Competition in Digital Financial Services – Regulatory Strategies and Pathways for Emerging Markets and Developing Economies

Promoting competition in DFS requires a sequenced policy and regulatory approach, beginning with interventions that establish trust and market foundations and evolving towards tools that support entry, scaling and effective competition in mature markets.

Generally, these tools can be divided into 4 main categories or tiers. Tier 1 addresses the foundational infrastructure and legal and regulatory frameworks necessary for well-functioning competition in DFS markets. Tier 2 focuses on reducing barriers to entry and improving contestability, enabling diverse and innovative actors to participate. Tier 3 then turns to the conditions needed for new entrants to scale effectively, while Tier 4 addresses the more complex, dynamic competition challenges that typically arise in mature DFS ecosystems, including data and platform power, cross-border activity and advanced demand-side frictions.

Competition-promoting interventions are most effective when they are targeted at the specific supply- and demand-side barriers that constrain competition in a given market.

For each barrier type, there is a set of potential policy and regulatory tools that can be leveraged to prevent, reduce, or mitigate it. While some tools may be used interchangeably, barriers often manifest in different ways, requiring more tailored responses.

Accordingly, public and financial authorities will benefit from identifying the most prominent barriers, and how they manifest in practice, in order to determine the most relevant interventions.

Moreover, the barrier-tool mapping demonstrates that the same tool can often help address multiple barrier types. Where certain tools emerge as relevant across multiple barriers identified in a given jurisdiction, this may suggest that they warrant priority over measures that target only a single barrier.

By enhancing savings mobilisation, financial intermediation, and capital allocation, policy and regulatory tools that support competition in DFS can help strengthen private capital formation in EMDEs.

By expanding participation, reducing costs, and improving information flows, competition-enhancing interventions can increase the volume of formal savings, improve the efficiency with which those savings are intermediated and support a more productive allocation of capital.

However, the relationship between competition and capital formation is not unambiguously positive. Its effects depend on initial market conditions, institutional quality and the calibration of regulatory frameworks.

In settings where incumbency reflects significant entry barriers and inefficiencies, greater competition can unlock substantial gains in capital formation. At the same time, intensified competition may reduce margins and increase uncertainty for investors, potentially dampening incentives for long-term capital commitments – particularly where ‘moats’ or stable revenue expectations are important for investment decisions.

The comparative case studies across the SSA and the APAC regions suggest that policy and regulatory tools, often introduced to achieve objectives beyond competition, can nonetheless shape competition dynamics.

Their impact, however, depends on careful calibration, appropriate sequencing and a strong underpinning within the broader institutional framework.

In Kenya, proportionate licensing for non-bank digital lenders, complemented by conduct requirements and supported by credit information infrastructure, helped lower entry barriers while addressing harmful market practices, potentially contributing to more efficient credit intermediation. Nigeria’s experience, by contrast, illustrates the limitations of fragmented and delayed interventions, where the new licensing framework was introduced without sufficiently strong foundational frameworks or supporting credit information infrastructure.

A similar pattern emerges in the comparison between Malaysia and Vietnam. Malaysia’s early and mandatory interoperability framework, characterised by an encompassing design and effective enforcement, reduced market fragmentation and lowered switching costs, with the potential to enable broader data sharing across providers and support more dynamic competition in digital payments, as well as capital formation. By contrast, Vietnam’s later and largely voluntary approach to interoperability has struggled to overcome entrenched fragmentation and siloed systems, limiting its potential positive impact on competition and capital formation.

Authorities have 2 principal avenues for promoting competition in DFS: incorporating competition considerations into existing policy and regulatory processes, and implementing interventions explicitly aimed at strengthening competition.

The first approach focuses on embedding a competition lens into policymaking and regulation, primarily through tools such as Regulatory Impact Assessment (RIA). This approach seeks to ensure that new and existing policy and regulatory frameworks, typically introduced to achieve other objectives, do not inadvertently restrict competition and, where possible, actively support it.

The second approach places competition at the forefront of decision-making by deploying targeted tools designed to promote more competitive DFS markets. The tiered conceptual framework provides a useful reference point, enabling authorities to systematically identify gaps in the policies and regulations that underpin competition in DFS. To develop more targeted interventions, however, the framework should be complemented by a broader assessment of market conditions and the supply- and demand-side barriers that are most prevalent in a given context. While this approach is more demanding in terms of capacity and resources, it is also more likely to result in context-appropriate and impactful competition strategies in digital financial services markets.