The widespread penetration of mobile phones has led to considerable interest in mobile money among developing countries, and particularly in Africa, where financial systems remain among the smallest and least developed in the world1. The majority of households and SMEs in Africa have no access to basic banking services such as savings, credit or payments; although there are great variations across the continent (formal banking penetration is around 60% in South Africa, but close to 20% in sub-Saharan Africa. One reason why banking penetration rates in Africa tend to be low is that bank charges are high and beyond the reach of the majority of the population.
A significant trend, which is changing the structure of the rural economy by allowing entry into the market economy of previously excluded segments of the population, with some potential impact on income and poverty levels, is the increasing remittance flows into and within developing countries. The increased remittance flows are due, in part, to the adoption of mobile phone financial services in a number of these countries. With low transaction costs, mobile financial services present a viable entry point into the formal financial market for these unbanked populations.
The current state of mobile-phone-enabled financial services is being driven by new and innovative business models, each with specific regulatory implications: (a) On one hand of the spectrum, licensed and supervised financial institutions are increasingly introducing mobile money products to their customers (whether account-based or involving transactions with a retail agent). The case of South Africa falls in this category; (b) on the other end; mobile network operators are issuing mobile money services for customers that do not necessarily have direct contractual relationships with a licensed and supervised financial institution. This model basically provides a payments platform that allows low-value electronic payments and transfers quickly, cheaply and conveniently for customers through a distribution network of agents. M-pesa in Kenya typifies this model; (c) in between these two, are several variants of hybrid models in which mobile network operators and a range of regulated financial institutions are recognizing the need to establish linkages/partnerships in the issuance of mobile money products to leverage on both the lower transaction costs and the regulatory space to attract new customers to formal banking services. The Tameer Bank/Telenor joint mobile banking venture (EasyPaisa) in Pakistan is a case in point.
Only a few countries have designed regulatory frameworks to supervise mobile money services. In most of the adopting countries, mobile phone financial services are seen as payment systems products, and as such, financial sector regulators often draw their mandate from either (i) existing banking legislations, or (ii) the general authority of the central bank to ensure the safety and efficiency of the payment system. Given the dominant participation of non-banks, and in particular mobile network operators (MNOs), in the mobile money space, there is increasing pressure to define appropriate regulatory standards for these services.
For example, the Philippines, Kenya and Pakistan have all developed practical regulatory responses to the emerging business models, while simultaneously being cognizant of the need to maintain sound financial stability objectives. In the Philippines and Kenya, both the Bangko Sentral ng Pilipinas and the Central Bank of Kenya (CBK) took a more experimental approach to the advent of mobile banking and appears to be following a pragmatic and “regulate as we go” policy. As a result, the two models are probably the most examined and successful examples of mobile financial services; with Kenya's flagship "M-PESA" service provided by Safaricom currently serving nearly 10 million customers, while in the Philippines, Globe Telecom and G-Cash combined provide services to approximately 6million people.
The willingness of the regulatory authorities in these countries to acknowledge and support the very narrow product focus of mobile financial services by non-bank providers has been essential to their success. In Kenya, security concerns regarding customer funds were resolved through the establishment of the M-PESA Trust Company which keeps all client funds in a single account with the Commercial Bank of Africa. Safaricom is not allowed to take money from this account and it cannot keep the interest earned on funds held. All liabilities of the Trust Company are the responsibility of Safaricom, including client claims and loss of funds. This arrangement avoids the need for the mobile banking service to have its operations formally tied to a bank, with consumer protection issues being addressed through the establishment of the Trust Company. By tailoring the service to only meet the needs of the poorest segments of the population, the sustainability and profitability of the industry under such narrowly defined boundaries is largely a function of the inventiveness and innovations of the telecoms companies that wish to provide these types of services, and the pragmatic regulatory solutions.
Objectives of the WG
Despite the advances by some countries in shaping effective regulatory frameworks, a number of pressing issues, that have a critical bearing on the success or failure of the emerging business models as well as on effective consumer protection of mobile money, still need to be addressed in order to foster further development of the sector. The AFI Mobile Money WG will therefore provide a platform to discuss critical policy and regulatory issues in the m-banking space, and promote widespread deployment/uptake of mobile money as one of the key solutions for reaching the un-banked poor in developing countries. The WG will also be fully integrated and linked to AFI’s policy development program and grants.
The broad objectives of the WG include:
Promote greater understanding of risk profiles: The WG will serve as the forum for identifying and promoting a greater understanding of the risk profiles associated with emerging mobile money business models, which regulators need to understand before designing appropriate national regulatory frameworks for supervising these new financial products and channels;
Shape the regulatory agenda: The WG will provide leadership in shaping the global agenda and stimulate discussion on appropriate approaches to regulating mobile phone financial services, while simultaneously attracting the inputs and interest of other strategic parties involved in the area of mobile banking into the working group;
Provide a platform for neutral information sharing and dissemination: The WG will act as a filter to new information on the innovative products, business models and regulatory approaches to ensure that it is free of the lobbying margin and can be easily trusted by aspiring peers as the basis for policy decisions. This information will be disseminated widely among policymakers and strategic partners;
Cross-border cooperation: Mobile money, in virtually all the jurisdictions where it has taken root, is increasingly a cross-border issue. Regulating mobile money into the future therefore requires cooperation between the regulators of different jurisdictions. The WG will need to address these specific multi-national/cross-border dimensions of cooperation, regulation and standards.
Activities and suggested format
Peer Learning: To the greatest extent possible, the Working Group (WG) will provide a neutral platform that actively facilitates ‘peer learning’, an opportunity to create value by sharing a knowledge base of implementation experience, and providing support to members in examining the business models and identifying the most appropriate regulatory responses.
Cross-industry partnerships: The WG will also explore ways through which regulators can proactively encourage partnerships between financial institutions and Telecoms companies so that can cooperate with each other to answer and resolve the most pertinent questions regarding security, consumer protection and reporting.
Engagement with standard setters: It is expected that this platform will identify appropriate best practices and standards, and engage with relevant sub-committees of International Standard setting bodies (BIS, FATF etc) in setting proportionate supervisory practices for mobile phone financial services.
Development of Risk Framework and Policy notes: The WG will develop a comprehensive risk framework and policy notes in the mobile money business environment in order to guide and stimulate discussion on appropriate regulatory responses.
Members and stakeholders
The Mobile Money Working Group provides a platform for financial sector regulators from a cross spectrum of countries including the champion countries, the aspiring countries as well as the more conservative jurisdictions. For each of these countries, it will be important to allow participation at both technical and decision making levels for regulators, as much of the activities are likely to potentially happen within specific subgroups, which will require the participation of technical staff and experts. However, the principal member will be Director Level, with the technical staff as an alternate. In addition, it is critical that the WG interacts with and accommodates mobile network operators and other strategic partners in some way in its activities, and to invite these parties to participate when key industry issues are discussed.
Quarterly meetings of the Technical Committee - which will be responsible for identifying, analyzing risks in the emerging business models, and formulating recommended regulatory approaches for discussion during the Annual meeting.
Annual meeting of the WG – makes recommendations and decisions on appropriate best practices and standards for regulating mobile money.
Obviously, consideration will be given to how this WG would relate to other forums and institutions operating in this space such as GSMA, CGAP etc., and opportunities for leveraging with existing initiatives. Much of the activities of the WG are likely to happen at technical levels potentially within specific subgroups, while an annual event will be considered to ensure the quality of engagement and information provided.
1 The financial sectors of many African states are smaller than a mid-sized bank in continental Europe, with assets worth less than US$1bn, and credit to the private sector in Sub-Saharan Africa represents around 16% of GDP, compared with 35% of GDP in other developing regions.