> Posted by Elisabeth Rhyne, Managing Director, CFI
I don’t know how they will do it. Bank regulators, that is. How will they cope with the challenges coming their way throughout this decade of rapid financial sector change?
In the good old days, if there were such days, bank regulators operated inside their comfort zones in a world with known risks. A standard set of skills and knowledge saw them through. If I may indulge in stereotype (without being entirely unfair), the profile a bank supervisor needed was: good with numbers, cautious, a stickler for details, dedicated, often courageous, and having a strong sense of right and wrong. These are all wonderful qualities, and for prudential supervision of banks, there was a good fit between the task and this personal profile. Just as important, the bodies of knowledge regulators and supervisors needed was well understood.
Not today. The post-financial crisis world deeply challenges the comfort zone for banking authorities. In specific, I want to focus here on how financial inclusion challenges it. Changes associated with financial inclusion require banking authorities to move beyond their zones and develop a broader range of skills and qualities in at least three ways.
1. Adapting to continual technology change. Regulators around the globe are struggling today to create regulations that will bring the wonders of mobile money into their countries. But mobile money is only the technology du jour. Just as regulators get mobile money squared away, new technologies and business models are bound to appear and render regulations on the previous model outdated. I suspect, for example, that the spread of smartphones will upend SMS-based mobile money models, forcing regulators to shift focus from telecoms operators to cyber-security. Each new technology brings different players, new business models, and its own set of stresses on regulatory boundaries. While there are many with deep technical expertise among bank regulators, the pace of change is daunting, especially for organizations that must work within or seek to change legislative and regulatory constraints.
2. New mandates for consumer protection, especially at the base of the pyramid. Bank regulation is built around a time-honored and economic-theory-backed justification that includes financial system stability, and in many cases depositor protection, but not what we know as consumer protection (transparency, product suitability, fair treatment, recourse). Regulators now need to view consumer protection supervision as an equal and necessary compliment to prudential supervision. But legislative mandates for consumer protection are new and still incomplete, organizational structures are often missing or overlapping, and the body of knowledge that supports consumer protection regulation is still quite young. Prudential supervision is still seen as the “hard science” by numbers-driven supervisors, while consumer protection may be viewed as nice but not really essential. Very few countries currently have consumer protection regimes that are mature and successful enough to serve as models.
3. Perhaps most importantly, financial inclusion is bringing an enormous influx of new customers and providers. Regulators must come to understand these new customers and connect with these new providers. The customers differ significantly from the middle-class consumers who have been banking customers for decades. They are economically vulnerable, with relatively low levels of education, and they may be far more comfortable operating in the informal sector. These customers’ first use of formal financial services often occurs with providers outside the traditional commercial banking sector. In Latin America, for example, store credit is a rapidly growing segment of the consumer credit market, especially for lower income clients. Regulators may lack the tools to monitor and influence this market if their mandate is limited to formally regulated institutions. At a recent CGAP/IDB/ASBA-sponsored gathering of Latin American supervisors on consumer credit, regulators expressed frustration over their lack of tools even for gathering information on non-bank providers. And regulators would generally prefer to focus on a manageable number of larger institutions than a proliferation of small providers.
This changing scene calls for regulators – and regulatory agencies – that can be flexible, creative, and open-minded, in addition to retaining all their old virtues. It calls for new skills to be brought into regulatory agencies (such as how to collect and interpret demand-side information) and new bodies of knowledge to be mastered, from new business models to technologies to client protection. It may require a change of mindset from a preoccupation with squeezing risk out of a system to a recognition that the task is to manage a continually shifting set of risks.
It will take significant investment, by both national and global entities, to equip regulatory authorities for these challenges. Investment is needed in both overall institution-building and in training for regulatory and supervisory personnel. Existing efforts, such as the Alliance for Financial Inclusion, the alliance between CGAP and the Toronto Centre, and others, offer high-quality support. Given the pace and magnitude of change that regulators must come to terms with, these efforts need to be stepped up dramatically.
Have you read?
Our Woman in Milan: Observations on the Intersection of Mobile Money and Regulation
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April 4, 2013 at 11:32 am
John Gitau
Beth,
To contribute to your challenging post, I will take refuge in Murphy’s famous law that say ” the more things change, the more they remain the same”. I am sure you mean well and strongly believe that fast changes we all desire can visit banks and their regulators. I have a different perspective. Banks and their regulators will change when they shall want and nobody can do anything about that.
I see banks from six parameters that characterize them: 1. Financial services 2. Customers 3. Law. 4. Tools. 5. Systems. 6. Profits. In a statement, ” banks are financial institutions that offer financial products to customers in a legal way using systems and tools with an objective of making profits for their owners”.
Out of the 6 areas, your post posits that they need to change their systems and tools to serve new set of customers.
My take is as follows:
1. Banks are not interested in the financial inclusion we are talking up to them. Listen to their studious silence in this debate. Which bank CEOs contribute thoughts or ideas in our space? Their associations leadership don’t openly and generously participate in our debate. They just tell us where they were, what they concluded and where they would meet next. It is up to us to read their recommendations with no room to ask questions. At times we wish they could say more. Are we sure that one day the banks will not ask us hard questions such as ” who told you we wanted your poor junk as our customers? Who are you to define customers to us? Do you think we are incapable of getting customers we want and when we want them? Get lost!” Come to think of it, who are we in the financial inclusion working for? Why are we pushing the poor down the banks’ throat while the same poor are trying to wriggle themselves from our grip shouting ” leave us alone with our savings, shylocks and ROSCA?”
2. Banks listen to nobody else except their regulators who are their advocates anyway and that is why consumer protection is the poors’ redemption song falling on deaf ears. Look at the annual billions that banks make in profits even in depressed economies. Do such figures talk of consumers’ welfare? They see advocates of consumer protection as skeletons in the feast. Don’t forget regulators are bankers to governments. So, who do regulators report to? Aren’t they a power unto themselves? Nobody wants to relinquish financial power monopoly. The poor being brought to the banks means more scrutiny and a mess to the party. The few banks adhering to consumer protection are just throwing bones to be chewed on as they enjoy the meat. We should not be misled into believing their sincerity.
3. Beth, you say the truth. that ” the new customers are economically vulnerable with relatively low level of education and they may be more comfortable operating in the informal sector”. Knowing that, why are we pushing them to banks while they are comfortable wherever they are? They haven’t told us they want to change. We in the financial inclusion field are not poor and if the poor have not asked us to get them formal financial services, is our effort based on altruism or self interest?. Do we sincerely believe deep in ourselves that banks are the best custodians of the poor? Are we so satisfied with banking services that we feel patriotic to recommend the poor to such great services or do we want to get more numbers so that we feel more solace since there is consolation in numbers? Aren’t we embarrassing ourselves between haughty and un-interested banks and “the-unwilling- to- go- to- the- slaughterhouse- poor? Has the governments sent us to do some work for them of recruiting the poor into the formal financial services?
4. I am laughing at the humour of regulators saying they lack the tools to study the poor potential customers. Which tools? Is it that they don’t have money to acquire tools or they don’t know how to get professionals to craft the tools they want? Has any of them visited MicroSave the global supermarket for financial sector tools? What a lame excuse. Can we buy that?
5. Regulators, even from their own action and lethargy have demonstrated their desire to serve the clients they understand- “the manageable number of larger institutions than a proliferation of small providers”. Who are we to tell them otherwise if they already have made up their minds?
Because banks or their regulators have not asked us to recruit customers for them, and the poor have shown their unwillingness to go formal, whose agenda are we in the financial inclusion pushing? If we are advocates of the poor, we should be busy helping them improve their informal financial operations and help them come up as a second tier financial sector.
Indeed, if I were bank, I will not care about the fragmented poor small account holders who are not only hard work to acquire but a nightmare to manage. Why should I if I am making good profits from my deliberately selected customers- the employed and business owners who give me all the money I need in ledger fees, commissions and loans? I would arrogantly say ” Helping the poor? my foot, that is the work of the government. Mine is to make profits and pay taxes and if the government is unable to allocate the money well to the poor, I should not be blamed or be forced to take clients I don’t desire. And by the way, these people I hear every morning by the roadside shouting about financial inclusion, who are they? Tell them to take their customers elsewhere, I am not interested. Who are they to tell me what I should or shouldn’t do around technology and innovation? And with that, I will go to the boardroom and announce the financial results of the year with pomp!