Regulating New Banking Models that Can Bring Financial Services to All

Authors: Claire Alexandre, Ignacio Mas, Daniel Radcliffe

Abstract: Technology, and in particular the spread of real-time communications networks, permits banks to delegate ‘last mile’ cash management and customer servicing functions to third-party retail outlets. By making basic deposit, withdrawal, and payment functions available securely through retail shops that exist in every village and neighborhood, there is an opportunity to dramatically increase the physical footprint of banks and to transform the basic economics of low-balance savings. Banking regulations need to be adapted to these new possibilities of banking beyond bank branches. We highlight five areas where sharpened regulatory analysis would help strike a better balance between maximizing the opportunities of these models and containing risks: (i) branching regulations which distinguish between pure transactional outlets and full service bank branches; (ii) regulations which permit banks to engage third-party retail outlets with minimal financial risks for both banks and their customers; (iii) consumer protection regulations that help customers understand and act upon their rights in a more complex service delivery chain, without burdening banks with unnecessary provisions; (iv) tiered know-your-customer (KYC) regulations that permit immediate account opening with minimum barriers for poor people, with a progressive tightening of KYC as their usage of financial services grows; and (v) creating regulatory space for a class of non-bank e-money issuers authorized to raise deposits and process payments, but not to intermediate funds.

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