How to Achieve Proportionality in Supervision

Supervisors will need to understand the risk profile of the DFS, the business model as well as permitted activities. Supervisors should first identify and measure the risk, the impact of such risk as well as the likelihood of occurrence. Supervisory resources are then deploy to DFS in proportion to the level of risk of such DFS, more attention is given to DFS with higher risk than those with lower risk.

Supervisors can apply proportionality by focusing their limited resources on high-risk DFS providers and activities while using lighter oversight for low-risk players. Tiered licensing, simplified reporting, and targeted supervision will allow regulators to protect consumers and financial stability without stifling innovation.

Supervisors must ensure the use of their limited resources effectively by understanding DFS risk profiles and applying the required tools for effective DFS supervision. Not every supervision tool may be necessary for all DFS, therefore, unique supervision skillsets should be channelled to required DFS while considering business models and complexities for effective supervision

Supervisors can apply proportionality to allocate limited resources in supervision by focusing efforts in areas where risk will have higher negative impact on the organization. In doing so, the supervisor should classify the Digital Financial Services (DFS) by risk level (high, medium, low) by considering factors such as customer base, volume of transactions, complexity of products cyber risk, outsourcing, etc. Other things to be focused on include material risk (consumer protection, AML/CFT, operational resilience, data protection, and agent management)

Supervisors can apply proportionality in DFS supervision by focusing their limited resources on the areas of greatest risk and need. Instead of treating all providers the same, they can direct more attention to those serving vulnerable groups, apply stricter oversight to high risk activities, and use lighter requirements for low risk providers. This way, supervision becomes both effective and efficient, protecting consumers while supporting safe growth in digital financial services.

Supervisors are required to conduct sectoral risk assessment to understand risk exposure by different players in the financial sector. These include banks, electronic money issuers and other payment serive providers. Develop risk assessment frameworks with assessment criteria varying from one group to another depending on the nature of the business and business models they operate. The criteria to be used can be quantitative or qualitative in nature, or both can be applied depending on the scenarios.

Supervisors are required to assess using specific assessent criteria for a particular group, Let say, banks and asses, which bank (s) are more riskier than others. This assessment aims to dtermine systemic important banks where Supervisors are required to put more focus to those banks identified as Systemic Important Banks. Supervisors are required to prepare a basket of Systemic banks and non-systemic banks. Supervisors are then required to ensure all banks identified to be systemic important are subject to additional compliance requirements to ensure they operate in a going concern basis. While other non-systemic important may receive less regulatory compliance to reduce regulatory burden depending on their risk profiles. It is important for Supervisors to review the criteria regularly consiring changing market environment.

Supervisors should apply proportionality in supervision of DFS with high risk considering the size of the DFS, customer size, technology advancement and number of risks. Supervisor should allocate more resources to DFS with high risks to facilitate identification of risks, combination of supervisory tools to mitigate the risks and impact assessment of the risks.

Regulators can apply proportionality in DFS supervision by allocating more resources to high risk providers with large user bases, high transaction volumes or complex business models. This may include extensive surveillance through variety of supervisory tools available including but not limited to limiting to onsite, offsite assessments etc. supervisors can also monitor market level risk, collaborate with other regulatory agencies and stakeholders including the industry players.

Supervisors can apply proportionality by aligning the intensity and frequency of supervision with the risk and systemic importance of DFS providers, focusing limited resources on larger, more complex, and highly interconnected entities. High-risk providers can be subject to more frequent and in-depth supervision, while lower-risk providers are monitored mainly through off-site reporting. By targeting the most relevant risks for each provider type and using data and technology to identify emerging issues, supervisors can achieve effective and efficient DFS supervision without imposing unnecessary regulatory burden.

1. Supervisors can apply proportionality by matching the intensity of Digital Financial Services (DFS) supervision to the level of risk, rather than treating all providers and products the same. This helps supervisors use limited resources more effectively and efficiently by concentrating higher-intensity supervision on providers with greater risk exposure, rather than on lower-risk providers designing supervisory models that match the specific complexity and risk exposure of each provider.

one, develop a Risk Assessment Methodology by creating a framework to evaluate each DFS provider's risk profile, considering factors like size, systemic importance, complexity, and specific risks. secondly, assigning risk weights to categories, ranking providers as high-risk, low-risk thereby preventing overallocation of supervisory resources to low-risk areas and freeing resources for targeted interventions. Thirdly, categorizing Providers into tiers or priorities, using proportionality to classify DFS entities as high, medium, or low priority based on impact and dedicate high-priority for systemically important providers, low-priority for niche, low-risk fintech’s like MSME lenders.

Supervisors can apply proportionality by focusing more resources on higher-risk and systemically important DFS providers, while monitoring lower-risk entities mainly through offsite supervision and market analysis. Supervisory plans should also remain flexible so resources can be shifted quickly when new risks emerge in order to ensue both efficiency and effectiveness.

Systemically important commercial banks with complex digital offerings may warrant deeper risk assessments, thematic reviews, and frequent supervisory engagement. In contrast, smaller EMIs, MFBs, or PSPs may be subject to targeted reviews focused on key risk areas such as safeguarding of funds, operational resilience, AML/CFT, and consumer protection.

Risk Based Supervision regime should allocate resources by prioritizing high-impact institutions and high-risk activities, which ensures supervisory efforts remain both effective and efficient despite capacity constraints.

Supervisors can apply proportionality to allocate limited resources by considering the risk profile on the entities to be supervised, deploying different supervisory approaches (offsite surveillance, onsite examinations, conduct monotoring etc) and deploying a mix of skills (as much as possible) in their teams so as to get optimal results.

This can be achieved by assessing the risk of the DFS, its systemic importance, and its impact on the financial ecosystem. Once this is identified, assessed, and quantified, resources would be assigned based on the DFS's risk profile, with effort channeled to those with higher risk. However, if the DFS has a higher risk and has put strong mitigants in place, and the net risk is low and stable or decreasing, based on proportionality, the resources that should be assigned might be minimal compared to those with a similar risk profile but weak mitigants.

Supervisors must identify systemic importance of DFS providers first. This way, supervisory resources are allocated considering failure of systemically important service providers should high impact risks occur. Systemically important (higher risk) providers are subject to more intensive supervisory tools such as onsite inspections and frequent offsite reviews, while lower risk providers may be monitored primarily through market surveillance. This risk-based allocation allows supervisors to avoid overburdening low risk providers while ensuring that high impact risks arising from operational dependencies, outsourcing, and AML/CFT are identified and managed.

They need to first understand the risk profiles of the DFS providers, develop a supervisory plan to effectively apply the necessary resources and this plan should include other authorities to ensure efficiency. This depends on the legal context of the country.

Supervisors need to carefully assess and analyze the risk profile of the various DFS providers in their jurisdiction, products they deal in, customer base and the systemic risk that they pose to the financial ecosystem. This will then inform the regulator's decision on which supervisory plan to apply for institutions that require more intense supervision, time and manpower. High risk providers may be allocated more resources than the low-risk providers.

To effectively apply proportionality, supervisors must first develop a thorough understanding of the risk profiles of all DFS providers in the market, assessing each provider's size, complexity, product offerings, and potential impact on consumers and financial stability.

The beginning point is to carry out a risk assessment on the DFS Providers to establish the risks facing different DFS Providers. The supervisor then allocates more money, time and expertise to those DFS Providers facing higher risks.

Applying Proportionality in DFS Supervision
The starting point for proportional supervision is an accurate and comprehensive risk classification of each provider. Supervisors must assess each provider's business model, permitted activities, size, systemic importance, and the nature of risks they pose before any resource allocation decisions are made. Misclassifying a high-risk provider as low-risk — or overburdening a genuinely low-risk fintech — undermines the entire goal of proportional supervision. Regular reassessment is equally important, as risk profiles can shift quickly with changes in product offerings, transaction volumes, or third-party dependencies.
With accurate risk classifications in place, supervisors can then direct the most intensive oversight — including onsite inspections, AML/CFT monitoring, and consumer protection reviews — toward higher-risk and systemically important providers, while applying lighter offsite monitoring to lower-risk entities. Thematic reviews are a particularly efficient tool, allowing supervisors to examine cross-cutting issues like agent due diligence and data privacy across multiple providers simultaneously. Supervisory plans should be risk-informed, regularly updated, and flexible enough to respond to emerging risks. A multi-disciplinary team drawing on prudential, AML/CFT, consumer protection, and IT risk expertise ensures the full range of risks is adequately covered, while inter-agency collaboration helps close supervisory gaps without duplicating effort.

Central Banks can apply proportionality by conducting their supervision of DFS providers basing on the scope and the level of risk posed by each provider. This helps central banks use limited the resources where they matter most while still ensuring financial stability and consumer protection.

Supervisors can prioritize allocating limited resources on high risk but greater need DFS providers and consider monitoring other DFS providers offsite, with thematic reviews if need arises.

To apply proportionality effectively, supervisors move away from a "one-size-fits-all" model and instead align their oversight intensity with the specific risks a provider poses to the financial system. For Digital Financial Service (DFS) providers, this is achieved through a Risk-Based Supervision (RBS) framework. Here is how supervisors can allocate limited resources using this principle:
1. Tiered Categorization of Providers
Supervisors group institutions into categories based on their systemic importance and risk profile.
• High-Intensity (Tier 1): Large entities like telecommunications-led mobile money providers (e.g., telebirr) or systemic banks. These receive frequent onsite inspections and continuous offsite monitoring because their failure would disrupt the entire economy.
• Low-Intensity (Tier 3/4): Small fintech startups or niche payment aggregators. These may only require automated quarterly reporting and "event-driven" supervision (only acting if a complaint or breach occurs).
2. Differentiated Regulatory Requirements
Proportionality is applied at the level of the rules themselves to reduce the compliance burden on both the provider and the supervisor:
• Simplified Licensing: Using "staged" or "sandbox" licenses for innovators, allowing them to test products with a limited number of customers before meeting full capital requirements.
• Tiered KYC: Allowing providers to offer "Basic Wallets" with low transaction limits and minimal ID requirements. This reduces the supervisor's need to monitor complex anti-money laundering (AML) checks for low-risk, small-value transactions.
3. Data-Driven Offsite Monitoring (SupTech)
Instead of physical inspections for every provider, supervisors use Supervisory Technology (SupTech) to automate oversight:
• Automated Dashboards: Using APIs to pull real-time transaction data directly from providers. If the data stays within normal parameters, the supervisor allocates zero manual hours to that firm.
• Risk Triggers: Setting "red flag" thresholds (e.g., a sudden 20% spike in failed transactions). Resources are only deployed to investigate when these automated triggers are tripped.
4. Focusing on High-Impact Risk Areas
Rather than auditing every department, supervisors prioritize "Risk Segments" that carry the highest consequence for DFS:
• Safeguarding of Funds: Ensuring e-money issuers have 100% of customer funds in liquid bank accounts.
• Operational Resilience: Focusing heavily on cybersecurity and system uptime, as technical outages are the most common cause of DFS consumer harm.
• Agent Management: Instead of supervising thousands of individual agents, supervisors hold the provider accountable for their internal agent-monitoring systems.
5. Proportional Enforcement
When a breach occurs, the response is scaled to the severity and intent:
• For minor reporting delays by small firms, a supervisor might issue a cautionary letter or guidance.
• For systemic failures or fraud by large providers, they move directly to fines, suspension, or license revocation.

Supervisors can apply proportionality , by assessing and ranking the needs of thier DFS according to size and complexity and allocating resources based on the ranking.

In order to conduct an effective and efficient Supervision, the first thing that supervisors should have to consider is, especially at time resources are scarce, understanding risk profiles of each DFS providers, rank them and then apply appropriate supervisory tools for each. By the way, no doubt, all the time resources are scarce.
Next, developing a supervisory plan is very important to decide what supervisory tool for which service provider. For instance, onsite supervision might be required for those having high risk level whereas offsite examination and market monitoring might be enough for those ranked as medium and below. The decision is to some extent subjective and might require a judgment including availability of resources.
Through such mechanisms it's possible to conduct efficient and effective supervision.

In my country, proportionality is achieved through risk based supervision. The resources ( people, time, funds) are allocated according to the level of risk from the risk assessment that is conducted. From the risk assessment, an annual plan is then prepared and that is what guides supervision. Its also good to appreciate the complexity behind licensing and supervising DFS, and this requires exchange of information among different specialities and state agencies.