Enabling Digital SME Financing...Financial technology (“fintech”) companies fall under the...

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Enabling Digital SME Financing A Self-Assessment Toolkit for Regulators

SAIS International Development Practicum

2019 - 2020

Saksham Khosla

Sarah Sassoon

Rohan Srinivas

Sophie Jiayuan Wang

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TABLE OF CONTENTS

TABLE OF CONTENTS 2

LEGAL DISCLAIMER 3

ACKNOWLEDGMENTS 4

GLOSSARY & DEFINITIONS 5

INTRODUCTION 8

GUIDANCE NOTE AND TOOLKIT APPROACH 10

OUTCOMES 11

PILLARS 12

PILLAR ONE: PERMITTED DIGITAL FINANCE ACTIVITIES 12

PILLAR TWO: DIGITAL INFRASTRUCTURE 17

PILLAR THREE: LEGAL FRAMEWORK FOR DIGITAL SME FINANCE 23

PILLAR FOUR: ACCESS AND USAGE OF DIVERSIFIED SOURCES OF DIGITAL FINANCE 26

PILLAR FIVE: DATA PROTECTION AND PRIVACY 29

PILLAR SIX: EVIDENCE BASE FOR POLICYMAKING 33

PILLAR SEVEN: DECISION AND KNOWLEDGE NETWORKS 36

PILLAR EIGHT: NON-FINANCIAL SUPPORT 40

CONCLUSION 43

APPENDICES 44

REFERENCES 46

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LEGAL DISCLAIMER This work is a product of external contributions, with support from staff of the World Bank Group. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because the World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for non-commercial purposes if full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, the World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: [email protected].

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ACKNOWLEDGMENTS This framework was produced for the SME Finance Forum and the IFC/World Bank Group as part of the International Development Practicum at the Johns Hopkins University School of Advanced International Studies (SAIS). It was prepared under the supervision of Matthew Gamser (CEO, SME Finance Forum, IFC) and Ghada Teima (Lead Financial Sector Specialist, IFC-World Bank Group). The authors would also like to thank Matthew Saal (Digital Financial Services Specialist, IFC), Harish Natarajan (Lead Financial Sector Specialist, World Bank), and Luis Maldonado García Pertierra (Digital Financial Sector Specialist, IFC) for their generous feedback. The analysis that follows would not have been possible without the time, experience, and knowledge shared by 30+ small and medium enterprises, fintech entrepreneurs, fintech associations, microfinance organizations, fintech investors, government officials, and policy experts. The authors would also like to thank SAIS professors Cinnamon Dornsife (Senior Advisor, International Development Program) and Tanvi Nagpal (Director, International Development Program) for their continued advice and support. Vikas Raj, Managing Director at Accion Venture Lab, also provided early feedback.

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GLOSSARY & DEFINITIONS Acronyms: Anti-Money Laundering (AML) Artificial Intelligence (AI) Application Programming Interface (API) Bangko Sentral ng Pilipinas (BSP) Bank Indonesia (BI) Bank for International Settlements (BIS) Combating the Financing of Terrorism (CFT) Consultative Group to Assist the Poor (CGAP) Digital Financial Services (DFS) Electronic Know Your Customer (E-KYC) Equity Crowdfunding (ECF) Financial Service Provider (FSP) General Data Protection Regulation (GDPR) of the European Union (EU) Global Partnership for Financial Inclusion (GPFI) Group of Twenty (G20) Information and Communication Technologies (ICT) Information Security Management System (ISMS) International Financial Institutions (IFIs) International Organization for Standardization (ISO) Know Your Customer (KYC) Micro, Small, and Medium Enterprises (MSMEs) Mobile Network Operator (MNO) Non-Bank Financial Institution (NBFI) National Financial Inclusion Strategy (NFIS) Non-Financial Support (NFS) Development Finance Institutions (DFI) Organisation for Economic Co-Operation and Development (OECD) Otoritas Jasa Keuangan (OJK) Payment Service Provider (PSP) Peer-to-Peer Lending (P2P) Point of Sale System (POS) Quick Response (QR) Self-Regulating Organization (SRO) Small and Medium Enterprises (SMEs) Socioeconomic Status (SES) Southeast Asia (SEA) Sub-Saharan Africa (SSA)

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Definitions: Alternative Finance: Financial products and services that are both non-digital and digital and are offered outside of the traditional banking system.1 BIS Innovation Hub: Formed under the BIS in June 2019, the BIS Innovation Hub is a network for central banks to collaborate on new advancements in financial technology and to develop public goods that will enhance the global financial system.2 Current hub centers are located in Hong Kong SAR, Switzerland, and Singapore. Digital Finance: The advent through which international financial institutions (IFIs) can increase the reach and breadth of financial services to people worldwide who currently have limited or no access. This encompasses all disruptive technologies and new entrants (mobile network operators (MNOs), payment service providers (PSPs), merchant aggregators, retailers, fintech companies, neo-banks, and super platforms) that seek to reduce the cost of providing financial services.3 Financial Technology (“Fintech”): Though there are various definitions of fintech, the Bali Fintech Agenda presents one that is widely used and accepted: “the advances in technology that have the potential to transform the provision of financial services spurring the development of new business models, applications, processes, and products.”4 Fintech Segment: The category under which a given fintech company falls, based on its product offerings. For example, “insurance” is a different segment than “credit scoring.” Innovation Hub: A space where disparate players in the financial, technological, and entrepreneurial ecosystem––from startup founders to financial services regulators––can convene to incubate new ideas, experiment with new technologies, and stay generally abreast of new technological advances.5 ISO/IEC 27001 Specification: Provides internationally standardized requirements for an information security management system (ISMS). These enable organizations to manage the security of financial information, employee details, personal data, etc.6

1 World Bank and the Cambridge Centre for Alternative Finance (CCAF), Regulating Alternative Finance: Results from a Global Regulator Survey, (Washington, D.C.: World Bank Group, 2019), 13. 2 “BIS Innovation Hub,” Bank for International Settlements, accessed March 8, 2020, https://www.bis.org/topic/fintech/hub.htm. 3 “Digital Finance,” International Finance Corporation (IFC), accessed April 23, 2020, https://www.ifc.org/wps/wcm/connect/Industry_EXT_Content/IFC_External_Corporate_Site/Financial+Institutions/Priorities/Digital+Finance/. 4 International Monetary Fund (IMF), IMF Policy Paper: The Bali Fintech Agenda, (Washington, D.C.: World Bank Group, 2018), 7. 5 “Swift Hub,” Swift Hub, accessed March 29, 2020, http://swiftgatehub.com. 6 “ISO/IEC 27001 Information Security Management,” International Organization for Standardization (ISO), accessed March 8, 2020, https://www.iso.org/isoiec-27001-information-security.html.

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Micro Enterprise: Per the IFC, a micro enterprise has fewer than 10 employees.7 National Payment Gateway: A national payment gateway is an integrated electronic payment system usually developed by the central bank which enables transactions between accounts offered by multiple issuers. Small or Medium Enterprise: Per the IFC, a small or medium enterprise has 11-250 employees.8 Regulatory Practices: For the purposes of this document, we will use this term to refer to the broad spectrum of regulatory design, with absence of regulation entirely on one end, and strict laws on the other. We will use this “flexible” term with the consideration that every country’s ideal regulatory practice is unique. Regulatory Sandbox: A controlled environment in which financial technology companies can operate in an experimental capacity without a formal license under the jurisdiction of financial regulators.9 Regulatory Technology (“RegTech”): Technologically-powered solutions which cater to regulatory and compliance needs in a low-cost, efficient manner. Supervisory Technology (“SupTech”): Technology-powered solutions which cater specifically to supervisory agencies’ needs in a low-cost, efficient manner.10 Secured Transactions Regimes: According to the IFC, “secured transactions” refers to credit transactions where a creditor holds an interest in a debtor’s movable property (“collateral”) to secure a loan or a debt obligation.11 Unbanked: Individuals who do not have access to financial services.12

7 “MSME Finance Gap,” SME Finance Forum, accessed March 8, 2020, https://www.smefinanceforum.org/data-sites/msme-finance-gap. 8 SME Finance Forum, “SME Finance Gap.” 9 Ana Maria Aviles, et. al., Advancing Digital Financial Inclusion in ASEAN: Policy and Regulatory Enablers (English) (Washington, D.C.: World Bank Group, 2019), 26. 10 Dirk Broeders and Jermy Prenio, FSI Insights on policy implementation No 9: Innovative technology in financial supervision (suptech) –– the experience of early users, (Basel, Switzerland: Bank for International Settlements, 2018), 1. 11 IFC, “Secured Transactions and Collateral Registries,” accessed April 5, 2019, https://www.ifc.org/wps/wcm/connect/e16a0996-a0fe-4230-b830-227d8f422497/Secured+Transactions+and+Collateral+Registries+Brochure-English.pdf?MOD=AJPERES&CVID=jpV-5TX. 12 “Who are the Unbanked?” World Bank Group, last modified April 19, 2012, https://www.worldbank.org/en/news/infographic/2012/04/19/who-are-the-unbanked.

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Financial Literacy Strategy: An action plan to enhance financial literacy, financial capability and individual financial well-being.13

INTRODUCTION The Problem for SME Finance Small and Medium Enterprise (SME) activity comprises up to 40% of GDP in emerging markets and is critical for supply chain development, job creation, and provision of goods and services.14 However, today there exists an SME credit gap of at least 5 trillion USD worldwide––and this accounts only for those SMEs operating in the formal sector (a vast majority of SMEs continue to operate on an informal basis, largely due to high barriers to entry to the financial services sector).15 This prominent lack of access to credit impedes SME growth, which, considering their contribution to national economies worldwide, transitively hinders global economic development. Digital is Part of the Solution Over the past decade, digital finance has become the advent through which international financial institutions (IFIs) can increase the reach and breadth of financial services to people worldwide who currently have limited or no access. Digital finance encompasses all disruptive technologies and new entrants (MNOs, PSPs, merchant aggregators, retailers, neo-banks, and super platforms) that seek to reduce the cost of providing financial services.16 Financial technology (“fintech”) companies fall under the umbrella of digital finance and have begun to provide a source of alternative financing to a host of formerly underserved beneficiaries. Beyond just “banking” individual consumers, fintech companies have created alternative digital lending channels for SMEs, encouraging their formalization, growth, and scale. Furthermore, they have additionally provided the tools with which SMEs can effectively become more bankable, credit-worthy, and easy to serve. Thus, the advent of a suite of digital financial products––from direct lending to insurance to credit assessment––continues to enable SMEs to meet their impact potential, allowing them to create more jobs, contribute positively to GDP growth, and spur socio-economic mobility.17

13 Bureau, Consumer Financial Protection, and White House Domestic Policy Council. "Financial Literacy and Education Commission Members." 14 “Small and Medium Enterprises (SMES) Finance,” World Bank Group, accessed March 8, 2020, https://www.worldbank.org/en/topic/smefinance 15 SME Finance Forum, “SME Finance Gap.” 16 IFC, “Digital Finance.” 17 The authors of this paper acknowledge that a large portion of fintech beneficiaries are, in fact, individual consumers. However, as this toolkit is aimed specifically at buttressing regulatory practices that surround digital financing products for SMEs in particular, individual consumers will be mentioned only insofar as they apply directly to SME digital financing.

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Regulation: The Missing Piece Given the quickly-evolving nature of digital financial services today, financial regulators face the dual mandate of encouraging fintech innovation while ensuring consumer, SME, and investor protections. In the age of digital financing, regulators can assume the role of “partners in innovation” by actively shaping new paradigms of licensing, digital infrastructure, and data governance and protection. While organizations such as the G20, GPFI, CGAP and OECD have put forth high-level principles around digital financial inclusion agendas, financial regulators still lack a repository of universal best practices to reference when crafting regulatory practices around digital financing for SMEs. Thus, this toolkit will aim to provide guidance around the key themes which regulators ought to consider. Toolkit’s Main Goals Following an extensive analysis of the digital finance for SMEs ecosystem, this toolkit aims to provide a high-level overview of eight relevant themes (or, “pillars,” as they are referred to below) that financial regulators worldwide should consider when deciding which regulatory practices best suit their country context. For purposes of maximum usability, it contains a purposefully narrow scope––as stated above, it focuses only on digital financial products and uses SMEs as its unit of analysis. Further, the authors of this toolkit acknowledge that there exist elements of the digital finance ecosystem that fall outside of the scope of this project; following desk- and field-based research, the authors have concluded that the following list of themes and indicators is most salient to the widest array of countries.18 Additionally, the authors of this toolkit acknowledge that this self-assessment, upon initial completion by a country's financial regulator(s), may be viable for external consultancy, engagement, advising, or otherwise. Overall, this toolkit’s goals are twofold:

• First, it aims to provide in-country financial regulators with a comprehensive snapshot of their current strengths and weaknesses around regulating digital finance for SMEs.

• Second, it will hopefully prompt financial regulators to, upon completion of the self-assessment, envision next steps and provide a notion of where they should focus their efforts going forward. Ultimately, each country will design relevant regulatory practices in the context of its existing banking and securities laws and infrastructure; however, this tool will aim to serve as high-level guidance around which practices may be universally enabling, and which may be inhibiting.

18 The authors of this toolkit traveled to Indonesia and the Philippines to ground-truth the applicability of this toolkit in two economies at different stages of development in their digital finance ecosystem.

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GUIDANCE NOTE AND TOOLKIT APPROACH

A) Target Audience: This self-assessment toolkit is meant for use by in-country financial regulators as they design national policies and laws around digital financing for SMEs. In this toolkit, we define regulators as the collective of all public-sector bodies engaged in strategic planning, legislation, supervision, and oversight of the digital finance ecosystem. The scope of our assessment is therefore not limited to the mandate of the Central Bank, the financial services authority, or any single government entity in isolation. The user of this tool is expected to mobilize knowledge of all aspects of financial regulation, technology regulation, and SME development policy in its respective country to provide informed inputs.

B) Structure: The toolkit is broken down into three layers: pillars, assessment goals (with

foundational questions where relevant), and assessment criteria.

● Layer One––Pillars: As stated above, the authors have identified the following eight pillars as high-level, critical considerations for sound regulation and oversight of digital financing for SMEs. The first three pillars are Permitted Digital Finance Activities, Digital Infrastructure, and Legal Framework for Digital Finance. These pillars include the measures which regulators are taking to enable and advance SMEs’ access to digital finance, as well as legal frameworks under which SMEs and their investors must operate.

Underlying any robust digital finance market is strong digital infrastructure and data analytics capabilities. Thus, pillars four and five are Access and Usage of Diversified Sources of Digital Lending and Data Protection and Privacy. Beyond reducing barriers to entry for fintechs to innovate and providing a level playing field for lenders and borrowers alike, a robust digital finance market is characterized by a proliferation of business models and products and their uptake across the full spectrum of SMEs. At the same time, given the crucial role of alternative data in extended credit to previously unbanked enterprises, it is important that customers have protections regarding the ownership, processing, and sharing of their data while being shielded from privacy infringements and fraud.

Pillars six, seven, and eight––Evidence Base for Policymaking, Decision and Knowledge Networks and Non-Financial Support––are concerned with capacity-building and aim to ensure SMEs’ access to resources, financial and non-financial alike. As discussed throughout this report, digital financing goes beyond provision of credit––thus, these pillars aim to assess levels of collaboration among relevant ecosystem actors, and further, the extent to which these collaborations inform policymakers.

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● Layer Two––Assessment Goals: Underneath each pillar is a set of “assessment goals;” these are key sub-divisions of each pillar that aim to measure the extent to which a country meets the pillar’s main components.

● Layer Three––Assessment Criteria: Underneath each assessment goal is a list of

assessment criteria that are presented in the form of questions. Using the accompanying Excel spreadsheet template, regulators should fill the questions out to the best of their abilities; these questions are both binary (yes/no) and qualitative in nature. Upon use of the tool, regulators will notice the inclusion of “Foundational Questions” under some of the Assessment Goals. These are high-level assessment criteria that, though they fall outside of the toolkit’s narrow scope, are meant to indicate the necessary infrastructure upon which digital financing for SMEs must be built.

C) Directions for Use: Regulators are only expected to provide answers to questions that

apply to their specific country context. For questions that are not applicable, please enter “N/A.”

OUTCOMES Scoring Methodology: In the accompanying Excel spreadsheet template, each criterion receives an “outcome” categorization of “Latent,” “Nascent,” “Emerging,” or “Advanced”––each answer is assigned a corresponding outcome based on field- and desk-based research (see “Methods” spreadsheets in the accompanying tool). Criterion score values are as follows: Latent = 1, Nascent = 2, Emerging = 3, Advanced = 4. Scores at the pillar level are calculated by taking the average of the assessment goal scores (which are, themselves, averages of their corresponding assessment criteria); pillar score values are as follows: Latent = 1, Nascent = 2, Emerging = 3, Advanced = 4 (rounded to the nearest integer). Interpreting Scores: The score obtained within each pillar represents the extent to which a country’s regulatory environment is currently enabling digital financing for SMEs. However, as this toolkit is meant to be country-agnostic, pillar-level scores ought to be considered within a specific country’s context (e.g., if a country which purposefully does not regulate alternative financing receives a “Latent” or “Nascent” score for Pillar 1––Permitted Digital Finance Activities––but “Advanced” scores for other pillars, context ought to be considered). The toolkit is primarily meant to identify regulatory pain points within a given country and to provide a set of next steps for regulators to consider when moving forward with policy design.

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PILLARS

PILLAR ONE: PERMITTED DIGITAL FINANCE ACTIVITIES

Pillar Assessment Goals Foundational Questions

Criteria

Permitted Digital Finance Activities

No. 1 Ensure that financial services registration and licensing processes enable alternative sources of financing to develop and scale.

3 10

No. 2 Ensure that the public sector is encouraging innovation around financial technology.

0 4

No. 3 Ensure that regulation permits development of agent network capabilities.

1 5

Why it matters: In order to foster growth around digital lending to SMEs, in-country financial regulators must maintain a balance between the adoption of risk-based initiatives and the protection of consumers, individuals, businesses, and investors alike.19 Definition of Outcomes

• A latent country either does not meet or just meets the foundational questions outlined below. At most, this country will regulate and oversee alternative financing activity in some capacity (e.g., through a formal law, amendments to existing traditional financial regulation, purposeful absence of regulation, etc.) and will additionally require that businesses register themselves with local or state government to operate. This country will also regulate financial services agent networks in some capacity. However, at present, this country will not be enabling digital finance providers to serve even individual consumers, let alone SMEs.

• A nascent country will have taken preliminary steps to regulate and oversee alternative financing activity in some capacity. However, at present, a nascent country will not have set up space (i.e., a regulatory sandbox or looser regulations for startup fintech companies) for new alternative finance providers to experiment and innovate. Thus, SMEs in this country will not be well-primed to receive sources of digital finance, as the

19 Aviles, Advancing DFI in ASEAN, 21.

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digital finance landscape in this country overall is still in the early stages of development.20

● An emerging country will have efforts to regulate digital finance either already in place or well underway. This country will not only ensure that there is regulatory flexibility for alternative finance companies to operate, but to thrive––regulatory sandboxes (albeit, not necessarily nuanced or complex ones) will offer these companies room to experiment and grow with the support of the regulators. Additionally, these countries will have begun to consider SMEs as a key part of their financial inclusion agenda, and thus will offer SMEs and fintechs alike access to resources (e.g., SME associations, fintech associations, innovation hubs and shared learning). In sum, they will prioritize finding solutions for SME financing gaps, and will have relatively complex mechanisms by which to do so in place.

● An advanced country will exhibit “best practices” in this pillar. Either via an enabling fintech law or purposeful absence of regulation around alternative finance (i.e., a laissez-faire approach), this country will have made strides in allowing SMEs to access diversified sources of digital finance. It will not only offer SMEs and fintechs alike access to resources (e.g., SME associations, fintech associations, innovation hubs and shared learning), but will further track market performance in this category and publish findings to promote evidence-based policymaking. They will be highly technologically-enabled in their regulatory operations (e.g., utilize RegTech and SupTech) and will enable the growth and scale of these alternative finance companies to reach underserved geographies (e.g., through robust NBFI agent networks).

Below are some examples of practices that either enable or inhibit growth: Enablers:

• Progressive alternative financing regulatory practices that allow innovation to thrive. These can take shape in the form of regulatory sandboxes, amendments to existing financial regulations, or in some instances, absence of regulation entirely.

• Collaboration among financial regulatory oversight bodies. In the event that multiple regulatory bodies oversee different elements of alternative financing regulation, collaboration, separation of tasks, and communication is imperative to ensuring consistent workflows.

Inhibitors:

• Restrictive alternative financing regulatory policies that stifle innovation. When fintech companies face high registration and licensing barriers to entry (e.g., high minimum capital requirements, cumbersome oversight, high registration and licensing fees), they are not as likely to flourish.

20 Alternatively, a latent or nascent country may be one whose current regulations around digital finance are too stringent, thereby stifling innovation altogether. This could mean that there exist high barriers to entry for alternative finance companies to operate (e.g., minimum capital requirements, strict registration and licensing requirements, strong investor backing, etc.), an unnecessarily strict fintech law, lack of transparency in regulatory decision-making, etc.

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Assessment Goal One: Ensure that financial services registration and licensing processes enable alternative sources of financing to develop and scale. Foundational Questions:

1. Do you regulate alternative financing activity? 2. Do you have an entity (or entities) responsible for regulation and oversight of alternative

financing activity? 3. Do you require that businesses be registered with the local or state government?

Assessment Criteria:21

1. How many entities are responsible for regulating alternative financing activity? 2. If multiple entities, do they operate independently, or do they collaborate?

a. Operate independently b. Collaborate

3. Do your existing legal and regulatory frameworks allow for new digital financing models which promote innovation and equal access to digital infrastructure?

a. If yes: i. What regulatory framework do you have in place to do so?

1. Fintech law 2. Amendment to existing regulation 3. Absence of regulation

b. If not: i. Are you in the process of developing a fintech law, or instilling more flexible

alternative financing regulatory measures? 4. Do you currently have a regulatory sandbox, or alternative means of allowing the

controlled testing of new alternative financing companies? a. If yes:

i. Within your regulatory sandbox (or alternative means of controlled testing), do you cluster companies by segment? (For example, Indonesia’s regulatory sandbox currently contains 17 segment clusters, among which are categories such as P2P lending, ECF, etc.)

5. Under your current regulatory framework, do you regulate alternative financing companies by segment (e.g., P2P lenders fall under a different regulation than ECF companies)?

a. If yes: i. Do you place stricter regulations on certain segments than others?

6. Under your current regulatory framework, are alternative financing companies mandated to formally register themselves?

21 In the questions below, alternative digital financing companies are any companies which provide financial services products to SMEs. These include non-lending digital products, such as alternative underwriting, credit-assessment, insurance, etc.

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a. If yes: i. What credentials does a company need to possess to register?

1. Government-issued ID 2. ID and historical financial statements 3. ID, historical financial statements, and minimum capital

requirement 7. Do you issue licenses to alternative financing companies?

a. If yes: i. Do you require an ISO/IEC 27001 specification ahead of issuance?22 ii. Are your business licenses segment-specific? For example, Indonesia’s

OJK has segment-specific licenses, such as POJK 77/2016 for P2P lenders and POJK 12/2018 for digital banking services.23

iii. Does a company need to be incorporated under your country’s law to obtain a license?

iv. Does a company need to have a minimum capital stock to obtain a license? v. Does a company need to comply with specific accounting and valuation

standards to obtain a license?24 8. Do you require that alternative financing companies have a license to operate? 9. Do alternative financing companies receive tax credits? 10. Are alternative financing companies required to share SME data with the public (via a

national credit bureau, government websites, etc.)? Assessment Goal Two: Ensure that the public sector is encouraging innovation around financial technology. Assessment Criteria:

1. Is your financial regulatory institution(s) a member of the BIS Innovation Hub, or any alternative means of shared learning?

a. If yes: i. Do you track and measure innovation hub activity? (e.g., research and

reports on current trends in digital financing, discovery of new technologies, etc.)

1. If yes: a. Do you share it publicly?

2. Do you currently utilize RegTech (see definition in “Glossary & Definitions” section)? 3. Do you currently utilize SupTech (see definition in “Glossary & Definitions” section)? 4. Do you have a national fintech association?

22 “ISO/IEC 27001 Information Security Management,” International Organization for Standardization (ISO), accessed March 8, 2020, https://www.iso.org/isoiec-27001-information-security.html 23 OJK, “Regulatory Framework of the Future Digital Financial Ecosystem,” 7. 24 Mexico’s Fintech Act requires the above criteria for a fintech to receive a business license in the country. “Mexico: Fintech 2019,” International Comparative Legal Guides (ICLG), accessed March 8, 2020, https://iclg.com/practice-areas/fintech-laws-and-regulations/usa

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a. If yes: i. Is there an entity responsible for oversight of the association?

1. If yes: a. Do they have a dialogue with regulators, and vice versa?

ii. What credentials does a fintech need to possess to obtain membership to your fintech association?

1. Registration 2. License 3. Both

iii. Do you measure and track fintech association activity? 1. If yes:

a. Do you share it publicly? Assessment Goal Three: Ensure that regulation enhances financial services agent network capabilities. Foundational Questions:

1. Do you currently have a basic regulatory framework for financial services agents? Assessment Criteria:

1. Do you currently have a basic regulatory framework for NBFI agents? 2. Do you have an entity that is responsible for the regulatory oversight of NBFI agent

networks? 3. Who may act as an NBFI agent?25

a. Government-affiliated merchants only (e.g., post offices) b. Any merchant c. Any merchant who is able to provide proof of ID d. Any merchant who is able to provide proof of business registration e. Any merchant who is able to provide proof of ID and business registration

4. What digital functions can NBFI agents perform?26 a. Accept / disburse cash b. Accept / disburse cash and accept digital payments c. Accept / disburse cash, accept digital payments, and transfer funds electronically d. N/A

5. Do government-affiliated merchants (e.g., post offices) automatically have the authorization to act as an NBFI agent?

25 Consultative Group to Assist the Poor (CGAP), Branchless Banking Diagnostic Template (Washington, D.C.: CGAP, 2010), 5. 26 CGAP, Branchless Banking, 5.

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PILLAR TWO: DIGITAL INFRASTRUCTURE Pillar Assessment Goals Foundational

Questions Criteria

Digital Infrastructure

No. 1 Ensure adequate access to ICT infrastructure for feasible adoption of digitalization in SME business management.

0 4

No. 2 Facilitate the adoption of front-end commerce digitalization tools by merchants and consumers.

0 4

No. 3 Foster a viable market of back-end digitalization tools that serves SME operations, financial management, loan application and disbursal.

0 5

No. 4 Government maintains a functioning nationwide system for identifying people and businesses that is consistent, accessible and trusted by lending creditors.

0 3

No. 5 Develop centralized or aggregate decentralized national credit and tax data repositories on businesses that are consistent, accessible and trusted by creditors.

0 9

No. 6 Develop infrastructure to support interoperability and data sharing between private-sector banks and fintech companies.

0 3

Why it matters: Digital infrastructure27 serves to reduce transaction costs and incubate innovation in digital banking and the broader fintech space. In developing and emerging markets, the lack of robust digital infrastructure––from internet connectivity to lack of digital transaction records––has often been a significant constraint on SMEs’ ability to build creditworthiness. The problem is particularly acute for the micro-enterprise segment, which faces the highest risk of exclusion from digital financing due to inadequate provision of digital infrastructure. Definition of Outcomes

27 The term “digital infrastructure” encompasses both the availability of ICT network infrastructure and the digital tools, platforms, and financial data infrastructure which enable SME borrowers and creditors to access digital financing opportunities.

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• A latent country lacks the bedrock components of network infrastructure to enable the development of a digital economy and allow the adoption of digitalization in commerce, data administration and financial services at scale.

• A nascent country has the basic network infrastructure in place to allow both the digitization of SME business operations and the government provision of digital public goods that facilitate SME financing. However, the availability of network infrastructure is inconsistent, SME adoption rates of digital tools are low, and the government has failed to provide viable credit data infrastructure. There may be early signs of growth in e-commerce but weak back-end infrastructure (e.g., POS systems, digital credit assessment tools, etc.) significantly hinder its growth potential.

• An emerging country has robust network infrastructure, high adoption rates of digital tools among SMEs, and consistent national systems for verifying identity, enterprise data, and financial data. However, there are a few market and policy gaps which hinder digital accessibility, inclusion, and market efficiency.

• An advanced country has a functioning ecosystem of private- and public-sector-enabled digital tools and databases; further, it has codified digital infrastructure standards in place which have been widely adopted by SMEs and creditors nation-wide. This country is able to offer digital infrastructure distinguished by characteristics of security, inclusion, centralization, and openness.


• Robust and reliable network connectivity and ICT hardware penetration is the first condition for the creation of SMEs’ appetite for digital finance, financial institutions’ readiness to offer digital products and the sound operation of digital financing.

• Cost-effective back-end digital business management tools. A viable market of online business management tools for digital invoicing, payment and signature is vital to SMEs’ ability to build evidence of creditworthiness and creditors’ ability to scale risk assessment.

• Thriving and accessible e-commerce ecosystem. When SMEs can conduct sales online, this enables them to easily aggregate transaction data (e.g., volume of sales, payment history, cashflow), which in turn makes them more attractive for potential creditors. Additionally, e-commerce presence opens SMEs up to new lending channels through e-commerce-focused fintech providers, such as Aspire in Southeast Asia (SEA) and Jumia in Sub-Saharan Africa (SSA).

• Data sharing on high-risk clients. Sharing data of SMEs to creditors with alternative credit-scoring methodologies may increase the chance of funding for high-risk SMEs and enable flagging of overall sector over-indebtedness.

• Government provision of a centralized financial data infrastructure. National credit and tax bureaus dramatically reduce KYC costs for creditors and enable scalable solutions for risk assessment.

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Inhibitors:

• Lack of secure and robust online network infrastructure prevents SMEs from willingly participating in digital financing practices for fear of inconsistency.

• Lack of sound nationwide identification systems. Inconsistent, fraud-prone or incomplete national identification systems, particularly in countries with geographical and physical infrastructure challenges, cause major barriers in achieving KYC efficiency and advancing digital financing nation-wide.

• Lack of centralization and harmonization of private-sector-owned data. SME lending thrives on efficiency. This requires creditors to have access to a repository of trusted SME-specific financial and transaction data. When such data is decentralized and privately owned by a plethora of credit scoring, e-commerce, and telecommunications companies, it slows the process significantly.

Assessment Goal One: Ensure adequate access to ICT infrastructure for feasible adoption of digitalization in SME business management.

Assessment Criteria:

1. What is the share of SMEs with access to electricity in the country? a. If national statistical office has this data, please report percentage b. If no to a), please give an educated estimate

2. What is the share of SMEs with access to the high-speed internet (3G or above) in the country?

a. If national statistical office has this data, please report percentage b. If no to a), please give educated estimates

3. What is the share of SMEs with at least one computer in the country? a. If national statistical office has this data, please report percentage b. If no to a), please give an educated estimate

4. What is the share of SME owners with a smartphone in the country? a. If national statistical office has this data, please report percentage b. If no to a), please give an educated estimate

Assessment Goal Two: Facilitate the adoption of front-end commerce digitalization tools by merchants and consumers. Assessment Criteria:

1. What is the share of SMEs with an online sales channel (including website, e-commerce platforms and social media)?

a. If national statistical office has this data, please report percentage b. If no to a), please report an educated estimate

2. What is the share of SMEs with online B2B supply chain procurement channels? a. If national statistical office has this data, please report percentage b. If no to a), please report an educated estimate

20

3. How much of online sales or procurement activities are also done through online payment?

a. If national statistical office has this data, please report percentage b. If no to a), please report an educated estimate

4. Are there national strategic initiatives or favorable fiscal policies to encourage e-commerce adoption by merchants and consumers?

Assessment Goal Three: Foster a viable market of back-end digitalization tools that serves SME operations, financial management, loan application and disbursal. Assessment Criteria:

1. What is the level of adoption of online invoice and/or cashflow management tools by SME vendors? (Please characterize as “low,” “medium,” or “high”)

a. If low, which of the following is the principal reason for low adoption? i. Cost ii. Financial literacy iii. Lack of suitable products

2. What is the level of adoption of online accounting tools by SME vendors? (Please characterize as “low,” “medium,” or “high”)


3. What is the level of adoption of online payment tools by SME vendors? (Please characterize as “low,” “medium,” or “high”)


4. What is the level of adoption of digital signatures among SMEs? (Please characterize as “low,” “medium,” or “high”)

a. If low, which of the following are the principal reasons for low adoption? i. Cost ii. Financial literacy iii. Lack of suitable products

b. If “low”, are there underlying transaction laws which legitimize digital signatures? 5. Do you have a feasible environment for payment automation? Please select all that exist

in your country: a. Direct debit b. E-mandate (recurring automated payments)

21

Assessment Goal Four: Government maintains a functioning nationwide system for identifying people and businesses that is consistent, accessible and trusted by lending creditors. Assessment Criteria:

1. Is there currently a national identification or equivalent nationwide identity authentication system for people and businesses that is reasonably consistent and fraud-proof?

a. If yes: i. Is the system digitized?

b. If no: i. Select “No such system exists” for the next two questions.

2. Do all types of creditors have feasible and consistent access to the system? a. Who among the following have feasible and consistent access? Please select all

that apply: i. Public-sector institutions ii. Banks iii. Licensed fintechs iv. Anyone who requests such information

3. How often do lenders use this system as part of their KYC process? (Please characterize as “low,” “medium,” or “high”)

Assessment Goal Five: Develop centralized or aggregate decentralized national credit and tax data repositories on businesses that are consistent, accessible and trusted by creditors. Assessment Criteria:

1. If your country participates in the World Bank’s Doing Business Project, please enter your country’s score on the Depth of Credit Information Index.28

2. Which centralized data repositories are available? a. If any of the following is available, please select all that apply:

i. Enterprise registry including key information such as business addresses, shareholders and/or key executives, active status and registered capital

ii. Secured transactions registries iii. Financial data registries including information such as revenues and

account receivables iv. Enterprise tax histories v. Blacklist of enterprises or directors implicated in fraud, crime and other

illegal activities b. If none of these is available, select “No such system exists” for questions 3-8

28 See here for the Depth of Credit Information Index methodology and data: World Bank Group, “Doing Business: Getting Credit methodology,” accessed March 8, 2020, https://www.doingbusiness.org/en/methodology/getting-credit.

22

3. Do all types of creditors have feasible and consistent access to the data repositories? a. If yes, who among the following have feasible and consistent access? Please

select all that apply i. Public-sector institutions ii. Banks iii. Licensed fintechs iv. Anyone who requests such information

4. How often do lenders use the system in their financing decision-making? (Please characterize as “low,” “medium,” or “high”)

5. How many years of data, on average, do these registries capture? 6. Are movable and intangible assets included in the national credit registry? 7. Is alternative data, such as utilities and airtime payments, included in the national credit

data repository or used in the national enterprise credit-scoring methodology? 8. Does data-reporting conform to international credit reporting standards, such as ICCR

standards? 9. Are there efforts from the regulators’ end to harmonize credit data and scoring

methodologies from private-sector companies? Assessment Goal Six: Develop infrastructure to support interoperability and data sharing between private-sector banks and fintech companies. Assessment Criteria:

1. Is there nation-wide API standardization such as QR standards? a. If “No,” are there government-led initiatives in developing or supporting private-led

development of open banking APIs? 2. Is there a national payment gateway or similar infrastructure to support payment

interoperability? a. If “No,” are there government-led initiatives in developing or supporting private-led

development of such a gateway? 3. Is there data sharing infrastructure serving financial institutions, such as data sharing

platforms on high-risk clients? a. If “No,” are there government-led initiatives in developing or supporting private-led

development of such data sharing infrastructure?

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PILLAR THREE: LEGAL FRAMEWORK FOR DIGITAL SME FINANCE


Criteria

Legal Framework for Digital SME Finance

No. 1 Courts are efficient at dispute resolution and a variety of effective contract enforcement mechanisms are available to litigants.

2 0

No. 2 Insolvency processes are timely, clearly outlined, provide entrepreneurs with second chances, and allow creditors options for monitoring progress.

2 0

No. 3 Collateral laws protect lender and creditor rights and support the use of movable assets as collateral.

0 1

Why it matters: The development of an effective legal framework is a fundamental determinant of the variation in SME access to finance seen across countries. Three specific features of this institutional landscape are important for financial regulators to consider. The first comprises judicial efficiency and contract enforcement: the speed and cost of dispute resolution, the number of pathways (including mediation and arbitration) available to litigants, and court structure and management––all of which, together, reduce the transaction costs in lending to SMEs.29 A comprehensive secured transactions regime forms the second component of a conducive legal framework. Ensuring that SMEs are able to use and transfer a variety of fixed and movable assets as collateral for digital loans opens up new sources of capital and stimulates innovation in unsecured lending products.30 Finally, creditor rights and insolvency regimes that accelerate the resolution process for SMEs are essential for sustaining demand for capital and market competition. These include legal frameworks which provide specialized judicial mechanisms, balance investor guarantees with the entrepreneur’s financial burden, and provide creditors with the ability to monitor the progress of an insolvency in real-time.

29 OECD, OECD SME and Entrepreneurship Outlook, 2019 Edition, (2019). 30 OECD/Economic Research Institute for ASEAN and East Asia, “SME Policy Index: ASEAN 2018: Boosting Competitiveness and Inclusive Growth,” (2018).

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Definition of Outcomes

• A latent country has excessively lengthy and expensive resolution of commercial disputes, inefficient court systems, insolvency regimes that yield little to no resolution or recovery for creditors, and laws that do not favor borrowers or lenders using movable assets as collateral.

• A nascent country performs better than the bottom quartile of countries on the time and cost of commercial dispute resolution, quality of judicial processes, insolvency framework, and legal framework for secured transactions, but is still below the global average.

• An emerging country performs above average across all relevant institutional factors supporting lending to SMEs: the recovery rate is close to 75 cents on the dollar, alternative dispute resolution mechanisms or fast-track procedures for small claims have been established, and there is legislation in place to support a collateral registry and an expanded definition of collateralizable assets.

• An advanced country has rapid and inexpensive contract enforcement and specialized commercial courts with automated case management procedures and a wide range of alternative dispute resolution mechanisms. It also has recovery rates well over 75 cents on the dollar alongside effective debt reorganization procedures and accessible insolvency proceedings and finally comprehensive functional secured transaction system underpinning a centralized collateral registry.


• Legal framework for securitization. Laws that support the securitization of intangible assets (receivables, negotiable instruments, etc.) are essential for expanding the range of SME assets that can be accepted as collateral by lenders. Secured transaction forms enable a range of new fintech credit products, ranging from asset-based lending to supply-chain finance.31 A centralized movable assets registry is a core component of modern secured transaction regimes which enhances the quality and accessibility of crucial information regarding creditworthiness.32

• Facilitating the use of movable and potentially intangible assets as collateral. In other words, allowing new types of SME assets to serve as collateral and improve credit flow with the proper risk-evaluation mechanisms in place.33

31 World Bank, Secured Transactions, Collateral Registries and Movable Asset-Based Financing: Knowledge Guide. World Bank, Washington, D.C., (2019). 32 Inessa Love, María Soledad Martínez Pería, and Sandeep Singh, "Collateral registries for movable assets: does their introduction spur firms’ access to bank financing?" Journal of Financial Services Research 49, no. 1 (2016): 1-37. 33 Miriam Koreen, André Laboul, and Naima Smaini, "G20/OECD Effective Approaches for Implementing the G20/OECD High-Level Principles on SME Financing," (2018).

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• Accelerated insolvency procedures for SMEs. These comprise the digitization of key processes such as the filing of claims and online access to reports and judgements, simplified procedures to support small business, establishment of clear timelines, and specialized tribunals and judges. In some countries, debt discharge rules may give entrepreneurs a second chance at accessing credit.34

Inhibitors:

• Actions that impede the insolvency process, from requiring additional documentation to reducing opportunities for financial restructuring.35

• Weakening the secured transactions regime by disallowing certain intangible assets or reducing secured creditor rights.

• Changes to civil procedure that slow down commercial cases and contract enforcement.

Assessment Goals Given significant conceptual overlap between the indicators of interest as outlined above relating to the strength of legal frameworks, all criteria for this pillar rely on existing data collected by the World Bank’s Doing Business Project. Regulators are only therefore required to enter data relating to the specific Doing Business topics mentioned below. Assessment Goal One: Courts are efficient at dispute resolution and a variety of effective contract enforcement mechanisms are available to litigants. Foundational Questions: If your country participates in the World Bank’s Doing Business Project, please enter your country’s:

1. Enforcing Contracts score 2. Score on the Quality of Judicial Processes Index36

Assessment Goal Two: Insolvency processes are timely, clearly outlined, provide entrepreneurs with second chances, and allow creditors options for monitoring progress. Foundational Questions:

34 Ibid. 35 OECD, OECD SME and Entrepreneurship Outlook, 2019 Edition, (2019). 36See here for the Enforcing Contracts indicator methodology and data: World Bank Group, “Doing Business: Enforcing Contracts methodology,” accessed March 8, 2020, https://www.doingbusiness.org/en/data/exploretopics/enforcing-contracts.

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If your country participates in the World Bank’s Doing Business Project, please enter your country’s:

1. Recovery rate (cents on the dollar) 2. Score on the Strength of Insolvency framework index37

Assessment Goal Three: Collateral laws protect lender and creditor rights and support the use of movable assets as collateral. Assessment Criteria: If your country participates in the World Bank’s Doing Business Project, please enter your country’s:

1. Score on the Strength of Legal Rights Index38

PILLAR FOUR: ACCESS AND USAGE OF DIVERSIFIED SOURCES OF DIGITAL FINANCE


Criteria

Access and Usage of Diversified Sources of Digital Finance

No. 1 SMEs are accessing and utilizing a growing range of digital credit products.

0 5

No. 2 SMEs have access to product-specific platforms where they can be connected to digital finance providers.

0 3

No. 3 SMEs have access to financial products through the direct financial support of government authorities.

0 2

Why it matters: A large academic literature on SME growth discusses the importance of access to a wide range of financial products.39 Regulators seeking to ensure that SMEs have continued access to digital finance for a variety of needs and at different stages of firm development should consider policies that support access to and usage of a range of digital financial products.

37 See here for the Resolving Insolvency indicator methodology and data: World Bank Group, “Doing Business: Resolving Insolvency methodology,” accessed March 8, 2020, https://www.doingbusiness.org/en/data/exploretopics/resolving-insolvency. 38 See here for the Strength of Legal Rights Index methodology and data: World Bank Group, “Doing Business: Getting Credit,” accessed March 8, 2020, https://www.doingbusiness.org/en/data/exploretopics/getting-credit. 39 Miriam Koreen, André Laboul, and Naima Smaini, "G20/OECD Effective Approaches for Implementing the G20/OECD High-Level Principles on SME Financing," (2018).

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Definition of Outcomes40

● A nascent country has very low levels of fintech activity targeted at SMEs, and SMEs have little alternative to traditional bank financing for accessing credit. Besides a weak market for fintech, there is neither any government investment in online platforms to help SMEs and investors connect, nor is there any use of fiscal tools (like tax incentives) for SME-focused private or public investment. The market volume of digital finance going to SMEs is fairly low and slow-growing and interest rates for digital finance are excessively high compared to commercial lending. More than 40% of SMEs that do apply for digital loans are rejected (reflecting either poor creditworthiness or infeasible loan terms), and NPLs exceed 10%.

● An emerging country has a large and rapidly-growing market for SME-focused digital financial products. The market volume of all new digital lending to SMEs is on track to doubling in the near-term, as are the number of SMEs utilizing such financing. Credit conditions for SMEs are more favorable, with interest rates for digital loans reasonably close to those for traditional bank lending (albeit still at a premium of more than 10%), and NPLs for fintech credit are below 10%. The government has established online platforms to help SMEs find investors or access different financing options, and there is active financial support through public financial institutions to provide tax concessions and government funds for innovative start-ups addressing the financing needs of SMEs.

● An advanced country is experiencing exponential growth in its fintech market, with new, innovative firms entering the market to offer SMEs a wide range of digital financial products. This rapidly-expanding supply is meeting high demand across the spectrum of SMEs, with interest and application rejection rates similar to those of traditional financial institutions. Bank-fintech partnerships offer more choices for SMEs (e.g., referral schemes where SMEs denied credit by banks are alternatively connected with fintech platforms). Advanced country governments offer electronic platforms that directly enable different financial products, like asset-based lending or supply chain finance (e.g., by recording and validating invoices).


● Awareness-building activities for SMEs comprise a crucial first step in increasing the demand for diverse financial products. These include seminars, training workshops, and online platforms to connect SMEs with investors.

● Broadening the funding base for SMEs. Governments may offer tax incentives to retail investors seeking to make investments in SMEs, provide public-sector finance to support these initiatives, or support asset-based financing instruments and the expansion of P2P lending.

● Online platforms built to enable supply chain financing provide a centralized location for the storage of SMEs’ historical records.

40 The presence of any SME-focused digital finance activity implies that a market of borrowers of lenders.

28

● Government or government-financed institutions that invest in SMEs through mezzanine funds or funds of funds (for equity investments).

Inhibitors:

● Unclear or lack of regulation for digital financing instruments and lack of supporting online platforms.

● Lack of direct financial support by the government in the form of tax incentives and direct or indirect investments.

● Infrequent SME education initiatives to generate demand for all available financing options.

Assessment Goal One: SMEs are accessing and utilizing a growing range of digital credit products. Assessment Criteria:

1. What is the average rate of growth for the market volume of all digital finance to SMEs over the past three years (or less if data is not available)?

2. What is the average rate of growth for the number of SME borrowers receiving digital finance over the past three years (or less if data is not available)?

3. Keeping SME risk profile constant, what is the difference in average annual interest rates between digital finance products and traditional bank financing?

4. Keeping SME risk profile constant, what is the average rejection rate for SME applications for digital finance over the past three years (or less if data is not available)? (1 - digital loans authorized as a percentage of loans requested)

5. Keeping SME risk profile constant, what is the average rate of non-performing digital SME loans as a share of all digital SME loans over the past three years (or less if data is not available)?

Assessment Goal Two: SMEs have access to product-specific platforms where they can be connected to digital finance providers. Assessment Criteria:

1. Are there official or government-supported platforms to connect SMEs with investors or provide financing options?

2. Are there official or government-supported online platforms to support specific forms of alternative finance like asset-based lending or trade financing? For example, platforms to register accounts receivables for invoice financing, or online inventory records for inventory financing.

3. Are there referral programs to connect SMEs to digital finance providers after they were denied credit by commercial banks?

29

Assessment Goal Three: SMEs have access to financial products through the direct financial support of government authorities. Assessment Criteria:

1. Do any official government-supported organizations provide direct equity investments to fintechs providing digital SME financing, or indirect equity investments through funds of funds?

2. Are there tax incentives for SME-focused equity investments?

PILLAR FIVE: DATA PROTECTION AND PRIVACY


Criteria

Data Protection and Privacy

No. 1 Ensure SMEs are protected under existing data protection and privacy laws or regulations.

2 6

No. 2 Ensure that data privacy and protection laws or regulations are catered specifically to digital financial activities.

0 3

Why it matters: A key component of digital financial technologies is their ability to utilize AI and personal data to assess creditworthiness in an asset-light manner. While this allows fintechs to serve those who were formerly underserved by the traditional financial system, a lack of transparency and formal consent architecture around data collection poses risks of fraudulent activity, identity theft, and data privacy breaches. Thus, it is crucial for regulators to prioritize consumer data protection and privacy as they design regulatory frameworks around digital financing. Definition of Outcomes

● A latent country either does not meet or just meets the foundational questions outlined below. At most, this country will regulate data protection and privacy in some capacity, though it will not necessarily differentiate based on the categories of data it protects, nor will it have any legitimate punitive measures in place for data privacy breaches or fraudulent activities. Additionally, it may or may not make those whose data is covered under said regulation aware of their legal rights.

● A nascent country will have taken preliminary steps to regulate data protection and privacy, though it will not necessarily cover SME data in particular. It may include SMEs

30

under businesses that must adhere to its regulations or laws as “consumers” of individual customer’s data, however, it will not consider SMEs as “providers” of data (to investors, fintechs, or other any other FSPs from which the SME may be seeking financing).

● An emerging country will have efforts to regulate SME data protection and privacy either already in place or well underway. This country will differentiate based on the categories of data it protects (e.g., online B2B and commerce data, banking and financial data, social data, etc.) and may require that FSPs seeking to access SME data (e.g., for credit assessment purposes) pay to do so.41 Additionally, it will ensure that SMEs are able to submit complaints of data breaches or fraudulent activities to a third party SME advocate or lobby (e.g., an SME association) that can then convey said issues to regulators. Complaint submission will be somewhat transparent and the turnaround time for complaint resolution will be between 30-60 days after initial submission.

● An advanced country will exhibit “best practices” in this pillar. It will place clear regulations around which FSPs may access SME data, yet will not deter FSPs from offering SMEs digital financing. Further, it will allow SMEs to consent to having their data accessed and will prevent FSPs for using said data for ulterior motives (e.g., discrimination, exploitation, fraud, etc.). In terms of complaints and recourse, while this country will have an SME association in place as an advocacy body, SMEs will be able to submit complaints directly to regulators and will be able to expect relatively quick resolution times (<30 days). In sum, an advanced country will enable FSPs to access SME data in a way that is consensual, protected, and open to dispute, if necessary.


● Possession of a strong understanding of the data landscape.42 This refers to assessing what personal data is being captured, who owns and can obtain access to the data, and what the data is being used for.

● Architecture in place to field complaints and resolve issues of data breach or fraud.

● Data protection law(s) cater specifically to digital financial activities. As AI-enabled alternative finance providers are highly data-dependent, laws and regulations should be specifically tailored with language addressing digital financing.

Inhibitors:

41 The authors of this report recognize that requiring payment for data may, in fact, hinder FSPs from accessing SME data and ultimately make it more difficult for them to offer financing. Thus, we have categorized this criterion as “emerging” to signal that, though protection of SME data is critical to have in place, too much protection may actually be counteractive to the ultimate goal of increasing SMEs access to sources digital finance. 42 Accion International, Data Protection, (Cambridge, MA: Accion International, 2019).

31

● Regulators’ lack of prioritization around issues of data protection and privacy. ● Consumers’ lack of education and knowledge around issues of data protection

and privacy, and more specifically, their rights. ● Data protection laws or regulations that do not contain industry-specific nuance.

Data protection laws or regulations which are narrow and monolithic in scope are not well-suited for an industry as quickly morphing as digital financing.43

Assessment Goal One: Ensure SMEs are protected under existing data protection and privacy laws or regulations. Foundational Questions:

1. Do you currently regulate data (in any capacity)? a. If yes:

i. What types of businesses must adhere to the rules? 1. Only medium and large businesses 2. All registered businesses (SMEs included) 3. All businesses (registered and non-registered, SMEs included)

2. Do you ensure that those protected under the law are made aware of their data protection and privacy rights?


1. Does your data regulation cover SME data? a. If yes:

i. Which categories of data are protected? (categories are per GPFI “Alternative Data Transforming SME Finance” 2017 report)44

1. Online B2B and commerce data (e.g., e-commerce data, supply chain data, performance data of SME business customers, etc.)

2. Banking and financial data (e.g., transactional account data, investment account data, insurance data, etc.)

3. Credit bureau data (e.g., FICO) 4. Social data (e.g., social media data, search history, online reviews,

etc.) 5. More than one of the above

If SME data is protected:

43 The questions below are concerned with data protection and privacy only insofar as it applies directly to enabling SMEs’ access to digital alternative financing products. While we acknowledge that SMEs can effectively be both the “providers” and “acquirers” of financial data, we are more so concerned with the provision of SME data to financiers to determine creditworthiness. 44 GPFI, SME Finance Forum, G20, and World Bank Group, Alternative Data: Transforming SME Finance, https://www.gpfi.org/sites/gpfi/files/documents/GPFI%20Report%20Alternative%20Data%20Transforming%20SME%20Finance.pdf (Washington, D.C.: World Bank Group, 2017), 31.

32

2. Do you currently offer recourse mechanisms for resolving SME complaints regarding data

privacy breaches, identity theft, or fraudulent activities? a. If yes:

i. To whom do SMEs submit these complaints? ii. How long (on average) does it take for a complaint to be resolved?

1. <30 days 2. 30-60 days 3. >60 days

3. Do you currently possess mechanisms to ensure that data is not used for ulterior purposes (e.g., discrimination, etc.)?45

4. Do you enforce penalties for breaches of SME data or fraudulent activity? 5. Do you require that FSPs pay for access to SME data? 6. Do you require that FSPs obtain consent prior to accessing SME data?

Assessment Goal Two: Ensure that data privacy and protection laws or regulations are catered specifically to digital financial activities. Assessment Criteria:

1. Under your current data protection law or regulation, are there requirements for data collection, storage, processing, and use for SME financial data that pertain uniquely to digital financial activities?

2. Under your current data protection law or regulation, are there specific cyber-security requirements for safeguarding SME financial data and / or sending notifications regarding data breaches?

3. Do you have an e-money due diligence assessment procedure in place to ensure SMEs are complying with AML/CFT regulations?

45 GPFI and G20, G20 High-Level Principles for DFI, 16.

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PILLAR SIX: EVIDENCE BASE FOR POLICYMAKING


Criteria

Evidence Base for Policymaking

No. 1 Regulators periodically collect comprehensive SME digital finance supply-side data.

1 6

No. 2 Regulators utilize SME Finance supply-side data to inform policy decisions.

1 5

No. 3 Regulators periodically collect comprehensive SME digital finance demand-side data.

0 6

No. 4 Regulators utilize SME Finance demand-side data to inform policy decisions.

1 6

Why it matters: Individual and enterprise data lies at the core of financial supervision and informs in-country regulatory decisions. Policymakers ought to collect data around SME demand for financial products (and the extent to which that demand is met) and use it to develop targeted policies for addressing the digital credit gap. Definition of Outcomes

● A latent country either does not meet or just meets the foundational questions outlined below. This country does not collect data regarding SME supply and demand for financial products, nor does it publish data or update regulatory policies in a public forum.

● A nascent country collects some data regarding SME supply and demand for financial products and may publish said data on an annual or bi-annual basis. However, said data is not updated regularly nor is it readily accessible to creditors seeking to credit-assess SMEs in search of financing. Additionally, said data is not used by policymakers to inform decision-making.

● An emerging country collects all data regarding SME supply and demand for financial products and publishes said data on a quarterly basis. Creditors have access to said data (though they may need to pay for it) and regulators use it to inform policy.

● An advanced country is one which exhibits “best practices” in this pillar. Data around SME supply and demand for digital financial products is published on a monthly (or more frequent) basis and is a free, online resource. Policymakers in an advanced country are open to collaborating with private-sector players to inform policies and forecast / anticipate upcoming trends in the industry.

34


● Updated and accurate reporting around SME supply and demand for financial products is crucial. Further, the ability for regulators and policymakers to utilize said data to inform policies and anticipate future trends is particularly enabling.

Inhibitors:

● Lack of data (due to high incidence of informality in the SME sector) grossly underestimates the breadth of the SME financing gap.

● Lack of SME digital financing-specific data-sharing in a public forum. Assessment Goal One: Regulators periodically collect comprehensive SME digital finance supply-side data.

Foundational Questions:

1. Do you collect data regarding the following indicators: a. Volume of financing provided to SMEs digitally b. Size of outstanding digital loans provided to SMEs c. Digital lending interest rates d. Collateral requirements for digital financing for SMEs (if any) e. % of digital lending applications approved f. % of digital lending applications rejected


1. Which of the following FSPs are currently offering digital financing to SMEs in your country?

a. Commercial lenders b. P2P lenders c. Equity financiers d. Venture capital and private equity investors e. Private debtors f. Other (please specify)

2. Which FSPs above provide the most significant portion of digital financing to SMEs? 3. What are tracked challenges to supplying digital financing to SMEs? 4. How often do you collect this data? 5. Is the data collected based on certain data standards defined by an existing law? 6. Does the credit reporting system also cover this data?

Assessment Goal Two: Regulators utilize SME Finance supply-side data to inform policy decisions.

35

Foundational Questions:

1. Do you publish periodic reports for SME digital financing supply-side data?


1. How often are reports published? 2. How do you disseminate this information to the public, namely to creditors? 3. Do you have institutionalized SME advocacy groups (e.g., SME associations) which

promote the collection and publication of this data? 4. Do you use benchmarks (i.e., other countries, international best practices) to evaluate

digital financing trends for SMEs? 5. If yes, which benchmarks do you use? 6. How often do you update regulatory policies based on these data?

Assessment Goal Three: Regulators periodically collect comprehensive SME digital finance demand-side data. Assessment Criteria:

1. Do you collect data regarding the following indicators: a. Percentage of delayed payment digital SME loans b. Percentage of non-performing digital SME loans (disaggregated by age and size

of loan) c. Number of SME bankruptcies

2. Do you conduct a demand-side survey for SME financing? a. If yes:

i. Does it inform the size of the SME financing gap? ii. Does it inform how many SMEs do not have access to finance? iii. For those SMEs which do not have access to finance, does it specify which

products they do not have access to? b. If not:

i. What estimates do you rely on to size MSME funding needs? 3. What entity (or entities) is (or are) in charge of conducting this data collection? 4. How often is this data collected? 5. What is the breakdown of the data collected above, according to owners’ age, gender,

and socioeconomic status (SES), and location? 6. What is the breakdown of the data collected above, according to SME size, sector, and

location? Assessment Goal Four: Regulators utilize SME Finance demand-side data to inform policy decisions. Foundational Questions:

1. Do you publish periodic reports for SME digital financing demand-side data?

36


1. Which entity (or entities) is (or are) in charge of conducting this data collection? 2. How often are they published? 3. How do you disseminate this information to the public, namely to SMEs? 4. Do you have institutionalized SME advocacy groups (e.g., SME associations) which

promote the collection and publication of this data? 5. Do you use benchmarks (i.e., other countries, international best practices) to evaluate

digital financing trends for SMEs? 6. If yes, which benchmarks do you use? 7. How often do you update regulatory policies based on these data?

PILLAR SEVEN: DECISION AND KNOWLEDGE NETWORKS Pillar Assessment Goals Foundational

Questions Criteria

Decision and Knowledge Networks

No. 1 Avoid silos and developing systematic approaches between all regulatory and governing bodies.

0 2

No. 2 Engage private-sector in concerted policymaking to avoid regulatory surprises and regulatory lag.

0 3

No. 3 Foster sustainable partnerships between private-sector creditors and technology providers.

0 2

No. 4 Establish an effective channel of dialogue with SMEs to collect feedback, concerns, and communicate policy changes.

0 3

No. 5 Regulators actively monitor and learn from the development of digital finance regulations in other countries.

0 3

Why it matters: Networks are an effective mechanism to shape enabling, utilization-focused policy on digital finance, reduce creditors' compliance costs, and accelerate innovation through collaboration. As a first step toward concerted policymaking, DFS regulators need to streamline their regulatory approach and responsiveness to evolving market conditions. Regulators can use networks to strengthen the digital finance ecosystem for SMEs by incorporating private-sector expertise and SME voices into policymaking and encouraging banks and fintechs to collaborate. Definition of Outcomes

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● A latent country fails to harmonize across all relevant stakeholders in digital finance regulation. Policymaking and agenda-setting are likely to be siloed, top-down, and incur high compliance risks for creditors.

● A nascent country has made concerted approaches in a limited number of areas to ensure regulatory decisions incorporate the interests of multiple stakeholders. However, such collaborations are likely the result of fragmented initiatives, and thus the industry remains largely siloed. As a result, regulatory decisions often come as a surprise to private-sector players, and conversely, there remains a high likelihood of lag in regulatory response to market activities.

● An emerging country successfully includes a diverse set of stakeholders in its efforts to increase SMEs’ access to digital finance. Further, knowledge, incentives, and goals are broadly aligned across said stakeholders. However, there are likely still further improvements to be made in the harmonization of the sector, particularly regarding centralization of knowledge resources.

● An advanced country succeeds in including input from various stakeholders when designing regulations regarding digital finance for SMEs. Policymaking is cohesive, market-driven, and has broad-based support from private-sector agents. Moreover, an advanced country is able to pioneer innovative approaches to public-private collaboration, regional dialogue, and cross-sectoral partnerships; further, it is able to provide leadership on private-sector collaborations in the form of ex-ante regulations that account for associated costs and risks.


● Engagement by regulators of private-sector executives and associations to co-author regulations and codes of market conduct.

● Bank-telco partnerships in which banks leverage telcos.’ geographic reach and payment data to credit-assess SMEs.46

● Coordination among regulatory and oversight entities towards unified strategy. In order to implement a national DFS innovation strategy, it is critical to achieve coordination among regulatory and oversight entities with divergent approaches and capacities to ensure each understands and delivers policy goals under their jurisdiction.47,48

Inhibitors:

46 Richard Hartung and Chris Kapfer, “Banks forced to get better at serving their SME customers,” The Asian Banker, accessed April 5, 2020, http://www.theasianbanker.com/updates-and-articles/banks-forced-to-get-better-in-servicing-their-sme-customers. 47 Aviles, Advancing DFI in ASEAN, 55. 48 Global Partnership for Financial Inclusion (GPFI) and G20, G20 High-Level Principles for Digital Financial Inclusion, (Chengdu, China: GPFI and G20, 2016), 12.

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● Lack of a systematic approach to DFS regulation between regulatory bodies. In most countries, multiple regulatory bodies are involved in DFS regulation. This poses an issue of decentralization and misaligned goals, which hinders efficiency, incites misunderstandings, and generally slows the formation of a national strategy.

● Lag in regulatory response to changing digital trends. Digital finance is a quickly-morphing space and oftentimes, regulators have difficulty enacting policies that fit market needs in a timely manner.

Assessment Goal One: Avoid silos and developing systematic approaches between all regulatory and governing bodies. Assessment Criteria:

1. Do you have a direct line of communication with counterparts at other regulatory bodies or government offices involved in shaping DFS regulations?

a. If yes: i. How do you find the quality of your collaboration? (please characterize as

“Low,” “Medium,” or “High”) 2. Have you passed any DFS regulations or sector initiatives in conjunction with other

regulatory bodies? Assessment Goal Two: Engage private-sector in concerted policymaking to avoid regulatory surprises and regulatory lag. Assessment Criteria:

1. Do you include private-sector executives within your regulatory institutions or engage them in consulting roles to co-shape policy and codes of conduct?

2. Do you have a transparent process to communicate regulatory changes to the private sector?

a. If yes: i. Are such changes communicated in real-time, such as through a website,

email mailing and other digital public channels? 3. Do you have an internal team tasked with keeping a pulse on market developments in the

domestic DFS market? Assessment Goal Three: Foster sustainable partnerships between private-sector creditors and technology providers. Assessment Criteria:

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1. Do regulations impose substantial additional compliance costs on banks which partner with fintechs or technology companies, potentially deterring these partnerships?49,50

2. Are there regulations to address the additional data security risks which arise when banks enter into partnerships with fintechs?51

Assessment Goal Four: Establish an effective channel of dialogue with SMEs to collect feedback, concerns and communicate policy changes. Assessment Criteria:

1. Which segments of SMEs are included in the dialogue loop with policymakers, through a chamber of commerce, or a policy forum, digital platform or other forms of representation? Select scenario that most closely reflect country reality

a. None b. All registered entities are included or can opt in c. Registered entities above a certain capital requirement are included or can opt in d. Only larger businesses or a selective segment of businesses linked through

personal networks are included 2. Do you have an SME association that advocates and/or lobbies on behalf of SMEs to

financial regulators? a. If yes:

i. Is there a formal process to affect policy change? 3. Is there a consistent communication agenda between regulators and the SME

association?

Assessment Goal Five: Regulators actively monitor and learn from the development of digital finance regulations in other countries. Assessment Criteria:

1. Do you have an internal team that tracks international DFS regulatory trends? 2. Do you have an effective channel of communication with regulators in key foreign markets

of interest? 3. Do you have access to regional partners for consultation or collaboration on shaping in-

country regulation?

49 “Removing the Risk from Bank-Fintech Partnerships,” Mondato, accessed April 3, 2020, https://blog.mondato.com/regulating-bank-fintech-partnerships/. 50 Paul Schaus, “A Vetting Guide for Banks Mulling Fintech Partnerships,” The American Banker, accessed April 4, 2020, https://www.americanbanker.com/opinion/a-vetting-guide-for-banks-mulling-fintech-partnerships. 51 “Removing the Risk from Bank-Fintech Partnerships,” Mondato, accessed April 3, 2020, https://blog.mondato.com/regulating-bank-fintech-partnerships/.

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PILLAR EIGHT: NON-FINANCIAL SUPPORT


Criteria

Non-Financial Support

No. 1 Ensure financial literacy is aimed at training for better use of digital financial tools by SMEs.

4 4

No. 2 Provide operational, advisory, and advocacy support to SMEs to increase access to financial markets.

3 5

Why it matters: The development of non-financial support systems––in both an operational and advisory capacity––is crucial to increase the use of digital financial services among SMEs. While access to finance is of primary concern, use of finance, ability to repay loans, and overall maintenance of financial health are key learnings that SMEs stand to benefit from. The provision of financial and digital literacy tools is a preliminary means to increase familiarity of available products and how to best use them. Definition of Outcomes

● A latent country either does not meet or just meets the foundational questions outlined below. This country does not have initiatives for increasing digital and financial literacy in general (let alone among SMEs), does not disseminate learning tools through basic multimedia platforms, does not provide operational support to SMEs, and does not cover National ID, KYC and e-commerce regulations in its National Financial Inclusion Strategy (NFIS).

● A nascent country is one which does have initiatives for increasing digital and financial literacy among its population but does not have measures in place to measure program impact, nor does it specifically target SMEs.

● An emerging country is one which offers initiatives to increase digital and financial literacy among SMEs specifically, and additionally has mechanisms in place with which to measure program impact. An emerging country additionally provides SME-targeted learning tools through basic and advanced multimedia, provides most operational support items to SMEs (detailed below), offers training and mentorship programs to SMEs, and specifically targets SMEs in its NFIS.

● An advanced country contains all the SME-targeted learning initiatives that an emerging country has but ensures their pervasive dissemination across SME sectors and geographies. An advanced country will have a National/Regional Financial Education campaign that aims to measure impact of existing programs and use findings to scale / improve initiatives on a country-wide basis. This country ensures that SMEs have easy access to business model development training programs, are ready to communicate

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with a complex array of potential investors and are confident in their ability to raise capital.


● Providing operational and advisory support helps equip SMEs with the tools to maximize their competitive advantage in the market. It provides them expert insight on product-fit, consumer acquisition, growth, and scale.

● Integration of financial literacy in school curriculums, adult education, and vocational training programs will increase the likelihood of digital adoption.

Inhibitors:

● Lack of a NFIS––let alone one that targets SMEs––provides no guidance for a country-level strategy or approach to digital financing.

● Lack of advisory support can leave SMEs uninformed of the opportunities they have access to and miss out on opportunities of training and mentorship which can inhibit SMEs from growing and increasing their access to financial markets.

Assessment Goal One: Ensure financial literacy is aimed at training for better use of digital financial tools by SMEs. Foundational Questions:

1. Does your country have initiatives for providing financial and digital literacy? a. If yes, what are they?

2. Which of the following players provide the most significant financial and digital literacy tools/initiatives?

a. Financial Institutions b. Private firms c. Government

3. Does your financial literacy initiative target SMEs specifically? 4. Does your digital literacy initiative target SMEs specifically?


1. Which authority (or authorities) are responsible for the design and deployment of your financial literacy strategy?

2. How do you disseminate financial literacy and digital literacy learning tools? a. National/Regional Financial Education campaign b. Public service announcements through radio and television c. Text messages and reminders

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d. Mobile games or apps e. Workshops and Bootcamps f. Training centers g. Incentive programs

3. What measures are in place to evaluate the effectiveness of your financial literacy initiatives?

4. What measures are in place to evaluate effectiveness of your digital literacy initiatives? Assessment Goal Two: Provide operational, advisory, and advocacy support to SMEs to increase access to financial markets. Foundational Questions:

1. Which of the following entities provide non-financial support (NFS) or enterprise development services to SMEs?

a. Financial Institutions b. Private firms c. Government

2. Through which mediums are these services customarily provided? (e.g., group training sessions, one-on-one training sessions, in person versus online, etc.)

3. Does your country’s NFIS target SMEs as well as individuals? a. If not:

i. Are you considering including SMEs? Assessment Criteria:

1. Which of the following types of operational support is available for SMEs by NFS providers: a. Business planning b. Financial management c. Legal and regulatory advice d. Market analysis and survey

2. Which of the following types of advisory support is available for SMEs by NFS providers: a. Training and Mentorship b. Capital raising

3. If training and mentorship services are provided to SMEs, how are these services disseminated?

a. Accelerators and incubators b. Match-making services to link businesses with suitable mentors c. Discussion forums and networking forums online

4. What entity (or entities) is (or are) in charge of the design and implementation of the NFIS? 5. Which of these topics does the NFIS cover?

a. National ID b. KYC c. E-commerce regulation

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d. Agent banking e. Development Finance Institutions f. Other (please specify)

CONCLUSION Designing coherent, comprehensive, progressive, and all-encompassing regulatory frameworks are a crucial first step for regulators to take in harnessing the advent of digital financing. As this guidance note has outlined, the main aims of this toolkit are:

● To capitalize on innovations in financial services and the ability for digital innovation to enhance the global financial inclusion agenda

● To empower SMEs––some of the most significant contributors to GDP growth worldwide––by formalizing regulation in the digital financing space, making it an even and fair playing ground for all stakeholders involved

● To provide a country-wide picture of regulatory strengths and weaknesses around policies for digital financing of SMEs

● To present high-level goals that are both measurable and achievable given the right framework design

● To serve as a first step and foundation toward implementing laws and regulations that enable innovation and protect both SMEs and investors

By designating a list of foundational pillars that can be applied to a variety of diverse country contexts, this toolkit prompts regulators to compartmentalize the vast digital financing ecosystem as a first step toward developing regulatory best practices.

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APPENDICES LIST OF INTERVIEWEES IN INDONESIA AND THE PHILIPPINES

Name Organization

Adrian Gunadi Investree

Alicia Opeña Philippines Department of Trade and Industry

Angie Tinio Rizal Commercial Banking Corporation

Anthony Thomas GCash

Azhar Muhammad Grab

Chandra Tjan Alpha JWC Ventures

Chris Antonius Tokomodal

Chrismanto Saragih PT Mitra Bisnis Keluarga Ventura

Christopher Gultom Akseleran

Grace Rentowati Microsave Consulting

Karen Cua BDO Network Bank

Kelly Hattel Asian Development Bank

Kuseryansyah Asosiasi Fintech Pendanaan Bersama Indonesia

Mackenzie Tan Impact Credit Solutions

Mercy Simorangkir AFTECH (Indonesian Fintech Association)

Olie Liggayu Acudeen

Paula Leynes Felipe International Finance Corporation

Pia Roman-Tayag Central Bank of the Republic of the Philippines

Plunkett McCullagh First Circle

Rahni Svenningsen Union Bank of the Philippines

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Reynold Wijaya Modalku

Sinta Setyaningsih OVO

Sung Su Kim Asian Development Bank

Terry Tse Alpha JWC Ventures

Triyono Gani Otoritas Jasa Keuangan (Indonesia Financial Services Authority)

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