The next paradigm shift for financial markets in the development world

Last year I had the opportunity to interview an executive at one of Malawi’s biggest banks. The topic of discussion was innovation and what can be done to better enable it in Malawi’s payments sector. He pointed to the recently promulgated payments legislation, and particularly the mandated requirement for interoperability of payments between all payments providers, as a major step forward for the industry: “We should not be competing on the basis of infrastructure but rather on value to the client.”  

In simple terms, until recently, the majority of mobile money markets limited consumer choices through closed loop systems. These closed loop systems either led to virtual monopolies due to network effects (like EcoCash, M-Pesa or MTN in some markets) or created friction for consumers who needed to use multiple sim cards (or other workarounds) when they needed to transfer money to people on a different network. The result was providers running parallel payments networks through their own agents, offering consumers and small businesses less convenience and value from the service.  

Acknowledging the limitations of such an approach, there has in recent years been a concerted effort, globally, to promote, and often mandate, interoperability. This has borne fruit: the interoperability of payments between mobile money providers and between mobile money providers and banks has increased dramatically. The GSMA recently reported a fourfold increase in the value of transactions between mobile money platforms and banks over the past five years, bringing major improvements for consumers.  

The move to interoperability has required a paradigm shift for mobile money providers that invested significant costs into building their infrastructure and networks in a way that initially protected themselves against competition. Many MNOs now recognise that they want to compete on the value they offer in the market and that no longer seeing the size of their own distribution footprint as the competitive advantage will grow the overall market for all market players as more consumers shift from cash to digital payments.  

This same mind shift will be needed in what we see as the next frontier for interoperability in the financial services market – personal consumer data.  

Just as providers’ closed loop systems constituted a major barrier to entry and competition in digital payments and served as a barrier to the growth in use of payments, so competitive barriers are now preventing the sharing and use of data to create more and better-suited products to meet clients’ needs. This is why the comment from the Malawian banker is so important. Without effective governance of data practices, we run the risk of not learning from our mobile money mistakes quickly enough, meaning that businesses compete on the basis of data infrastructure rather than on value to the client. 

There is good reason for market players to want to uphold these barriers. Data infrastructure can provide a competitive advantage for its owners. The more data you have, the greater your ability to use that data to identify and serve consumers, thereby increasing the likelihood that they use your services, which in turn further increases and improves the data that you hold.  

But, as more data is captured for proprietary use by FSPs, this will only grow barriers to entry, competition and innovation at the market level. Ultimately, what emerges is a barrier to overall market development and value. This phenomenon becomes more complex with more and more providers operating across borders, fuelled by the rapid digitalisation of economies globally that is further accelerated by Covid-19 restrictions on physical movement.  

The antidote, which is gaining traction in jurisdictions like the UK and EU, is open data sharing models.  

Following the logic above – and taking a leaf from the mobile money interoperability experience – the case for open data should be compelling. So, what do market players like the Malawian banker think of the role of data and the potential for open data sharing models in the local industry? Without a hint of irony, his response was that “our data is our competitive advantage.” 

I suspect that this view is still widely held across the continent and abroad. While we seem to have agreed that financial service providers should compete on the quality of their products and service rather than who has that largest payment infrastructure footprint, we have evidently not reached the same agreement with regards to data. 

The continued use of data as a competitive advantage is neither good for consumers nor for the development of healthy, robust economies. Therefore, it is critical that developing economies start convening key stakeholders around what appropriate and responsible data governance should look like. This discussion needs to consider how to ensure that consumers’ data is effectively protected and that they aren’t subject to discriminatory bias on the basis of their data, but it must also look beyond data protection to the topic of shared data infrastructure. 

Given the importance of data, how country or regional policymakers set the rules for control and use of data will greatly affect how financial markets develop. This asks big questions of policymakers and regulators around how to embed considerations around data governance and open data within the existing regulatory system to allow financial institutions to innovate locally, while leveraging the increasingly regional and global data infrastructure.  

Countries that move quickly will act as magnets for innovators that are drawn to the opportunities presented by the clarity offered in the governance of data and the opportunities presented from greater access to consumer data. Those countries that delay are likely to be left behind.  

Some policymakers have already started convening industry around what appropriate and effective data governance should look like. The European Commission, for example, published guidance on sharing private sector data in the European data economy in 2018. But engaging the local industry may not be enough. Given the cross-border nature of financial institutions, and the subsequent flows of data associated with them, it is likely that this conversation will need to take place at a regional and indeed global level.  

Through dialogue, we might just get closer to the answers that we need to make sure that we leverage data and technology for the right purposes. 

This is but one of the topics that we’re considering as part of our broader stock-take on trends in and implications of digitalisation for the financial sector and beyond. With support from GIZ, we will soon be embarking on a series of digital meet-ups to explore further frontier topics in the nexus between digital governance, financial services and the sustainable development goals. We’ll continue to share the big questions as they arise.