Balancing Regulatory Uncertainty in Branchless Banking Design

This is the third post in a series that discusses the role failure plays in the eventual success of branchless banking models.

Nothing is perfect. Neither business models, products, nor even financial service regulations. This is particularly the case in mobile money, as it typically involves innovative models policymakers might not have thought about when they introduced relevant financial sector laws. As mobile money continues its expansion across the globe, providers are learning to manage expectations as we see more evidence of the absence of perfection, but also of failures in launching new models and products that can be traced back to an unfavorable legal environment. There are lessons that can be extracted from these experiences for providers looking to navigate complex regulatory environments.

The process of determining regulatory implications can be roughly broken down into three stages, each building upon the previous and ultimately leading to a determination of whether a model or product can operate legally (see figure below):

First, landscape the environment in which the decision will be made. This translates into defining the broad characteristics of the model or product, the institutional risk appetite for legal uncertainty, and the general regulatory environment against which the model or product will be measured. It is crucial that providers consider the extent of the regulatory implications early on in the model/product development. We worked with one provider in one market that had already committed considerable R&D resources before they commissioned a study on the main regulatory obstacles. It turned out that the product as it was planned was unlikely to get approval and they ultimately decided not to move ahead. The second blog in this series provides a good example of this.

Second, determine the implications of regulation against the specific characteristics of the model or product. Naturally legal certainty is often a key consideration in this regard. In some cases regulation is clear-cut, regarding what can and cannot be done with mobile money. Countries that come to mind are mostly those that have issued specific legal guidance on mobile money such as Nigeria and Philippines. In the former the Central Bank of Nigeria has clearly indicated the scope of mobile money provision, heavily dependent on either banks or narrowly defined mobile payment operators (leaving little room for mobile network operators). In the latter case, the Bangko Sentral Philippinas has electronic money regulations that have created relatively equal space for MNOs and banks. In both countries the regulatory context is clear, whether you like it or not. The other key consideration for operators is the openness of regulatory regimes to launch innovative models. In many countries regulations remain oriented towards banks, nonbanks such as mobile network operators are simply not permitted to offer mobile wallets.

More often than not, providers find themselves in the middle ground – their mobile money service is neither clearly permitted nor clearly prohibited. The case of Uganda comes to mind here, where we are seeing growth of mobile money in the absence of regulatory clarity. In Uganda, banks are issued a Letter of No Objection (LNO) based on the (confidential) legal agreement between them and a mobile operator and allowing them (or better: explicitly not prohibiting them!) to partner with a mobile money provider. But each legal agreement is bespoke to the institutions in question, negotiated independently with the Bank of Uganda. New providers must embark on the regulatory approval process in the absence of transparent (and therefore possibly unequal) regulatory compliance requirements.

Experience has shown that providers can expect to find themselves in a "go/no go" context, where the decision to proceed may be a matter of carefully considered legal/ regulatory risk, often taking into account any precedent of engagement (positive or otherwise) with the regulator and their unique risk appetite. In Russia, for example, we have seen small, innovative e-payment providers operating broadly without legal certainty, and because of the their carefully optimistic growth regulators have stepped in to clarify regulations which has in turn encouraged larger, more risk averse banks and MNO’s to now enter the market.

And third, the decision making stage occurs when the provider will be drawn into a number of decisions that will define the regulatory engagement process and test the risk appetite to commit resources to determining regulatory certainty. At the risk of oversimplification, in the case of the model/product being not permitted, the provider has the option of either changing its design or successfully lobbying for regulatory changes (or even a combination of both: In Pakistan, Telenor was legally not permitted to launch mobile money services; to do so it needed to be a bank. It decided to buy a bank, which required the State Bank of Pakistan’s approval – something it successfully lobbied for). If the implications of the product are unclear, the first step is to create clarity. If this is not possible, the “go/no go” decision mostly depends on the provider’s risk appetite. The figure below depicts this process using a simplified flow chart.

The figure focuses particularly on cases lacking legal certainty and what a provider might expect from the engagement process to seek clarity. In reality, the process might be more iterative in nature, as regulatory engagement is the reality of operating in a new product or institutional context with little legal precedent.  

Flow chart: managing legal implications

Providers have learned to expect a complex relationship with regulators in environments that are unclear or prohibitive to mobile financial services. Proactively thinking a few steps ahead (using, for example, the figure above) can help providers to manage the complexity. Understanding the regulatory landscape and its implications on the product or model is a necessary process that should not be underestimated as it will clearly impact the decisions around the suitability of a particular product or model. It may be helpful to undertake a little introspection and determine ones institutional risk appetite to help guide the decision making process.

Given the iterative nature of regulatory engagement, providers should know that a decision made today can often impact future engagement with regulators. Thinking ahead will help providers survive (and thrive!) in their respectively complex environments.