Financial Inclusion and Disruptive Innovation: Regulatory Implications

In this research, CGAP explores the latest wave of disruptive financial services innovations to better understand the regulatory changes that allow emerging markets and developing economies (EMDEs) to harness their financial inclusion potential while containing consumer and financial sector risk. These innovations are segmented into three dimensions:

1. Business model innovations such as digital banking, fintech activities, and platform-based finance.
2. Product and service innovations, including digital credit, crowdfunding, crypto assets, and central bank digital currencies (CBDCs).
3. Innovative technologies that underpin these models and products, such as distributed ledger technology (DLT), artificial intelligence (AI), application programming interfaces (APIs), cloud computing, and biometrics.

Choices on how to regulate and supervise these innovations have important implications for financial inclusion. CGAP’s initial research found three cross-cutting themes to be most relevant: defining the financial sector regulatory perimeter, managing relationships between different types of authorities, and balancing different policy objectives. This paper provides a synthesis of disruptive innovations in digital financial services and their regulatory implications for financial inclusion. Further, it recommends using these themes to frame a basic stocktaking exercise to identify areas for regulatory action.

The paper’s intent is to encourage regulators to consider a more holistic approach in response to disruptive innovation, as opposed to one focused on individual innovations. Moreover, this working paper lays the foundation for ongoing CGAP work on recommendations for regulators on how to best harness innovation for inclusive finance.