That is why regulators play such an important role in addressing innovation. Since innovation is key to advancements in financial inclusion, CGAP has been exploring the intersection between regulation, innovation, and financial inclusion through research focused on what makes some regulators better equipped to deal with innovation than others.
Our team of former regulators and regulatory experts have reviewed thousands of pages of regulations, policy notes, and research reports, interviewed over 200 policymakers, start-up founders, and financial industry professionals, and traveled to countries all around the globe to ask three simple questions with not-so-simple answers:
- What kind of regulatory responses to innovation are typically associated with better financial inclusion outcomes?
- What are the key enablers and barriers to implementing these responses successfully?
- Are there common guiding principles for countries to follow in the adoption and implementation of these responses?
What did we find?
Among other things, that law matters as much as technology, if not more. It defines the regulatory mandate and perimeter, provides necessary regulatory tools, and creates certainty for innovators to experiment and thrive. It also provides a reference point that helps regulators anchor their response to innovation in existing rules that frame the regulatory risk assessment and risk mitigation.
We also found that the practices that help regulators deal with innovation have to do with good leadership and change management as much as they do with a deep understanding of cutting-edge technology. In fact, the most important of these practices is a cornerstone of any good leadership – a clearly articulated and communicated vision.
The theme of clear vision came up so often in our preliminary findings that we started thinking about the concept of vision-driven regulation. A clearly articulated and widely understood vision of the future state in the financial sector would enable regulators to adopt vision-driven regulation that:
- Is anchored in a deep understanding of the relevant context and the role financial services play in society and its development;
- Focuses on end-goals, desired outcomes, milestones, and indicators that help measure progress and course correct if necessary;
- Prioritizes areas and initiatives that help achieve the vision in the most efficient and effective manner;
- Does not get distracted by technology from a careful assessment of underlying risks and opportunities presented by innovation and its application in the design and delivery of financial services; and
- Relies on agile processes where decision-making power and resources are distributed according to the needs of the operational teams. This means a less siloed and often less centralized internal organization with both vertical and horizontal collaboration among teams based on their specialization.
Such vision-driven regulation is often championed by a key decision-maker at the top who sets the tone and signals that innovation matters for the whole organization and its mandate, helping to bring everyone on board. The tone at the top is also frequently reinforced through the establishment of dedicated units (e.g., fintech office or regulatory sandbox) where pro-innovation culture gets incubated and gradually spreads out throughout the organization.
Vision-driven regulation must also be informed by diverse perspectives to avoid biases and blind spots. Innovation often promises to enable a new ecosystem or change the prevalent paradigm. Thus, it is very important to ensure such new ecosystems or paradigms are more inclusive and equitable than the old ones. And that can only be done if diverse voices are represented in the process. For instance, by reflecting means of access available to women when designing a central bank digital currency (CBDC) such as limited access to smartphones or shared phones – a prevalent practice in some markets. Or by bringing diverse perspectives when proposing new policies – for instance when an open finance design is informed by gender-disaggregated analysis of digital data trails.
These observations from the global landscape build on the rich body of work by CGAP and others, including our recent paper “Financial Inclusion and Disruptive Innovation: Regulatory Implications”. They prove that innovation is changing regulators and regulatory architecture forever – often in ways that are profound, but less visible and understood. With the ongoing project, we want to shed light on these changes and better equip regulators to harness innovation for financial inclusion.
