Just a few years ago, there were strict rules about who was allowed to provide which services in what countries, with national governments controlling the products and services offered in their jurisdictions. Things have changed. Take the financial sector. Typically, a global player would either have to work via a correspondent institution domiciled locally or set up a local subsidiary to be able to offer services locally.  

Enter digitalisation.  Now we see financial service platforms owned and operated in advanced economies being downloaded in emerging markets via app stores, providing access to a range of financial services the individual did not previously have – both good ones (e.g. health insurance, cross-border payments), bad ones (high-cost credit, gambling) and ones we aren’t yet sure about (e.g. crypto).  

In many cases, these are accessed and used outside of the local legal framework and purview of supervisors – thereby, in effect, creating gaps in governance. As governments struggle to deal with these gaps, market actors are de-facto taking on a governance role, resulting in the phenomenon we at Cenfri are terming the privatisation of governance.  

Let’s unpack what we mean by this. 

Governance: a very short introduction by Mark Bevir notes “Governance comprises of the processes of governing – whether undertaken by the government of a state, by a market, or by a network – over a social system and whether through the laws, norms, power or language of an organised society.” This already gives an important clue that governance, even though we traditionally associate it with governments, can also be private. 

When thinking about governance through the traditional lens, it comprises policy, legislation, regulation, supervision, corporate governance and public or democratic opinion: 

• Policy is a deliberate system of principles to guide decisions and achieve rational outcomes 
• Legislation is law which has been promulgated by a legislature or other governing body
• Regulation is a rule or directive made and maintained by an authority 
• Supervision is the monitoring of rules or directives
• Corporate governance is the framework of rules, relationships systems, and processes within and by which authority is exercised and controlled in corporations 
• Public opinion is the collective opinion of the people of a society on a specific topic or voting intention, as for example expressed via the press, that serves as a check and balance and, hence, an implicit form of governance 

But these pillars no longer hold as neatly in the cross-border/stateless and to some extent immaterial or invisible “digital world”. Whereas governments exercise power over physical territories in the “real world”, in a world where people live online, the power – and ability to set the tone on important governance topics – shifts to big tech.  

Take the recent public debate between Tim Cook and Mark Zuckerberg on the merits of governance of data privacy and protection in the face of innovation. They have an incentive to have this debate as the public can vote with their feet in terms of whose goods and services they buy. But where do regulators fit in? How do they work with these tech giants to govern the control and use of data, especially when they are not domiciled in their jurisdiction?  

Or take the example of digital lending apps in Kenya, India and Nigeria that are accessed via the Google Play marketplace. Google announced a crackdown on these apps in 2020. This year they have taken it a step further, updating their policies regarding personal loan apps in India to require the disclosure of key information and ensure compliance with local laws and regulation. Are these emerging initiatives for alignment between regulators of digital financial services and digital platforms a new way of governing in the digital world, or do they reflect a bigger shift away from governments to industry?  

Apart from questions on who is governing, ethical questions are also arising about how governance is exercised. In many cases, governance decisions within the tech world are de facto being outsourced to algorithms. They are far superior to humans in their ability to process information and are not prone to making mistakes like humans are. However, algorithms can only approximate human judgment and may reach outcomes that are not socially acceptable. They can also not be held accountable like humans can. For example, in a recent report from CFI Accion on Artificial Intelligence they highlight the example of AppleCard, a partnership between Goldman Sachs and Apple, which ended up coming under investigation because of complaints that husbands were receiving 10 to 20 times the credit limit of their wives. Are these misfires part of the innovation process or do they reflect a bigger concern around where decision-making sits and what role regulators have in providing oversight over it?  

Such questions will be the starting point for a series of digital dialogues that we will be convening with GIZ and On-Think Tanks to think about the nexus between digital governance, digital financial services and the sustainable development goals.  

Through convenings on topics like AI in the financial sector, fintech innovation and cybersecurity risks, and illicit financial flows and digital currencies, our aim is to help locate the role of regulators of digital financial services within the broader digital governance debate. We look forward to sharing the emerging insights as the conversations unfold!