Just a few years ago, South Africans paid a hefty price to keep their money safe, shelling out between $2 to $5 as monthly account maintenance fees and 50 cents in transaction fees – equivalent to 1.5% of the average person’s monthly income. With the country’s big five banks controlling 95% of the market, there was nowhere else to go.
Then, in 2017, the Reserve Bank updated its licensing rules, opening the doors to digital banks and handing TymeBank the first new banking licence in twenty years. By 2019, TymeBank had arrived on the market with zero-fee accounts, transactions priced 30-50% below incumbents, and a convenient supermarket-kiosk onboarding model.
In just two years, over 4 million customers, nearly half from low-income and rural communities, flocked to TymeBank, forcing incumbent banks to slash fees and innovate by increasing their digital offerings. South Africa clearly shows how greater competition can advance financial inclusion—offering a model of what’s possible, and echoing lessons emerging around the world.
Healthy competition broadens access and deepens financial inclusion
Bringing formal financial services to 1.4 billion adults and millions of microenterprises will not happen without healthy competition among financial service providers. A growing body of global evidence shows that more competitive financial markets tend to deliver better outcomes for all. Competition can expand access, lower costs, spur innovation, and improve the range and quality of financial products—particularly for underserved and excluded populations.
For instance, in Bolivia and Brazil, increased competition made it easier for consumers to switch between financial providers, helping reduce spreads and driving down loan interest rates. In Colombia, more competitive banking markets have been linked to expanded credit access for micro and small enterprises (MSEs) through tailored offerings and greater availability of working capital. Similarly, in Ghana, districts with a higher density of bank branches showed higher rates of financial inclusion as people had more service points and more providers to choose from, boosting access and trust.
By contrast, in Mexico, evidence from loan-level data for 2005-2016 shows that dominant national banks with greater market power charged micro and small firms interest rates roughly 11% above the market average, illustrating how weak competition can raise the cost of credit for the smallest businesses and reinforce exclusion.
Beyond traditional banks, fintechs have further amplified these gains through innovations such as digital onboarding, alternative-data underwriting, and embedded finance, which make products more relevant and affordable. For example, in South Africa, neobanks like Capitec and Bank Zero have reduced fees and expanded access for first-time users, prompting incumbents to lower prices and accelerate their digital transformation. In India and Brazil, opening up payment infrastructure like UPI or Pix has also lowered barriers to entry and enabled broader competition, expanding access through more diverse providers. Likewise, Open Finance regimes like India’s Account Aggregator (AA) framework have created a consent-based channel for sharing customer financial data, enabling non‐bank lenders and fintechs to roll out innovative, competitively priced credit and savings products. In other markets, fintechs have partnered with traditional players or reached new segments, particularly where mobile and internet access are improving.
Of course, more is not always better. Competition can introduce new risks like weakening credit standards, poor market conduct, consumer harm, and regulatory gaps, but research shows it does not inherently threaten financial stability. With strong regulatory oversight, more competitive markets can reinforce the safety and soundness of financial systems and protect consumers. Yet, despite these benefits, financial markets in many countries remain highly concentrated, limiting the progress in account ownership from translating into broader financial inclusion.
Persistent market concentration holds back inclusive finance and economic growth
Banking is characterized by high capital requirements, risk sensitivity, information asymmetry, reliance on large-scale infrastructure, and strict oversight, so it’s not unusual for a handful of institutions to dominate the market. For example, in Nigeria, just five banks control more than 75% of banking assets, and in Mexico, the top five banks hold around 70%.
Historically, this concentration was long accepted as a trade-off for stability, first entrenched by state-owned banks in many emerging markets and developing economies (EMDEs) and then reinforced by a wave of consolidation in the 1990s among global players. The Great Recession of 2008 further drove regulators to tighten capital and liquidity requirements, and risk-management rules to restore trust – measures that, while strengthening stability, also raised barriers to entry and inadvertently favored large incumbents, further deepening banking concentration.
Even so, concentrated financial markets are detrimental to broader economic growth. When a few banks dominate lending markets, smaller relationship-based lenders such as credit unions and cooperatives that rely on soft information are crowded out. This makes productive credit harder to access, especially for MSEs, the very backbone of economic growth. In Brazil, for example, municipalities exposed to large bank mergers saw average loan-rate spreads jump by about 5.9 percentage points and new lending drop by 17%. A broader body of evidence points the same way: across a 53-country sample, firms operating in less-competitive banking markets were markedly more likely to be credit-constrained, underscoring how weak competition can throttle access to finance. This persistent concentration puts the spotlight on financial authorities.
Financial authorities have a key role in fostering competitive markets
The key question is not whether to promote competition, but how to do so responsibly. Financial sector authorities play a powerful role in shaping how financial markets evolve – often in ways not intended. Decisions about who can enter the market, how data is shared, or how infrastructure is governed all influence market outcomes. Equally, what, when, and how regulators decide to regulate (or choose not to), are also key determinants of how the market evolves.
However, regulatory decisions in the financial sector often involve balancing multiple and sometimes competing objectives. For instance, authorities may want to encourage new, innovative entrants to advance inclusion, but they must also prioritize safeguarding financial stability, protecting consumers, and maintaining public trust. Loosening entry requirements too quickly can strain supervisory capacity or introduce excessive risks. These considerations often relegate competition to a secondary or implicit concern. Yet, these priorities can align. Healthy competition can enhance systemic resilience, improve service quality, and unlock more meaningful, responsible inclusion. By focusing on competition, financial sector authorities can advance their primary policy objectives and complement the broader competition efforts often driven by specialized competition authorities that work across sectors.
Yet currently, competition issues in the financial sector receive adequate attention only after anti-competitive behaviour has crystallized, through ex-post enforcement. Although many of the conditions that lead to abuse of dominance or exclusion are shaped much earlier, through regulatory choices. Bringing competition considerations to the forefront of their regulatory work, financial sector authorities can shape more open, dynamic, and inclusive markets from the outset through the rules they set, the infrastructure they govern, and the providers they license. With these considerations in mind, what does the future hold?
Looking ahead: promoting competition responsibly for greater inclusion
The next frontier of financial inclusion demands fostering open, competitive financial ecosystems where diverse providers deliver tangible benefits – from faster payments, more affordable credit, to customized financial products that meet customers’ specific needs.
At CGAP, we view healthy competition as one of the cornerstones of inclusive, resilient, and responsible financial systems. Our forthcoming work will map the pathways through which competition drives financial inclusion and examine how policy choices can either support or undermine that dynamic, shedding light on the critical trade-offs for policymakers.
