Digital Banks: How Can They Be Regulated To Deepen Financial Inclusion?

A new wave of digital banks that adopt new technologies to offer banking products and services is emerging globally.
With their innovative application of technology, advanced analytical capabilities, and lower operational costs, digital banks have the potential to offer more affordable services to underserved customers, which would align with the needs and wants of this segment.

CGAP has identified the following three regulatory approaches to digital banks globally that could accommodate new business models with the potential of a positive impact on financial inclusion.

i. A few countries have created a special licensing category for digital banks in addition to their existing traditional banking category.

ii. A few countries preferred to follow a phased authorization approach for digital banks (or for all banks), where new players should or can go through a restricted phase before becoming fully licensed banks.

iii. However, the majority of jurisdictions have not created a separate license category for digital banks and do not offer them to go through a phased approach to licensing

This deck primarily targets policymakers in emerging markets and developing economies (EMDE), who are interested in making the best use of the potential of digital banks to bring welcome competition and innovation to the banking sector and advance financial inclusion and want to learn about other countries’ experience in doing so. It describes details of the three identified regulatory approaches with the objective of helping policymakers make better-informed choices for what could be the preferred approach for their country.