An Introduction to Digital Financial Services (DFS)

Abstract

Digital Financial Services (DFS) is a relatively new, low-cost means of digital access to transactional financial services. Often termed ‘mobile money’ or ‘mobile financial services,’ DFS is one of the core solutions used in developing countries to catalyze financial inclusion and provide much-needed low-cost access to financial services. Aimed at those at the Bottom of the Pyramid (BOP) in developing countries, it shifts provision of financial services it uses digital access devices such as mobile phones and digital value transfer channels. It also features the emergence of agent networks for cash-handling and DFS account signups. DFS can be offered banks and non-banks – known as Digital Financial Service Providers (DFSPs) - who may be licensed or authorized by a range of regulators to provide these services, either on their own or in mandated partnerships. Core DFS regulators include the central bank, the financial intelligence unit and the national telecommunications authority. ‘Enabling and proportional’ regulatory regimes allow DFSPs to collect customer funds through agents operating on their behalf, convert those funds into electronic money (e-money) to be stored in customer stored value accounts (SVAs) that are used for primarily transactional purposes. While DFS has demonstrated novel responses and innovations from regulators and lawmakers to facilitate and supervise new market participants, often the regulatory innovations have been incremental or perfunctory, featuring some interesting carve-outs that often represent the local political economy, for example requiring formation of specific financial entity vehicles to provide DFS. Initial, foundational services include remittance and bill payments, but with limited interoperability between competing providers. There are signs however of a more integrated approach, where DFSPs integrate into a national payment system and the broader economy, while central banks themselves are building interoperable switches to catalyze this integration. Governments are increasing digital liquidity in DFS and hence driving DFS use by placing social payments into DFS SVAs. New forms of vendor platforms also facilitate these improvements. While some 690 million people in 91 countries actively use their DFS accounts, handicapping a more rapid evolution and adoption of DFS are strict anti-money laundering (AML) rules; poor identity document regimes in many countries that stifle account signups; and poor mobile coverage and lack of high speed mobile data coverage in rural areas that forces DFS customers there to use insecure and error prone text-based DFS user interfaces on their phones. All these factors appears to be the cause of a drop in account usage in some countries in favor of a dependency on agent-derived over-the-counter transactions. There is also a downstream effect on competition and the commercial viability of some DFSPs. This brief primer on DFS expands on these issues and demonstrates how technological, regulatory and commercial components interact to form the DFS ecosystem.