Digital platforms are playing a transformative role in extending access to financial services. Mobile money, fintech innovations, and digital banking services have brought millions into the formal financial system, opening up access to payments, savings, credit, and insurance. But while digital platforms offer immense benefits, they also pose significant challenges to competition within financial services.

Digital financial services are now the main driver of financial inclusion. In eight Sub-Saharan African countries, over 20% of adults only use mobile money accounts. In Latin America and Asia, non-bank players have introduced innovative financial products and services, reaching marginalized and previously underserved communities.

Yet the nature of digital financial services often leads to market concentration, with a few dominant market players. This has profound implications for financial inclusion, innovation, and consumer welfare.

The Competition Challenge in Digital Financial Services

Digital platforms exhibit strong network effects, meaning the value of a service increases as more users join the platform. This often leads to the market tipping in favor of a small number of players, reinforcing their dominance. The more customers a platform attracts, the more attractive it becomes to new users, creating a self-reinforcing cycle that makes it difficult for smaller players to compete.

Service providers with first-mover advantages can quickly rise to dominance, gaining a competitive edge through brand recognition, customer trust, and economies of scale. Once established, these incumbents can leverage their position to expand their services, further entrenching their market power.

Dominant financial service providers (FSPs) often have the incentive and ability to act anti-competitively—though this does not mean they always do. Practices such as predatory pricing, exclusive agreements, and restrictive data-sharing policies can limit competition, stifling innovation and reducing consumer choice. For instance, a dominant mobile money provider might impose high interoperability fees, making it expensive for users to transfer funds to competing platforms.

The Power of Data and Market Leverage

Large digital platforms have the ability to collect and analyze vast amounts of user data, which they can then use to refine their services, tailor offerings, and predict customer needs more accurately than smaller competitors.

This data advantage allows dominant players to leverage their market power from one segment to another. For example, a telecommunications company with a stronghold in voice and data services can use its vast customer base and data analytics to enter and dominate the payments market. From there, it can expand further into savings, credit, and insurance, making it increasingly difficult for new entrants to compete.

Moreover, economies of scale and scope fuel positive feedback loops that strengthen incumbents’ market positions. The more services a platform offers, the more integrated and indispensable it becomes in users’ daily lives. This integration not only enhances user convenience but also creates high switching costs, discouraging consumers from exploring alternative providers.

Why Competition is Essential for Financial Inclusion

Ensuring a competitive market is crucial for long-term sustainability and consumer welfare. Competition drives innovation, leading to better and more affordable financial products. It prevents monopolistic practices that could exploit consumers through high fees, restrictive policies, or reduced service quality.

A competitive landscape also encourages financial resilience, by reducing dependency on a single provider. If one dominant firm were to collapse or experience a major service disruption, millions of users could be left financially stranded. A diversified market with multiple strong players ensures that consumers have alternative options, fostering a more stable financial ecosystem.

Strategies to Promote Competition in Digital Financial Services

Regulators, policymakers and industry stakeholders can ensure a healthy competitive environment via:

1. Interoperability Requirements: Regulators can encourage interoperability among providers, to ensure seamless transactions across different platforms. This prevents dominant players from using exclusivity as a competitive barrier.
2. Fair Data Access Policies: Implementing data-sharing regulations that allow new entrants to access essential market data can level the playing field. Open banking frameworks, which require banks and fintech companies to share customer data (with consent), can enhance competition.
3. Antitrust and Competition Enforcement: Strong regulatory oversight is needed to prevent anti-competitive practices such as predatory pricing, market foreclosure, and unfair contractual agreements. Authorities should have the power to investigate and act against firms engaging in such behaviour.
4. Support for New Entrants: Regulators can encourage competition by supporting the entry of Fintechs and smaller financial service providers by creating new licensing windows, launching regulatory sandboxes, and innovation hubs that allow new players to test their solutions in a controlled environment.
5. Consumer Education and Awareness: Empowering consumers with financial literacy and awareness about their choices can drive competition. When consumers understand their rights and available options, they are more likely to switch providers if they feel they are not getting the best service.

How is AFI working to promote competitive markets?

AFI brought together 14 member countries to launch a Competition Enablers Knowledge Exchange (CKx) in partnership with UNCDF, to strengthen regulatory capacity and spark policy reform. Through this platform, members have engaged in technical webinars with leading experts, a global capacity-building program, and a high-level leaders’ roundtable. AFI also published Advancing Fair Competition for Inclusive Digital Finance, a report which examines how competitive dynamics shape DFS markets, and how pro-competitive policies can unlock more inclusive ecosystems.

This effort has already yielded meaningful impact. Member countries report increased awareness of how competition issues—from market dominance to interoperability barriers—affect digital financial inclusion outcomes. Regulators have been able to identify concrete approaches and tools to foster fair competition and, in several cases, have received direct support in advancing new policy and regulatory initiatives.

Looking ahead, AFI will deepen and scale this work by integrating competition considerations across broader thematic areas, establishing a comprehensive knowledge repository on competition enablers, and supporting members in designing and implementing tangible, impactful reforms. Together, these steps will help ensure that competitive, innovative DFS markets continue to expand access and choice for underserved communities.

AFI’s Competition Enablers Knowledge Exchange is supported by the Gates Foundation.

See also: Inclusive financial regulation requires a competition lens