credit bureaus, referred to as
alternative data. The alternative data sources include, among other things, historical
mobile phone credit balances as well as digital payments made by the credit seekers. At
the same time advanced analytic models (e.g. artificial intelligence, machine learning) help
process the increasing amount of data.
Support services can be provided by specialised third party companies or by financial

service providers and integrated into the business. Sometimes they are also part of
collaborations; where e.g. MNOs are cooperating with banks to collect and process
customer data.

AFI: Mobile Financial Services- Basic Terminology. (2013)
CGAP: Agent Management Toolkit - Building a Viable Network of Branchless

Banking Agents. (2011)
CGAP: Business Models in Digital Financial Services. (2016)

CGAP: Customer Centricity for Financial Inclusion. (2014)
CGAP: bKash Bangladesh- A Fast Start for Mobile Financial Services. (2014)
CGAP: Why Equity Bank Felt It Had to Become A Telco- Reluctantly. (2014)
CGAP: Digital Financial Inclusion: Implications for Customers, Regulators,

Supervisors and Standard-Setting Bodies. (2015)
EIB: Digital Financial Services in Africa - Beyond the Kenyan Success Story.
(2014)
GPFI: Digital Financial Inclusion - Emerging Policy Approaches (2017)
GSMA: Mobile Money (2016)
IFC: Financial Inclusion in the Digital Age. (2018)
IFC: EMCompass- Digital Financial Services: Challenges and Opportunities

for Emerging Market Banks (2017)
IFC, Software Group: Alternative Delivery Channels and Technology –

Handbook. (2015).
KfW: Digital Finance: die Zukunft des Finanzsektors- Empfehlungen für die
Finanzielle Zusammenarbeit. (2017)
McKinsey & Company: Mobile Money in Emerging Markets - The Business

Case for Financial Inclusion. (2018)
McKinsey Global Institute: Digital Finance for All: Powering Inclusive Growth
in Emerging Economies. (2016)
1. Why is a widespread agent network crucial for the proliferation of mobile

money?

2. Why do mobile money providers need to achieve significant scale to become
profitable?
3. Which business model (MNO, bank or third party led) is best suited to provide
DFS?

4 Key trends
Initial scenario (continued)
Cynthia is curious as to how fintechs are able to provide such an intuitive user experience
that outscores traditional solutions. How are they able to match the needs of their clients
in such a perfect way? In Cynthia’s MFI, the range of products is quite limited, and terms
and conditions were set a while ago. Clients were okay with that range for a long time, but
now it seems expectations have changed. Customers are expressing a need for more
flexible loan terms according to the various needs and purposes of borrowing money.
Cynthia wonders how they can become more customer centric? How can they translate
the user insights into new product propositions quickly? And how can technology help with
that?
Digital technology in finance has initiated a range of different trends that have a massive
impact on how financial providers are running and how customers are experiencing
financial services. In this Chapter, we want to focus on the most important trends that
largely influence how financial services are provided in emerging markets to the
underbanked.
4.1 Big Data, Big Potential

With the rapid expansion of mobile services and access to internet, the amount of digital
data generated is growing at an unprecedented pace. In fact, the internet together with
mobile phones and other internet-connected devices are generating the same amount of

data as all written works in human history - in just 30 minutes!29 Can you imagine? How
much data are we leaving behind every day, by our use of technology? And how can this
wealth of data be harnessed for good? How can Big Data help to advance financial
inclusion?
Figure 11: Data created each minute (2016)
 Big Data
Big Data is the collection and use of large data sets that can be broadly
combined and distributed to identify patterns and expand insights. As an
increasing share of individual behaviour is digitally encoded, Big Data in
financial services can be used to better understand consumer profiles and
preferences and make predictions of future needs and behaviours.
Of course, the use of data in financial services is not new. It has always been a critical
element for financial service providers, e.g. for making loan decision or tailoring products
to specific customer segments. Yet, with digitisation, new data sources have arisen, and
with that a massive volume of data that can be clustered in three main categories:
Data on the use of financial services: Clients are increasingly shifting to digital means,
which helps providers to better track how financial services are used. For example, by
29 Inc. Magazine: Big Data: You Have No Idea How Much It Will Change Your Life.” Inc. Magazine. (November 2012)

using mobile wallets to make transactions or buy new airtime, clients are generating a
large data trail that providers can use to gain insights on how and when transactions are
made, and for which amount. This information can help to better tailor the products or rate
the eligibility for a loan. For instance, it has been found that a person who adds airtime in
a similar amount every week is usually more reliable in repaying a loan than someone who
buys airtime erratically.
Data on social interactions: Another form of data that clients are increasingly leaving
behind are information about digital and social interactions. In emerging countries with a
lower rate of smartphone penetration, the most widely available data is mobile phone use,
e.g. call records or text messages. And as internet use is also rising, so are the information
of social media activity. For example, a strong online identity, such as a long standing
social media account and a large network of contacts, could be a sign for a reliable
borrower and improve an applicant’s credit score. Of course, providers typically cross-
match data from multiple sources and compare them to other information gathered directly
from the client, such as income and marital status.
Market-wide data: In contrast to individual data, market-wide data refers to data about
the region or country. Governments are increasingly digitising their data collection process
and data mining can be facilitated. Instead of going door-to-door to assess household
consumption, providers can use satellite images to make predictions about the poverty
levels of potential clients. Such images can give hints about access to electricity (via night-
time images) or about physical infrastructure, such as existence of paved roads, urban
marketplace or metal or non-metal roofs and provide information about client’s income
levels.
Non-traditional or alternative data are especially relevant for potential ‘thin-file’ customers
that have no or a short length of credit history. Those that have previously been ‘invisible’
to the market could gain access to credit for the first time.
 Alternative Data
Alternative data are information of data gathered from non-traditional

information sources. In financial services, alternative data, such as utility bill
payments or call records, can be used by financial service providers to assess
potential borrowers.
As data becomes increasingly available, the analytical tools that help make sense of data
have become more sophisticated to make predictions, thanks to advances in machine
learning and artificial intelligence.

In a nutshell, Big Data holds huge promise for financial inclusion: for customers it can help
gain access to formal financial services for the first time. For financial service providers,
the new wealth of data can help them deepen existing relationships, acquire new
customers and better manage risk. And the Big Data trend has the potential to massively
extend access to credit. It is estimated that around 325- 580 million people could gain
access to formal credit for the first time by 2020, as smartphone penetration and internet
use is rapidly accelerating.30
 M-Shwari and the proliferation of digital credit
The landscape of digital credit

deployments is quickly evolving.
Digital credit services are mostly
leveraging the data that customers
are leaving behind, for example
information about mobile
transactions or call records. In
contrast to conventional loans, digital credits are instantly provided. That
means a credit decision is automated and often made within seconds. Also,
such deployments do not require in-person interactions: the customer can
apply for a loan, receive loan disbursements and make repayments remotely,
via the mobile phone.
One of the most prominent examples of a digital credit model is M-Shwari, a

digital current account product offered by the Commercial Bank of Africa
(CBA) and Safaricom, the largest mobile network in Kenya. M-Shwari is a
great example of how the mobile money infrastructure can be leveraged. M-
Shwari accounts can only be accessed via M-PESA, the ubiquitous mobile
money service in Kenya. Opening a bank account often takes less than 30
seconds: CBA is able to use the existing customer data that Safaricom
collects when customers have registered for a SIM-card or opened up an M-
PESA account. As soon as customers have an M-Shwari account, they can
apply for a loan, even without a banking history. This is the biggest appeal for
customers: getting easy and fast access to short-term credit. In just 5 years,
over 21 million Kenyans have opened an M-Shwari account and over KSh 30
billion (EUR 250 million) in loans have been disbursed.
30 Omidyar Network: Big Data, Small Credit. The Digital Revolution and Its Impact on Emerging Market Consumers. (2016)

Yet, getting access to instant loans is expensive. M-Shwari charges a
facilitation fee of 7.5% on credit, independent of the loan duration. The
annualised interest rate can be as high as 90% for a loan of one month. Also,
there is an alarming growth in defaults on digital credits, with many people
being blacklisted by credit bureaus. These challenges require to revisit how
digital credits are designed and delivered.
Read more here: CGAP: How M-Shwari Works: The Story So Far. (2015)
We will go into more detail about the emerging digital lending landscape in
Unit 4.
However, access to new data also brings new challenges: With the abundance of
alternative data, challenges arise around what data to use, how to use it, and how to do
this responsibly — especially, to respect privacy rights of individuals and MSMEs. We will
go into more detail about opportunities and challenges around Big Data, especially for
financial service providers, in Unit 2.
4.2 Customers in the Centre

With a new wealth of data, providers are enabled to gather more insights about existing or
potential customers and put the clients at the centre of their operations. A customer-centric
model enables organisations to acquire more customers, improve retention and accelerate
use of services. At the same time, employees are empowered to resolve issues and handle
customer complaints diligently and create an added value for the customer.
Yet, setting up a customer-centric business is not an easy undertaking. Most financial

institutions today are still product focused. It requires the business to be built around the
customer rather than a portfolio of products. Growth has to be based on meeting customer
needs and creating long-term customers.
 Customer-centric business model
A customer-centric business model puts the customer at the centre of

business strategies and decision making. It enables an organisation to

develop a deep understanding of customer needs, preferences and
behaviours and design a unique and distinctive customer experience.
Customer centricity is increasingly recognised as a necessity. Currently there is a lack of

customisation and clients are offered highly standardised products that do not really meet
their needs. What we can observe in the financial inclusion chain is a large access-usage
gap.
Enabling Access Uptake

environment • Products are made • Costumers take up or
• Environment allows available to regiser for products.
adequate products to customers.
be provided.
Usage FI outcome Impact

• Consumers actually • Outcomes are • Financial inclusion
use product. directly attributed to leads to broader
financial service impact on household
usage and government level.
Source: insights2impact: Financial service usage

Figure 12: Financial inclusion chain
Products are made increasingly available to low-income customers, and consumers are
taking up or registering for such products, especially mobile money solutions. However, a
large share of consumers do not actually use the products: Only 70% of account owners
in developing countries have made or received at least one digital payment per year,
compared to 97% of account owners in high-income countries. The share of inactive
accounts is especially high in South-east Asia, first and foremost India (48% of inactive
users). Reasons for this low usage are poorly designed products, bad customer service
and overall a poor user experience.31

DFS growth: Extensive, rather than intensive
!
Growth in DFS has been primarily extensive (as per number of customers)
rather than intensive (as per number of transactions per customer). This
has led to a significant access- usage gap:
Only 33% of all registered mobile money accounts are active on a 90-day
basis, meaning that the vast majority lie dormant. When they are used, most
transactions (66%) are made for airtime top-ups (adding credit to mobile
phone for voice, SMS or data services). 32
Extensive growth can be problematic as markets will reach a saturation

point quickly. Concerted efforts from all industry stakeholders are needed
to ensure that inclusion leads to active usage.
Against this background, customer-centric business models are increasingly

acknowledged by stakeholders. Only by focusing on the actual usage of formal financial
services, financial inclusion targets can be achieved and an impact on the household and
market level can be made.
But how shall organisations structure themselves around customers and initiate the
change process within their operations?
The journey always begins with acquiring a solid understanding of the customers.
Which challenges in life do they face? How are they currently managing their money?
What are their motivations and aspirations? Such insights could come from existing
relationships and interactions or from external sources. It is important to start with focusing
on what is already there and then looking at the knowledge gaps and structure quantitative
and qualitative research around them.
Once providers have gained in-depth insights into customers, they can start designing
their products and services with the client in the centre. If you are interested in learning
more about the techniques and design principles necessary to develop customer centric
products, you can learn more in our elective Unit 7.
32 GSMA: State of the Industry Report on Mobile Money (2015).

And customer centricity does not end with product development. It is also crucial that
providers structure their organisations accordingly. CGAP has identified four principles that
organisations need to abide by33:
 Leadership and culture: Leaders need to embrace customer centricity first and
initiate a customer-centric corporate culture. Only then the new spirit can trickle
down to the rest of the team.
 Operations: Operations staff (including compliance, IT, HR, finance and
marketing) should be part of the product development process (to some degree)
and assess the consequences of new products jointly. In this way, providers can
make sure to have the buy-in from the relevant stakeholders in the organisations.
 Customer experience: A positive customer experience must go beyond the

product and solve real-life challenges throughout the customer journey. For
instance, it is important that clients are treated with respect, complaints are
handled effectively and help is available when clients need it.
Financial Juntos: Improving customer retention via customized

capability: conversations
Providers
need to focus Juntos is a global fintech provider
their efforts serving low-income customers in
on emerging markets who are
strengthening accessing formal financial products for the first time. Their business
customer’s model provides a good example of how technology and customer-
financial centric design can meet customer needs and promote the actual usage.
capability. Juntos has developed a platform that enables to send automated
Capable relevant SMS messages to customers of financial institutions. Financial
customers service providers can engage Juntos to achieve specific targets (e.g.
are more improve customer retention or drive product uptake) and then tailor
likely to be specific messages for their customers. This can include reminding
active users. customers to pay back a loan on time or encouraging them to save. In
this way, customers feel more at ease with their providers and set up
 long-term relationships.
Read more here: Juntos Global
33 CGAP: Customer-Centric Guide (2016)

4.3 Interoperability in Mobile Money
Interoperability is a hot topic in digital financial services and has attracted lots of attention
among industry stakeholders.
Yet, interoperability is not specific to finance and used in a variety of industries. It refers to
the ability of different systems to seamlessly interact with one another. It allows systems
to exchange information and then use the information in a meaningful way.34 For example:
Users of one email provider (e.g. Gmail) can easily interact with users of a competing
service (e.g. Freenet). However, there is no interoperability between social media
providers, like Facebook or Google+ and users cannot exchange directly with one another.
But what does interoperability mean in the financial sector and why does it matter for
financial inclusion?
 Interoperability
Interoperability is the ability of different systems to seamlessly interact with

one another.
When payment systems are interoperable, they allow proprietary platforms or

different products to interact seamlessly. Interoperability can promote
competition, reduce fixed costs and enable economies of scale. This can help
ensure the financial viability of the service and make payment services more
convenient.
As you have learned, with the proliferation of digital technology new actors have entered
into the market with innovative financial services. These non-bank services providers,
many of them being MNOs offering mobile money solutions, are still not accepted in many
(retail) payment infrastructures, despite their important role. As a result, they often start as
proprietary solutions, where transactions are rather processed in-house than on a central
platform. This leads to a fragmentation of the mobile money market, resulting in limited or
null interoperability. This means a customer can only make transactions to an account that
is with the same provider, not a competing one. If several MNOs are running their own
proprietary solutions, it can result in large inefficiencies due to duplication of payment
34 Digital Finance Interoperability & Financial Inclusion

infrastructure. And as the number of provider networks increases, so does the variety of
transaction types, from bill payments to cross-border remittances.35 This can negatively
impact adoption, usage and thus financial inclusion.
Interoperability, on the other hand, can tear down barriers between different mobile money
solutions, as it reduces the duplication of services and makes service delivery more
efficient. At the same time, it facilitates cooperation between different players, contributes
to market access and service reach. For customers, it will be easier and cheaper to send
and receive payments.
Let us summarise the manifold potential effects for consumers, businesses and markets:
 In an interoperable payment infrastructure, consumers can benefit from network

effects and reduced transaction cost. It will get more convenient and cheaper to
make transactions between each other.
 Businesses can benefit from increased transaction volumes and new business
opportunities.
 And financial markets can be made more inclusive because interoperability can
promote competition, introduce economies of scale and scope (e.g. reduced fixed
cost) and improve the utility of payment instruments. All elements can facilitate
financial inclusion.
Despite all the benefits, interoperability is hard to achieve. Larger providers often see it
as a competitive risk to open up their own proprietary systems for other providers.
Especially in highly concentrated markets, the few dominating players might not see the
need to interact with other payment systems. Instead they want to lock in customers and
retain the existing market share.
Accordingly, for different payment systems to work seamlessly, it requires more than just
technical connections. Interoperability can only reach its full potential if providers are
incentivised to pass payments to each other. Interoperability of different payment systems
depend on three major elements:
 Governance and operating rules: It is crucial for regulators and policy makers
to put policies in place that incentivise providers to move to interoperability. There
are various approaches that regulators can take, which depends on each market
context and objectives. Regulators can 1) enforce early interoperability (might
discourage providers); 2) let the market establish itself (depends on the
35 Money transfers without borders

negotiation will of providers) or 3) encourage and incentivise markets towards
interoperability.
 Business agreements and incentives: Business agreements between different
interoperable participants must be in place that set the right commercial incentive
about how transactions are priced and who bears risk if new providers want to
join the network. Such agreements must balance the economic interests of all
participants.
 Technical integrations: It is necessary to have a technical infrastructure in place
that connects participants and transfers payments and data. This can take the
form of payment switches, aggregators, network connections- technical tools that
allow payment systems to work together.
 How Tanzania achieved mobile money interoperability
Tanzania was one of the earliest countries to launch mobile money in 2008.
The market has since then grown quickly, with a wide range of providers, 39
million registered mobile wallets and the four leading mobile money operators
(Tigo, Vodacom, Airtel and Zantel) being in fierce competition.
Then in 2014, Tanzania became the first African country to introduce mobile
money interoperability. The four key MNOs agreed on a set of standards on
how person to person payments are handled across networks. This was a
major milestone for financial inclusion. It allowed instant transfers between
customers of different providers, making it cheaper and more convenient to
send and receive mobile money.
How could that happen? A set of conditions favoured the process:
 The foundation was provided by an enabling regulatory environment

that nurtured competition and initiated the dialogue around
interoperability. The Bank of Tanzania (Central Bank) is a progressive
institution that did not dictate how markets should organise themselves.
 With 39 million registered wallets, the market was close to saturation
from customer acquisition perspective. Providers were urged to find new
business opportunities.
 In contrast to Kenya, the mobile money market in Tanzania was more
balanced in terms of provider market share. Negotiation power between
providers during the process was relatively equal.

 There was a strong demand among mobile money users to make
transfers across multiple providers.
In a nutshell, Tanzania was well-suited to a market-based approach to

interoperability thanks to its supportive central bank, conducive regulatory
framework, and a sufficient level of market competition and maturity. Other
countries could learn lessons from Tanzania’s journey.
Read more here: GSMA: The Impact of mobile money interoperability in

Tanzania (2016)
4.4 Partnerships & open APIs

With the proliferation of digital technologies and new players entering the market,
traditional financial institutions are increasingly urged to organise themselves for
innovation. In order not to become side-lined by technology focused new entrants, to make
a virtue out of necessity and start partnering with fintechs.
Partnerships between financial institutions and fintechs can be mutually beneficial:

Fintechs get to scale their technology and access capital to grow. Financial institutions, on
the other hand, gain assistance in their efforts to improve product offerings, increase
efficiency and lower costs. Fintechs have the agility and technology expertise traditional
providers lack. They learn new ways to leverage data, evaluate risk or manage customer
relationships. At the same time, financial institutions undertake certain activities alone that
form part of their core competencies, such as maintaining customer relationships or
protecting customer and transactional data.

Source: Center for Financial Inclusion report 2017
Figure 13: Strengths of Financial Institutions and Fintechs36
Through partnerships, fintechs and financial institutions are addressing four major
challenges37:
 Gaining access to new market segments: Onboarding unbanked customers,
especially in remote areas, has always been a financial challenge that digital tools
can help to overcome. By partnering up with fintechs that offer cutting-edge
technologies, financial institutions can acquire new customers, especially the
ones that have been hard to reach.
 Creating new offering for existing customers: Financial institutions have to
create profitable and useful services for existing customers to ensure steady
revenue streams and decrease customer churn. Through partnerships, financial
institutions can add innovative features or additional channels to their bank
services.
 Collecting, using and managing data: Fintechs can help financial institutions to
organise and mine existing data. This in turn can encourage to lend to thin-file
customers without formal credit history.
 Deepening customer engagement and product usage: Bringing underserved
individuals to the formal financial sector often requires financial education and
capacity building. Fintechs can introduce new tools to create ongoing customer
engagement and encourage frequent interactions.
36 Accion and IFF: How Financial Institutions and Fintechs Are Partnering for Inclusion: Lessons from the Frontlines. (2017)
37 Based on: ibid

Once the right partner has been identified and the partnership is internally approved, the
process of system integration begins. This can be a cumbersome and lengthy process
as technical issues may arise, as well as regulatory concerns around data sharing.
Open Application Programming Interfaces (API) have the potential to significantly
reduce the time for financial institutions to work with external parties. APIs are a set of
requirements that govern how an application can communicate and interact with another
application. It allows software programmes to talk to one another and defines which
information should be supplied and which action will be taken when it is executed. Then
the API extracts the data.38
 Open APIs
APIs are a set of requirements that govern how an application can

communicate and interact with another one. An open API is publicly available
for all (third party) developers. It allows to access back-end data that can then
be used to enhance their own application to be built on top of the system.
In the context of financial inclusion, DFS providers can use APIs to open their
financial infrastructure to third parties and enabling these innovators to
develop tools that leverage the provider's systems and data.
When financial institutions partner with fintechs, an open API provides a secure connection
that allows fintechs to access customer data (with consent) in a controlled way. Without
open APIs, small companies must negotiate commercial arrangements with the larger
provider and then navigate the complex process of technical integration.
Open APIs make this process far more efficient and competitive, bringing massive benefits
to all parties involved:
 Financial institutions can partner easily in a controlled manner while keeping their
institutional expenses low. It can result in revenue growth through customer
acquisition and retention.
 Fintechs get the essential guideline they need to engage with financial institutions
and develop new products and services.
 Customers can benefit from enhanced products and services and a more
personalised experience.
38 Why API Banking Means a New Role for Banks

A great example of an API in the DFS space, is the ability of the user to pay utility bills
through telecom operators (as in Pakistan) 39 . This in-built mechanism has allowed
customers to pay their bills from various locations and via various providers, resulting in
greater convenience, increased volumes of bill payment collection and higher revenues
for the telecom operator.
Yet, opening backend information does not come without risk, as it creates security and
management challenges. Opening APIs should be an iterative, experimental process.
Financial institutions can start by releasing initial API offerings and then test them in the
market to ensure they help third-party developers to build new products and features
thereupon. You will learn more about open banking and APIs in Unit 2.
 Watch this video
A great explanation of what exactly an API is: What is an API?
In a nutshell, financial institutions and fintech partnerships have huge potential for all
parties involved, contributing to customer engagement and financial inclusion. Yet, they
are prone to failure and often end before they have even started. In Unit 5 you will learn
more about partnership management and how to organise yourself for innovation.
 Accion Global Advisory Solutions: Unlocking the Promise of (Big) Data to

Promote Financial Inclusion. (2017)
Accion & IFF: How Financial Institutions and Fintechs Are Partnering for
Inclusion: Lessons from the Frontlines. (2017)
CGAP: How M-Shwari Works: The Story So Far. (2015)
CGAP: Customer-Centric Guide (2016)
CGAP: Digital Finance Interoperability & Financial Inclusion (2016)
CGAP: The Business Case for Customer-Centricity (2017)
CGAP: The Potential of Digital Data: How Far Can It Advance Financial
Inclusion? (2015)
39 GSMA: APIs for financial inclusion.

CGAP: The Proliferation of Digital Credit Deployments. (2016)
CGAP: Digital Rails. How Providers Can Unlock Innovation in DFS

Ecosystem Through Open APIs. (2016)
CSFI: Big Data, Big Potential: Harnessing Data Technology for the
Underserved Market. (2015)
Ericsson: Interoperability as a means to financial inclusion. (2016)
GSMA: State of the Industry Report on Mobile Money. (2015)
GSMA: The Impact of mobile money interoperability in Tanzania (2016)
Inc. Magazine: Big Data: You Have No Idea How Much It Will Change Your
Life. Inc. Magazine (November 2012)
IFC: Alternative Data Transforming SME Finance. (2017)
IFC: Achieving Interoperability in Mobile Financial Services (2015)
ITU: Access to Payment Infrastructures. (2016)
insights2impact: Financial service usage. (2017)
Omidyar Network: Big Data, Small Credit. The Digital Revolution and Its
Impact on Emerging Market Consumers. (2016)
1) What are opportunities with big data?
2) What is meant with an access-usage gap in Digital Finance?
3) Why is it hard to achieve interoperability?
4) What are open APIs and why are they helpful in a DFS partnership?

5 Types of Fintech, Domains and
products
5.1 Introduction
Cynthia, wants to nudge her MFI to finally prepare themselves for the future and digitise
their operations. Maybe offering a mobile payment service would be a first step. Or should
she first get an overview of the available solutions? Maybe it is better to first digitise their
internal processes, and e.g. get a new core banking system with an open API that allows
to easily integrate with third party service. She wants to see which fintech solutions are
currently available in the market, the benefits they can bring and how this could adequate
for her business and target market.
Digital Finance is a complex area and hard to grasp. Over the past years, new technology
driven finance providers explored several areas of finance and banking. We have
categorised those domains in order to give you insights to each of those fields:
Categories of digital finance providers:
1. Money transfers and payments
2. Personal finance management and financial planning
3. Savings and investments
4. Borrowing
5. Insurance

6. Infrastructure and back-end service providers
5.2 Money Transfers and Payments
The sector of transfers and payments creates the largest opportunities for Fintechs and
other digital finance providers. Traditional banking payment services are slow, expensive
and are mostly not accessible for people creating an urgent need for people to send money
remotely. New technologies lead to faster transaction times with lower costs.
In Unit 3 of this course, we will deep dive into the area of money transfers and payments.
This chapter will provide you with a short introduction.
In general, this area can be split into the following categories:
Consumer payments: Payment solutions for retail and commercial clients.
Payment infrastructure: Back-end services for payments and infrastructure for POS
systems and merchants acquisition. Also, the detection of fraud is a field where Fintechs
are active.
Crypto Currencies: Digital currencies and its infrastructure on the blockchain provide a
new technology to process global payments in real time without the need of an
intermediary.
Consumer Payments:
Remittance market
With today’s fast-increasing globalisation, more and more people process cross border
transfers on a regular basis. This is more prominent in developing countries where global
remittance increased by 51% between 2007 and 2016.
Looking at traditional service provider (banks), it’s incredibly expensive to make an

international transfer. In many countries, it costs on average up to 15% of the total transfer
amount.
This means that disruption in the remittance sector is especially important, making it viable
for people to send large or small amounts of money around the world at a fraction of the
cost. Lowering costs and making services more convenient is especially important for
small businesses. Various micro services or products can´t be sold because of too high
transaction costs.

Online Payment Processing
In the United States alone, more than 50% of people prefer to do online shopping than
traditional retail shopping. By 2020 it is expected that e-commerce sales will reach USD 4
trillion.
There are multiple start-ups looking to stake a piece of the industry, making it easier, safer
and cheaper for consumers to pay for products and services online.
Four of the eight most valuable FinTech companies fall under this category, and includes
Ant Financial (USD 50 billion), Stripe (USD 5 billion), Adyen (USD 2.3 billion) and Klarna
(USD 2.2 billion).
As the internet’s impact on every aspect of our lives continues to expand, this sector is set
to become one of the biggest in the world, not just in fintech, but amongst all industries.
Mobile wallet applications40
Mobile wallets could be seen as a sub-section of the payments sector as it not only
provides a safe place to store your money but also offer seamless payment solutions.
Between 50% and 70% of people in developing countries do not have access to traditional
financial services, like a bank, while around 80% of individuals do own a mobile phone.
Due to the huge opportunities for FinTech start-ups to make a real difference in the lives
of the unbanked individuals around the globe, the sector attracts around 10% of total
FinTech investments.
The sector is so lucrative that big tech companies have developed their own wallets, such
as Apple (Apple Pay), Google (Google Wallet) and Samsung (Samsung Pay). Due to its
importance for the underbanked, we will focus on mobile money within the scope of Unit
3.
 Mobile Wallet
A mobile wallet is a software application that is run on a mobile end device.

The wallet stores payment details (e.g. credit or debit cards, cash balances)
that can be used to execute payments. For money transfers, a user and the
payment recipient simply need to download the app, install it on the
smartphone and visit an agent. The user then hands out the amount of money
40 The Difference Between E-Money, Mobile Money & Mobile Banking

he wants to be sent. The money is sent electronically via mobile networks
and will instantly appear in the receiver’s wallet.
In developing countries mobile money plays an important role. This topic will be further
covered in Unit 3 of this online course.
 McKinsey: Mobile financial services in Africa: Winning the battle for the
customers (2017)
Blockchain and crypto currencies for payments
The blockchain and crypto currencies have disruptive potential for global payment
markets. In Unit 2 you will learn more about these technologies.
For now, we only need to understand that blockchain technology enables peer to peer
transfers without any intermediary. Transfers can be settled almost real time globally for
any amount in any country at a 24/7 service. The potential of this technology is therefore
huge in developed and developing countries.
For developing countries, the particular feature is to enable the unbanked population to
store and manage money without a traditional bank account. Furthermore, charges for
transfers can be reduced significantly. The only technical requirement is a smartphone
and a functioning internet connection. Then a crypto wallet needs to be downloaded in
which private keys are stored and used to validate transactions.
 Wala Platform
Founded Date: 2015
Location: London, United Kingdom
Sector: Payment Solutions/ PFM
Funds Raised: USD 1,2 million (ICO in December 2017)
“Wala has built a community-driven and gamified personal financial management

tool for cash-based consumers in emerging markets. The product allows users to
easily track their spending and earning to develop a financial profile for a customer
that currently does not have one. The app then uses that profile to set weekly
financial and engagement goals which improve the consumers spending and
savings.” (crunchbase.com)

Besides the PFM solution, Wala allows users to purchase products and services
using the DALA token. Wala has now more than 100, 000 merchants offering goods
and services through their platform. Users can not only buy air time, but also pay
for services such as paying for electricity bills, paying school fees and buying other
merchandise using the Dala token. The interesting aspect of this system is that
users can transact across 10 markets in three different countries. That means a
user in Uganda can pay electricity bill for his household in South Africa.
For more information:

https://getwala.com/
5.3 Personal Finance Management and Financial

Planning
Personal Finance Management (PFM) is a software/ application solution that helps users
manage and analyse personal finances by aggregating balances and transactions to a
user-friendly overview.41 Basic functions of a PFM software are:
1) Categorisation of transactions
2) Overview of all internal and external banking and e-commerce accounts
3) Data visualisations (spending trends, budgets, net worth, etc.)
4) Investment recommendations
5) Credit recommendations
A PFM software uses real-time data from every account to update the aggregated
information and provides a real-time overview over the user’s financial situation. Based on
this overview a PFM solution develops forecasts and recommendations using statistical
models. Many tools involve management of insurance contracts with automated
optimisation engines to achieve maximal saving potential.
Difference between Personal Finance Management and Online Banking
PFM can be considered as a technological complement of online banking. While online

banking consists of exporting financial data and overviews from one bank to the customer,
41 Investopedia: Personal Finance

PFM solutions focus on real-time analysis and aggregation of that data from multiple banks
or service providers.
Online Banking core functions PFM-Management core functions

Real-time net overview of balances and
Download bank statements
transactions from multiple sources
Digital brokerage (Stock screening, order
Income and Expense Analysis
management/transactions)
Document management system Cashflow Analysis
Payments and transactions Benchmark & Comparisons
Communication channel to the bank Budget & Financial Planning
PFM offers a wide range of advantages for its users:
1) PFM provides an analytical fundament for integration of further Fintech services

in a banking platform to improve the individual’s financial situation.
2) Isolated analysis of finances for each bank account can lead to biased results,
while an aggregated overview on one platform solves this problem.
3) Availability of big data and data analytics (e.g. machine learning) allows PFM
solutions to identify individual patterns and develop tailor-made financial planning
models.
 Further Reading
McKinsey: Mobile financial services in Africa: Winning the battle for the
customers (2017)
5.4 Savings and Investment
Helping customers to manage their liquidity is a wide area of digital finance. It covers
savings as deposits as well as investments in stocks and commodities. Customers need
to be separated into private and retail clients as well as institutional investors. Also, here
the focus of new service providers is different between underbanked markets and
financially mature markets.

Mobilisation of savings for underbanked markets
Savings, alongside payments, are a basic financial service that is highly relevant in
developing countries.
Savings products in the formal financial system enable customer to safeguard their money,
earn a financial return, monitor their expense flows, reduce their dependence on credit,
and build up account balances to enable them to deal better with unexpected
emergencies.
Nevertheless, people who belong economically to the bottom of the pyramid are not using
savings products for various reasons:
 Lack of access points (e.g. to banks or bank branches)

 Difficulties in dealing with bureaucracy (e.g. KYC process)
 Costs
 Cultural barriers
Digital finance can help with the mobilisation of savings via digitally activated services with
lower-cost alternative distribution channels, more convenient product designs and an easy
KYC and onboarding process. Great examples are M-Shwari in Kenya which onboarded
5 million customers from lower income households within the 1st year of its product launch.
In Asia the Laku Pandai programme has enabled banks to collect USD 3 billion in deposits
from 1.1 million new customers in rural areas, in less than a year.
 M-Shwari
M-Shwari was developed by CBA and Safaricom and is operated via mobile
phone. M-Shwari offers a wide range of financial services including deposit
and loan solutions with focus on making micro-savings and taking micro-
loans. The account is issued by the CBA and linked to a M-Pesa mobile
money account. The bank account is fully subject to banking regulations
requiring banks to verify the identity of the customer according to KYC
standards. This is done via details from the customer registration of the phone
number and M-Pesa account.

Top 10 Things to Know About M-Shwari
The key areas that digital finance can leverage to achieve further financial inclusion can
be described as follows:

Increase cash-in and Improved access to Increase use of savings
cash-out points savings products products
 Agent networks can be  Offer access via  Product features like a

an alternative to mobile phones as game can increase the
branches of offices distribution channel use of savings
and grant access to  Connecting savings  Personalised savings
services as well as accounts to mobile plans based on setting
cash money or digital a goal as target
 Agent services can be wallets amount
supported by digital
technology to ease the
onboarding process or
monitor liquidity so
agents don´t run out of
cash
In Unit 3 we will further dive into different savings products and their key success factors
for financial inclusion.
Digital savings and investment products for mature financial markets
Mature financial markets are characterised by the availability of a variety of savings and
investment products offered by banks and investment companies. A specific area where
digital products have an impact is robo-advisory.
Retail investors who want to start investing can be overwhelmed by the array of investment
instruments and asset classes available and offered by various providers. Typical retail
clients don´t have the time to be constantly monitoring investments and instead want a
way to get passive exposure to the market, based on their risk appetite.
A robo-advisor collects information from retail clients about their financial situation as well
as their future goals. Clients have to answer a survey or a couple of online questions.
Based on the derived individual investment profile, clients get advice on how to structure
their investment portfolio.
The concept gained considerable popularity in the United States, with very successful
providers like Betterment and Wealthfront already having more than USD 10 billion in
assets under management.
Robo advisors are developed with the major goal to digitise and automate services offered
by traditional asset/wealth manager. Most robo advisors offer an easy and user-friendly

client-onboarding process. Their digital solutions are characterised by highly efficient
processes and algorithmic risk management which allows even non-professional
customers to passively invest their money in capital markets.
 Robo Advisor
A robo advisor is defined as an intelligent system that provides asset

allocation recommendations by using software solutions which use algorithms
to analyse large data sets of market data. The software solution can directly
execute trades for the customer such that human interaction can completely
be isolated from the investment process. In developed markets, robo advisors
are considered a severe threat for traditional asset management as they can
operate on a significantly lower cost-level through automated processes and
improved digital customer interaction.
 Further Reading
Accenture: The Rise of Robo-Advice (2015)
African Development Bank: Financial Inclusion in Africa (2013)
CGAP: Why M-Shwari works (2015)
5.5 Borrowing and Capital Raising
This domain is about providing customers with access to funding. Funding can be related
to equity investments and loan products.
Specific areas of borrowing and capital raising are:
- Peer to peer lending and crowdfunding

- Alternative financing
- Credit Scoring
Peer to Peer Lending
Traditionally, a bank is the intermediary between a borrower and a lender. With the rise of
internet peer to peer platforms, borrower and lender can be matched without a bank in

between. A classic peer to peer platform (P2P) does not lend itself and therefore does not
require a banking license.
 Peer-to-peer platform
Peer-to-peer platforms are designed to work as decentralised systems without

the need of intermediation by a third party (e.g. bank). The transaction is
directly executed between the seller and the buyer via the peer-to-peer
service.
Credit Scoring
Credit scoring is based on predictive modelling which quantifies the likelihood

of a client defaulting on a debt obligation or becoming insolvent. By utilising a
client’s historical data (repayment behaviour, income, debt, collaterals, etc.)
and comparing it to peer group data, the predictive model can predict a certain
defined future behaviour, transform it to a standardised numerical value and
apply it to credit cost computation.
The direct match between the borrower and the lender includes several advantages and
disadvantages:42
Advantages of P2P lending platforms Disadvantages of P2P lending

platforms
 New source of funding for borrower  Lender need to manage the default
 New channel and asset class for risk
investors  Lender need to match the amount for
 Banks and their fees can be avoided lending to the specific borrower
 Faster lending process is possible  Lender need to manage the process
 Digital and mobile based solutions of insolvency in case of default
can reach underbanked clients  Lenders are not covered by the any
deposit insurance scheme of the
banking sector
42 Peer-to-Peer Lending Breaks Down Financial Borders

 Further Reading
Federal Reserve Bank: Fintech Lending (2017)
Crowdfunding
Crowdfunding is an online swarm financing model in which multiple investors fund one
project/ borrower. Crowdfunding campaigns are usually launched on specific online web-
based platforms to connect start-ups and strategic as well as financial investors.
Swarm financing itself has different forms:
Crowdfunding Reward System Examples

Model43
 No monetisation of investment
Crowd donating  Little rewards are possible (no binding GivenGain
agreement)
 Profit sharing model Bergfürst
 High risk model Companisto

Crowd investing
 Most complex crowdfunding instrument Seedmatch
 Used by start-ups Bettervest
 Loan agreement model type Kapilendo
Crowdlending  Project owner with repayment obligation iFunded

(debt)  Relatively high interest rates Kickstarter.com
 Used by SMEs Auxmoney
43 The Different Types of Crowdfunding (and which is right for you)

 Supporter get early access to developed
products
Kickstarter.com
Pre-Selling  Validation of products in early-stage
Indiegogo
 Test of pricing strategies
 Used by start-ups
Peer-to-peer systems and financial inclusion

!
P2P platforms can be used to enhance financial inclusion through its superior
geographical reach. People from the remotest areas that have internet access
can be eligible to get/give a loan. Such platforms have the potential to support
economic growth in currently underserved regions by providing small
companies, farmers with loans to back up and advance their operations.
For further information visit:

CFI: The Role of Peer-to-Peer Lending in Financial Inclusion (2014)
 Further Reading
CGAP: Crowdfunding in China (2017)
Initial Coin Offerings
Raising equity can be done via an Initial Public Offering (IPO) on traditional capital
markets. A company offers its shares to investors and becomes listed on the stock
market.
Crypto currencies are offering a similar method by issuing tokens instead of shares.
Initial Coin Offering is a new type of crowdfunding based on the blockchain
technology. ICOs are used as a capital raising method for start-ups by generating an
underlying crypto currency that is issued to investors of a specific project in exchange
for fiat currency or another crypto currency that is used to fund the project.

! Relevance for SME and MSME
Today only companies with a significant size can issue shares via an IPO.
SMEs have basically no access to equity markets because of their size. Yet
SMEs also need finance, including in the form of equity. If ICOs became a
market standard, become regulated and generally accepted by investors, the
market potential could be more than huge: we might finally find a way to finance
the “missing middle”!
The following table compares a traditional IPO and an ICO. The most critical point is
regulation. A traditional IPO has a clear and proven legal framework which gives
comfort to investors as well as issuers. The legal framework for ICOs is just
developing and has until now attracted a lot of fraud. The missing legal framework
makes it difficult for traditional investors to enter the ICO markets. Nevertheless,
opportunities are huge since ICOs can be structured freely.
IPO shares ICO shares
Referred to as: shares Referred to as: tokens / coins
Abide by clear regulations No predefined rules, but ICOs can define

their own
Represent a stock of a corporation Tokens = can represent anything the

creator wants it to represent (i.e. shares of
the company, timeshare of a building,
vehicle, a cat, etc…)
Number of shares issued is decided by the Number of shares issued is decided by the
company creator(s) smart-contract creator(s)
Value depends on dividends/performance Value depends on the performance of the

of the company product
Cannot buy in advance Can purchase in advance
Enforced by law and legal agreements Enforced by the Smart-Contract

Furthermore, the ICO process differs from the IPO process on many levels. ICOs are
relatively simple to launch as the main tasks are developing a whitepaper, setting up a
website and creating the tokens without going through regulatory processes. Companies
going public through an IPO on the other side are mostly publicly known businesses and
not as dependent on marketing activities.
Credit Scoring
As of 2017, 1.7 billion adults have no access to banking-type services of any description.
The lack of access to basic financial services has created major barriers for people to
overcome poverty by making it almost impossible for individuals and businesses to borrow
money.44
A new way of credit scoring for the digital age of finance is where the real opportunity for
financial technology lies. By leveraging new and mobile technologies, fintech companies
can radically shift the economic foundation of impoverished regions by creating
opportunities for the unbanked to obtain the basic services they need to improve their
financial situation. And this includes access to credit.
Traditional banks evaluate creditworthiness via the transaction history and bank account
statements showing the assets and balances. People without such a track record are
excluded from the system. By using substitutes to “traditional data,” fintech companies
have developed new ways of assessing one’s creditworthiness, making it possible to
extend credit to the financially excluded and access an unserved market while contributing
to economic development.
One great example is Tala.
 TALA
Tala is a mobile technology and data science

company that uses smartphone data to assess
clients’ creditworthiness.
Tala’s mobile app aggregates more than 10,000 different data points on a
customer’s device, including financial transactions, savings, network diversity, and
geographic patterns, to build a customised credit score and deliver personalised
44 The Global Findex Database 2017

financial services. So far, the company has delivered more than a million loans,
totalling over USD 50 million.
Tala currently operates in East Africa and Southeast Asia, where it focuses on
improving financial access for underserved individuals. The company is
headquartered in Santa Monica and has offices in Manila, the Philippines, and
Nairobi in Kenya.

https://tala.co/
This is how Tala works:

https://www.youtube.com/watch?v=kSR8G8mfp84&t=1s
5.6 Insurance
The banking sector is not the only one disrupted by new technologies. Insurtechs, focusing
on the insurance markets, provide existing services at lower costs or help insurance
companies to better understand their customers and risks in order to provide personalised
insurance policies.
Financial inclusion through Microinsurance:
The market of microinsurance is growing with an increase in the number of available

products every year. The products offered included life, health, accident, cattle, crop, and
travel insurance. MNOs are increasingly driving MMI development providing the delivery
channel for products.45
 BIMA - Microinsurances
BIMA is an insurtech player using mobile technology to provide

insurance and health services to emerging markets. To serve its
customers, the company has developed a proprietary technology platform,
established exclusive partnerships with leading mobile operators, and built
exceptionally strong relationships with international insurers. BIMA utilises its
45 The Emerging Global Landscape of Mobile Microinsurance

disruptive technology platform to serve customers in 14 countries across Africa,
Latin America and Asia Pacific and has reached 30 million subscribers to date.
Bima customers typically have to live with less than USD 10 per day. Insurance is
a significant tool to prevent families from falling further into poverty. Nevertheless,
insurance penetration in emerging markets is approximately 3%. Microinsurance
products aim at this group of people by offering low-cost, simple insurance
products through mobile technology which has high penetration rates in emerging
countries.
BIMA: brings micro-insurance to underserved families in emerging markets (2017)
This is how BIMA works:

https://www.youtube.com/user/Bimamobile
Insurtechs in developed countries
Insurtech is exploring avenues that large insurance firms have less incentive to exploit,
such as offering ultra-customised policies, social insurance, and using new streams of
data from internet-enabled devices to dynamically price premiums according to observed
behaviour. Traditional insurers gather broad actuarial tables to assign policy seekers to a
risk category.
Insurtechs use inputs from all manners of devices, including GPS tracking of cars to the
activity trackers on our wrists, these companies are building more finely delineated
groupings of risk, allowing products to be priced more competitively.
AI, RPA, and advanced analytics, particularly, are the catalysts that make these more real-
time and personalised insurance models possible.
In Unit 3 further information about the impact of digital finance on insurance will be
provided.
Munich Re Foundation: The landscape of microinsurance in Africa (2016)
CGAP: Landscaping mictoinsurance in Africa and Latin America (2013)

Fintech Domains - Summary
!
 Fintechs offer powerful and innovative solutions for expanding
access and usage of financial services in developing countries
 New digital finance provider are active in various fields of financial
services and not only in payments or savings.
 The payment domain is the largest business field and has significant
impact on financial inclusion since customers are enables to participate in
trade, to save money and to pay over long distances
 Peer to peer platforms for lending and borrowing have widened
product access for both, investors and borrower. Nevertheless, the total
market share of P2P lending compared to traditional bank debt remains very
small until now
 New ways to access creditworthiness via customer data has given
thousand of unbanked people access to their first loan. The trend of using big
data for the analysis of creditworthiness is still at the beginning
 Personal finance management systems help lower income people tot
better manage their finances and encourages them to save and reduce
vulnerability in financial stress situations
 Microinsurance products improve dealing with situations of natural
disasters and serve as backup for many families with no secured income and
savings
Again, read through the chapter “Types of Fintech Domains” and answer the
following questions
1. How and on which areas are Fintechs having an impact on financial inclusion?
2. From a microfinance perspective, what advantages does peer-to-peer lending

have?

6 Regulation and Digital Finance
Cynthia’s sister is not so fortunate that she has a salaried job at a financial institution. She
is a daily labourer without a formal bank account. Most of her money is saved in cash or
invested in assets such as her livestock. Lately she started using a mobile money service
though, which allows her to receive money that her son is sending her once in a while. The
mobile wallet is linked to her SIM card and allows her to store money and make regular
transfers.
She now heard about the opportunity for her as a mobile money customer to get access
to a loan via her phone. This is all done automatically, and the application is assessed
through algorithms. She is sceptical- how can I raise complaints or questions if I have
never spoken to a real person? What if I do not manage to repay back the loan? And what
will happen with my data? Will it be shared with other parties as well?
6.1 Introduction: Why is regulation key?

Banks and non-banks are both developing new, cost-effective and digital ways of serving
unbanked and low-income customers who are often difficult to reach through traditional
distribution channels like bank branches. Digital finance providers use the access of
devices and channels like mobile phones, payment cards, point-of-sale terminals and retail
agents that accept cash from customers.
Many service providers operating in these areas have not previously been engaged in
financial service activities. These non-banks include mobile network operators, which in
some countries can become licensed as e-money issuers or distributors and/or payment
service providers. Digital transactional platforms combine elements of a payments
instrument with the capacity to store value for future use and can offer an affordable
alternative to traditional transactional banking for poor and low-income customers – an
alternative that is generally suitable to their typically small and unpredictable income
stream.
Looking at the service providers, it is not always clear from the beginning if and how their
activities should be regulated. Regulations for financial services differ significantly between
jurisdictions, but many financial service providers operate globally. Nevertheless,
compliance with legal financial regulations is not optional, but mandatory. To understand
the overall concepts, let’s start to understand the need for financial regulation.
Regulation of traditional financial service providers

Financial service providers have an important role in the economy. Banks not only
intermediate between lender and borrower and supply the economy with needed liquid
assets, but they can create money by lending more money than they have received in
deposits (see Chapter 1). This function is very important for the economy in order to grow.
On the other hand, banks will never be able to withdraw all deposits to their owners at one
time. In this case, the financial system would collapse. (see bank run). A financial crisis
has significant impact on the wellbeing of an economy and therefore the maintenance of
trust to the system is key. But there are some more arguments for the need of regulation,
so let’s summarise the goals:
Market confidence Financial stability Consumer protection

Maintain the trust in the Ensure the function of the Instead of every depositor
financial system financial system for the monitoring the solvency of
economy the bank, it is more efficient
to organise central
monitoring
Regulation in Digital Finance

New financial service providers in digital finance are expanding the possibilities for un- and
underserved people. The use of new business models and technologies is also raising
new regulatory issues for policy makers. The role of regulatory bodies is extremely
important for the development of the digital finance ecosystem since they have to provide
the following tasks:
 Ensuring responsible services for customers

 Enable services at affordable costs
 Ensuring the development of a sustainable digital finance ecosystem
In more and more countries, digital finance providers run applications that enables
customers to transfer funds, to store value via digital transaction platforms through mobile
phones or any other low-cost communication infrastructure. Retail agents transform cash
into electronically stored value and back into cash. Also, governments are levering on
digital services and provide a number of services and payments via platforms that often
lead to significant reductions of cost and more safety in the process.
Compared to traditional bank regulation, digital finance introduces new market participants
and allocates roles and risks differently. An appropriately regulated and supervised digital
finance ecosystem can dramatically reduce delivery costs and enable a significant

proportion of the population of a country to better participate in its economic activities. Key
areas for regulators can be defined as follows:
1. Agent banking
2. Consumer protection
3. Anti-money laundering (AML)
4. Countering financing of terrorism (CFT)
5. E-money regulation
Further developed digital finance markets provide relevant lessons about "emerging
regulatory enablers" such as competition, interoperability, agent exclusivity, deposit
insurance coverage of digital stored-value products, interest payment on e-money
accounts, and others. Many of these issues fall within multiple regulators’ competencies,
requiring effective communication and collaboration among them.
 Example for challenge in regulation - Agent banking
 Agents as primary interface between service provider and customers is

leading to new consumer protection challenges:
 Customer data confidentiality
 Fraud risk
 Theft
 Abusive treatment by agents
 Inadequacy of recourse roles and arrangements
 Key questions are how and by whom agents should be supervised and
what are the measures and criteria for supervision.
 Further Reading
UNCDF: Policy for digital finance

6.2 Stakeholder in Financial Regulation
The impact of the regulator on financial services, markets and intermediaries is significant.
By giving specific guidance on products, operational models, monitoring requirements and
also risk management, the regulator is actively shaping business models and markets.
Regulations and advice is provided by so called standard setting bodies (SSB´s).
 Standard Setting Body
A standard setting body (also standards developing organisation (SDO), or

standards setting organisation (SSO)) is an organisation whose primary activities
are developing, coordinating, promulgating, revising, amending, reissuing,
interpreting, or otherwise producing standards for financial regulation. The
intention is to develop standards for financial regulation that can help local
authorities to find alignment with international standards.
Most standards are voluntary in the sense that they are offered for adoption
without being mandated in law. Some standards become mandatory when they
are adopted by regulators as legal requirements in particular domains.
The most relevant SSB´s for financial inclusion are:
SSB Description
Financial Stability Board (FSB)  The FSB is a global committee with no
legal character that evaluates and gives
recommendations on topics regarding
worldwide financial stability
 Includes all G20 major economies, FSF
members (Financial Stability Forum and
the European Commission)
 Major goal is identification and reduction of
global systemic risks
 Tasks include e.g. coordination of work
between financial authorities and SSBs,
cooperation with the International
Monetary Fund (IMF) regarding
implementation of early-warning systems

and monitoring of market developments
with impact on regulation
Basel Committee on Banking  Established at the end of 1974 to enhance
Supervision (BCBS) financial stability by optimising global
banking supervision
 BCBS serves as a forum for constant
cooperation among its members regarding
exchange of information, improvement of
supervision techniques and
recommendation of minimum supervisory
standards.
 Published three agreements on minimum
capital requirements (Basel I, II, III)
Financial Action Task Force (FATF)  FATF created in 1989 and assigned with
making recommendation regarding
improvement of anti-money laundering
regulation standards
 Frequent evaluation of member’s policies
and procedures
 37 members including the European
Commission, Gulf Cooperation Council
There are other standards setting bodies relevant for guaranteeing global financial stability
which we will focus more detailed in the elective – Compliance and Regulation (Unit 7):
 International Association of Deposit Insurers (IADI)
 International Association of Insurance Supervisors (IAIS)
 International Organization of Securities Commissions (IOSCO)
 Committee on Payments and Market Infrastructures (CPMI)
An exemplary SSB is the Financial Action Task Force (FATF) that is assigned with making
recommendations for improvement of anti-money laundering (AML) regulation standards.
The organisation supports the implementation of legal, regulatory, operational measures
and defines global norms on “customer due diligence” or CDD requirements.
New business models trying to reach financially excluded households can be evaluated
based on these requirements.

 Further Reading:
Global Standard-Setting Bodies and Financial Inclusion: The Evolving Landscape (2016)
6.3 Who is being regulated

According to the relationship between parties holding contractual relationships with
customers, providers of financial services can be divided into the following categories:
Full-service bank  Offers accounts for payments, transfers

and value storage via mobile device or
payment card
 Accepts deposits and provides loan and
other services to customers
Example: KCB Bank Kenya
Limited-service niche bank  Any form of banking institution located
separately from the bank’s main location
Services offered can be restricted to
specific products (deposits, transfers,
microcredits, etc.)
Mobile-network operator (MNO)  Mobile phone-based money transfer
system (SMS transfers)
 Accounts are stored on cell phones
 Deposit and withdrawal of money works
through network of agents
Example: MPESA, Tola
A non-bank, non-MNO e-money issuer  Payment instrument containing monetary
value paid in advance by e-money user to
the issuer
 Issuance in different forms (e.g. prepaid
card, network-based accessible via
mobile device)
Example: PayPal
The models require three basic components, such as a digital transactional platform, a
network of agents/users and a mobile device to access the platform. Using these models,

various financial services (payments, transfers, credits, savings, insurance, etc.) can be
offered to excluded and underserved customers.
6.4 Example: Branchless Banking in Brazil

In many countries, especially in Latin America, financial institutions have been leveraging
banking agents to reach mostly lower income clients in rural areas. Within those areas,
traditional branches operate on a cost-covering level since transaction numbers and
volume are too low. Banking agents that are integrated in the retail infrastructure can
implement financial services in their business model and offer low-income people in such
areas first time access to banking products.
Branchless Banking in Brazil

Brazil is one of the most developed markets when it comes to the use of electronic
channels (branchless banking) for conducting retail transactions. The banking agent
network delivering banking services on behalf of fully licenced institutions has increased
to approximately 118,000 throughout the country. The question remaining is whether and
how this infrastructure is subjected to regulation.
Institutions licensed by the Central Bank of Brazil (CBB) are allowed to offer various
financial services (deposit solutions, withdrawals, transfers) through legal entities
functioning as agents. Those entities must be registered online.
The CMN resolution 2.640/1999 determined the range of services banking agents could
deliver:
1. Receiving and forwarding account (savings and demand) opening applications
2. Payments and deposits in savings, investments, and demand accounts
3. Third-party payments (bill payments)
4. Payments and deposits for the bank itself
5. Receiving and forwarding loan applications
6. Analysis of credit and background information
7. Collection services
8. Control and data processing related to the transactions conducted through the
agent
CMN 2.953/2002 clarifies that the provider (bank) is always responsible for complying with
all applicable regulatory requirements. The ongoing success of the agent model in Brazil
led to further innovations and broadening of services (e.g. credit card applications) offered
by the agents to improve provision of banking services.

Branchless Banking and Customer Experience
!
From a customer experience the branchless banking model provides a
significant improvement in convenience when it comes to provision of
financial services. In its most basic form, this model only requires a device,
an internet connection and banking transactions can be done within minutes
at the closest kiosk in the area.
From the perspective of banks, it is much more cost-effective to use existing
retail infrastructures in which basic services can be integrated. Branchless
banking provides an efficient platform to address restrictions of traditional
banking networks by reaching low-income and unbanked customer
segments.

CGAP: Branchless banking in Brazil (2010)
6.5 Risks in Digital Finance

Banks and nonbanks are exposed to various types of risks. Especially in digital finance
where for example operations or client transactions can be outsourced to agents create
inherent risks that need to be managed. To achieve a sustainable development of the
ecosystem for digital finance provider proper regulation and risk management procedures
are imperative. Some risks like financial risks are well understood and managed. However
DFS involve technology risks or reputational risks as well that can be as damaging to the
business model. The below table provides you with an overview of risks in Digital Finance.
In the elective Unit 7 we will provide further insights how these risks can be better
understood and well managed.

Figure 14: Risk categories if digital finance46
6.6 Regulatory Sandboxes

In the computer industry, software testing cannot simply be done on a system without
securing it from potential modifications. Therefore, in the computer science segment,
closed testing environment, so-called sandboxes, were designed for safely conduction
software testing. An antivirus software, for example, puts restrictions on what any
programme can do. When malicious activities are detected, the applications are stopped
and the user is informed about potential threats.
 Regulatory Sandbox
The concept has also been applied to the digital finance area: testing
environments for new business models that are currently not subject to any
kind of regulation. A regulatory sandbox is an initiative designed to facilitate
organised test stages for various financial products and services within a well-
defined space and duration in a real market environment where restrictive
regulatory requirements can be ignored while still following adequate
consumer protection rules. Regulatory sandboxes are usually open for
incumbent financial institutions and start-up companies.
46 Digital Financial Services and Risk Management, IFC/ World Bank, 2016

Purposes of regulatory sandboxes can be the following:
1. Minimisation of legal uncertainty

2. Investment access improvement
3. Getting used to a test-and-learn approach
4. Establishing new rules for innovative product and business models
5. Support of partnerships between start-ups and legacy

BBVA: What is a regulatory sandbox?
 Further Reading
FCA: Regulatory sandbox
 DFS Regulation - UK
In the UK, there is no specific regulatory framework for digital finance technology
solutions. Fintech companies are subject to regulatory requirements if they carry
out certain regulated activities.
The FCA (Financial Conduct Authority), the financial regulatory body in the United
Kingdom, initiated “Project Innovate” in October 2014. The project consists of
three major elements:
1. The “innovation hub” supports financial innovative start-ups with teaching

measures regarding the existing regulatory framework and how it is
individually applied. Furthermore, the FCA helps with the authorisation
process.
2. The “advice unit” provides businesses with innovative approaches (e.g.
automated models) for regulatory feedback
3. A “regulatory sandbox” provides an environment for businesses to test
their business models in live-scenarios without immediate incurrence of
all regulatory consequences regarding their activity.

Since its launch in 2016, the sandbox has helped 60 companies in the UK to test
their products with real customers in a live market under supervised conditions.
90% of the businesses progressed towards a wider market launch, according to
the FCA.

FCA: Regulatory sandbox
6.7 RegTech
Since the financial crisis in 2008 regulatory requirements costs have been constantly
rising. Employee structures shifted towards higher concentration in risk management,
regulatory reporting or compliance departments leading to higher personnel costs. Besides
MIFID II and IFRS, 9 banks are occupied with several other regulatory instructions (e.g.
BCBS 239, AnaCredit) that are having high impact on business operations as
implementation requires significant resources.47
A possible solution for banks can be RegTechs. RegTech tools can analyse online
transactions in real-time in order to detect issues or irregularities in the digital payments
segment. Outliers are reported to the financial institution running the software to evaluate
if a fraudulent activity is taking place. Institutions are able to minimise risks and costs
related to lost funds and data breaches at a relatively early stage.
 RegTech
RegTechs are a group of companies that leverage technology to help

businesses comply with regulation more efficiently and less expensively by
standardising regulatory processes. Those companies work in collaboration
with financial institutions and regulatory bodies. Information sharing is
undertaken by using cloud-computing solutions. For example, huge amounts
of data sets can be run through cloud-based predictive analysis tools to
identify potential risk areas a bank should focuss on in order to comply to
regulation.

PwC: RegTech for financial services
47 Regulatory productivity: Is there an answer to the rising cost of compliance?

 deltaconX
deltaconX regulatory platform is an innovative software solution catering

for European Financial & Energy Market participants, enabling customers
to meet various regulatory requirements such as the European Market
Infrastructure Regulation.
Through full automation and dynamic error handling,
reporting processes are massively simplified, minimising
manual work and human errors.
By removing the need to delegate deltaconX allows users to gain full
control over all reporting processes across:
• Corporate groups
• Source systems
• Asset classes
• Transaction types
• Reporting channels
For more information visit:

http://www.deltaconx.com/
A more detailed analysis of the RegTech market development, including the different areas
of RegTech software solutions, will be provided in Unit 7 that will solely focus on regulation
and compliance within the scope of digital finance.

Regulation - Summary
!
 Regulation is a core element to achieve higher financial inclusion and
to ensure a sustainable development of the digital finance ecosystem
 Regulation of financial markets leads to higher market confidence,
financial stability and consumer protection
 Regulatory bodies must provide to following tasks  1) Ensuring
responsible services for customers 2) enabling services at affordable
costs 3) Ensuring the development of a sustainable digital finance
ecosystem
 Providing financial services is linked to several risks ermerging from
internal and external sources (e.g. underlying technology, agent
networks, business, fraud, etc.)
 Due to high exclusion from financial services new infrastructures have
emerged (e.g. agent banking) which must be subject to regulation 
legal frameworks need to find an equilibrium between safety and
customer experience/inclusion in order to support the postitive impacts of
digital finance services
 Regulatory sandboxes have been developed as regulatory playgrounds
to test and gain experience with new business models and technologies.
Again, read through the FCA article about regulatory sandboxes in the UK and
answer the following questions
1. What impact does a regulatory sandbox have on digital finance services? Is the
model a positive factor for innovation speed and/or security
2. How can stakeholder of DFS regulation influence and improve regulative
frameworks and customer protection?

7 Exercises Solutions
Now we have learned that Digital Finance is not changing the concepts of finance
and value exchange, but the delivery methods and technologies being used. Let´s
reflect and take a look at traditional finance provider and new digital finance
provider:
1. What are their main competitive advantages?

2. What are the main challenges of traditional and digital service provider?
Solutions
Traditional banks Digital Finance Provider
Competitive advantages Competitive advantage:

 Owner of customer relationships  Use of new technologies
 Access to large funding sources  Strong innovation culture
 Staff / man power  Digital IT infrastructure
 Scale
Challenges:
 Lack of innovation culture
 Lack of digital technology Challenges:
implementation  Missing access to customer
 Lack of proper IT infrastructure database
 Lack of funding
 Lack of scale
The overall picture shows the contrast between traditional banks and fintechs. Their
challenges and advantages or opposite to each other so they would actually be perfect
partners.

Have a look at study “Leapfrogging- a Survey of the Nature and Economic

Implications of Mobile Money” and answer the following questions:
How does mobile money impact the economy from a micro perspective? Please
name at least for outcomes (page 26-30)
Solutions
The study refers to six outcomes how mobile money can have an impact on households
and businesses:
1. Mobile payments (and the use of the mobile phone) can significantly
reduce transaction costs, such as transportation cost, coordination cost,
search and information costs.
2. Mobile payments can help lower information asymmetry and

improve transparency, as financial transaction will be recorded. This will
impact access to credit for the underbanked and protect their money
against fraud and theft.
3. Having a safe place to store the money via mobile money account
can incentivize poor people to save money and change the nature of
saving.
4. Mobile money technology could allow poor people to be better

protected against risk, as they can manage their money more flexibly.
What’s more, access to information will increase the availability of micro-
insurance solutions.
5. Mobile money could impact family dynamics - more privacy of the household
spending could influence budget allocation in a household.

6. The ease of making and receiving payments can positively influence investment
decisions in a business or household.
1. Why is a widespread agent network crucial for the proliferation of mobile

money?
2. Why do mobile money providers need to achieve significant scale to become
profitable?
3. Which business model (MNO, bank or third party led) is best suited to provide
DFS?
Solutions:
1. Agents act as the face of the service provider: they help registering new clients,
handle complaints, and most importantly, act as a cash-in, cash-out points. As most
economic transactions (such as retail payment) are still handled in cash, people need
to convert their e-money in cash and vice versa when they do remote transactions.
A widespread network is important, as clients need to have convenient access to an
agent at their proximity.
2. Scale is crucial because the provision of mobile money requires large fixed
investments, e.g for setting up the agent network, implementing the IT backbone or for
personnel. Also, to promote a service and raise sufficient awareness in the mass
market, providers need to spend significant amount of money on marketing and sales
efforts.
3. There is no best suited business model- all have their pros and cons. It also
depends on the country context and underlying market dynamics. E.g. Who are the
dominant players in the market/ what is their market share?; Does the provider allow
non-banks to enter the market?
There is an increasing recognition for partnerships and specialisation &
interconnection. Different types of providers are coming together to leverage their core
competencies and bring more value to the customer.

1. What are opportunities with big data?

2. What is meant with an access-usage gap?
3. Why is it hard to achieve interoperability?
4. What are open APIs and why are they helpful in a DFS partnership?
Solutions:
1. Big Data holds a huge promise for financial inclusion: for customers it can help gain
access to formal financial services for the first time as it becomes less risky for
providers to extend credit to previously thin file customers. It is estimated that around
325- 580 million people could gain access to formal credit for the first time by 2020, as
smartphone penetration and internet use is rapidly accelerating.
For financial service providers, the new wealth of data can help them deepen existing
relationships, acquire new customers and better manage risk.
2. Products are made increasingly available to low-income customers, and consumers

are taking up or registering for such products, especially mobile money solutions.
However, a large share of consumers do not actually use the products. Only 33%
of all registered mobile money accounts are active on a 90-day basis, meaning that the
vast majority lie dormant. When they are used, most transactions (66%) are made for
airtime top-ups (adding credit to mobile phone for voice, SMS or data
services). Reasons for this low usage are poorly designed products, bad customer
service and overall a poor user experience.
3. Beyond technical requirements, interoperability can only reach its full potential if
providers are incentivized to pass payments to each other. What’s more, market
dynamics play an important role: If there is one dominant player with a significant
market share, such as Safaricom in Kenya, chances are low that they open their
systems voluntarily. This often requires regulators and policy makers to put policies in
place to incentive providers to move to interoperability.
4. APIs are a set of requirements (like a communication protocol) that makes it easier
for developers to create software or interact with an external system. An open API
is publicly available for all external developers and makes it easier for developers to
access backend data that can then be used to enhance their own applications. In the
financial services context, open APIs can stimulate innovation and create more value
for the customer.

Again, read through the chapter “Types of Fintech Domains” and answer the
following questions
1. How and in which areas are Fintechs having an impact on financial inclusion?
2. From a microfinance perspective, what advantages does peer-to-peer lending
have?
Solutions:
1.
 Money transfers and payments

 Personal finance management
 Savings and investment
 Borrowing and capital raising
 Insurance
2. With the rise of internet peer to peer platforms, borrower and lender can be matched
without a bank in between. A classic peer to peer platform (P2P) does not lend itself
and therefore does not require a banking license.
 New source of funding for borrower

 New channel and asset class for investors
 Banks and their fees can be avoided
 Faster lending process is possible
Digital and mobile based solutions can reach underbanked clients
Again, read through the FCA article about regulatory sandboxes in the UK and
answer the following questions

1. What impact does a regulatory sandbox have on digital finance services? Is the
model a positive factor for innovation speed and/or security?
2. How can SSBs of DFS regulation influence and improve regulative frameworks
and customer protection?
Solutions:
1. A regulatory sandbox is an initiative designed to facilitate organised test stages for

various financial products and services within a well-defined space and duration in a
real market environment where restrictive regulatory requirements can be ignored while
still following adequate consumer protection rules. Regulatory sandboxes are usually
open for incumbent financial institutions and start-up companies. Purposes are:
Minimisation of legal uncertainty

2. Investment access improvement
3. Getting used to a test-and-learn approach
4. Establishing new rules for innovative product and business models
5. Support of partnerships between start-ups and legacy
2. A standard setting body (also standards developing organisation (SDO), or standards

setting organisation (SSO)) is an organisation whose primary activities are developing,
coordinating, promulgating, revising, amending, reissuing, interpreting, or otherwise
producing standards for financial regulation. The intention is to develop standards for
financial regulation that can help local authorities to find alignment with international
standards.


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Digital Ecosystem

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CERTIFIED EXPERT IN

Unit 1: The Digital Finance

1.1 Introduction .......................................................................... 5

1.2 Banking is necessary. Banks are not .................................. 6

1.3 Impact of new technologies and digital finance: Differences in

2 Digital Finance for Financial Inclusion ............................... 22

2.1 Current situation and opportunity ...................................... 22

2.3 Key Terminology ............................................................... 28

2.4.1 Quantifying the impact ....................................................... 32

3 The Digital Ecosystem ....................................................... 35

3.1 Regulatory framework ....................................................... 36

3.4 Providers ........................................................................... 42

3.5 Digital Financial Services .................................................. 50

3.6 Customers ......................................................................... 51

3.7 Support services ................................................................ 53

4 Key trends ......................................................................... 56

4.1 Big Data, Big Potential ...................................................... 56

© 2018 Frankfurt School of Finance & Management 1

4.4 Partnerships & open APIs ................................................. 67

5 Types of Fintech, Domains and products .......................... 72

5.1 Introduction ........................................................................ 72

5.2 Money Transfers and Payments........................................ 73

5.4 Savings and Investment .................................................... 77

5.6 Insurance ........................................................................... 86

6 Regulation and Digital Finance.......................................... 89

6.1 Introduction: Why is regulation key?.................................. 89

6.2 Stakeholder in Financial Regulation .................................. 92

6.3 Who is being regulated ...................................................... 94

6.4 Example: Branchless Banking in Brazil ............................. 95

6.7 RegTech ............................................................................ 99

7 Exercises Solutions ......................................................... 102

© 2018 Frankfurt School of Finance & Management 2

API Application Programming Interface

ATM Automated Teller Machine

B2P Business to Person

CBA Commercial Bank of Africa

DFS Digital Financial Services

FSP Financial Service Provider

G2P Government to person (payments)

IFC International Finance Corporation

KYC Know Your Customer

MNO Mobile Network Operator

MVNO Mobile Virtual Network Operator

OTC Over the counter

POS Point of Sales

P2P Person to Person

SMEs Small and Medium Enterprises

Telco Telecommunication Company

© 2018 Frankfurt School of Finance & Management 3

Welcome to the first Unit of the Certified Expert in Digital Finance!

Learning outcomes of this module will be:

 Overview of development of finance and technology

Key Skills to be learned

© 2018 Frankfurt School of Finance & Management 4

© 2018 Frankfurt School of Finance & Management 5

KPMG: The future of banking

1.2.1 The early stages of finance

1 Banking is necessary, banks are not

© 2018 Frankfurt School of Finance & Management 6

 Three functions of money

Measure for value

© 2018 Frankfurt School of Finance & Management 7

 Basic concept of banking and finance