Policy makers from 18 countries conclude high-level meeting on mobile banking regulations

March 20, 2009    

Consumer protection, rules for nonbanks front and center

To promote effective regulation of mobile banking, CGAP, DFID, and the Alliance for Financial Inclusion (AFI) organized the second Global Leadership Seminar for high-level policy makers and regulators who set policy for branchless banking, including mobile banking. Held March 9–11, 2009, outside of London, seminar participants represented countries where branchless banking is growing quickly, or is poised to do so soon: Argentina, Bangladesh, Brazil, Colombia, Egypt, India, Kenya, Maldives, Mexico, Pakistan, Peru, the Philippines, Russia, Rwanda, Sri Lanka, South Africa, Tanzania, and Zambia. CGAP's Technology Program and AFI are supported by the Bill & Melinda Gates Foundation.

Amid all the uncertainties of the financial crisis and resulting economic downturn, one might expect financial regulators to be cautious about embracing novel approaches for delivering financial services to the world’s poor. However, in joining this event, participants demonstrated their conviction that these new models for branchless banking can be implemented safely and, given the potential of rapidly reaching scale among the poor, that branchless banking could be a powerful tool in these tough economic times. (Poor people, after all, are the ones most vulnerable to the global economic decline.)

In their regulatory approach to branchless banking, these policy makers are ideally positioned to lead the world toward establishing the critical balance among access to formal financial services, consumer protection, and financial stability.

Rules for mobile money: Evidence-based policy…or policy-based evidence?
For many poor people, the distinction between a purse for spending and an account for saving is irrelevant. What they need is the ability to safely “store” value, and smooth out what may be erratic cash flows. Many questions arise when we talk about stored value: Is it just a payment instrument? How is this different from cash? Or a deposit? How is it defined from a regulatory perspective?

The term “e-money” gets thrown around quite a bit in this field, and put simply, e-money can be considered a virtual replacement for currency. When this virtual currency is held not in a physical wallet but in a mobile wallet on a cell phone or on a smart card, we call it stored value. An appropriate regulatory framework would identify how institutions are expected to manage risk. Proportionate rules on capital, liquidity, asset–liability management, management, systems, and controls are all ways to establish a safe operating environment for stored value to operate as a cash substitute.
For officials, it’s important to fully understand the risks involved in branchless banking before making the rules. Open and vigorous dialogue with industry can help. Regulatory space can be established to allow officials to monitor and supervise branchless banking business models while creating incentives for the market to develop innovative products that are more likely to take hold among customers.

To be clear: this is not a call for hands-off regulation. It may be more of a “hands clasped” approach, as a continuous and hearty relationship between regulators and market players can establish a model to ensure that service providers have clear incentives while customers are protected.

Consumer protection and mobile banking
In recent years, several developing countries have issued regulations governing mobile transactions, e-money, and other aspects of branchless banking. Yet, as adoption increases for services ranging from smartcard-enabled agent networks to mobile phone payment systems, regulators continue to face challenges in ensuring adequate consumer protection, particularly for new users of financial services.

Challenges are intensified by the fact that many services have been widely available for only a short while. As a result, there are no “off-the-shelf” regulatory frameworks that can successfully mitigate risks and address problems in complex and far-reaching branchless banking systems. Nor is there a rich trove of historical data to use in shaping policy.

Growing adoption of branchless banking means that regulators are also likely to see new consumer safety issues arise, as an increasingly complex financial system gives rise to more sophisticated frauds. While there’s no one-size-fits-all solution to protect against current and future branchless banking problems, to date regulators have done well by focusing on implementing basic rules that protect consumers, define regulatory and supervisory powers, and limit risk-taking by providers.

The first step is to define, in laws and regulations, the activities that are subject to licensing, regulation, and supervision by the financial authority. Providers of branchless banking must also be required to offer clear disclosures of prices and service offerings, ensure fair treatment of all customers, and observe agent qualification, data privacy, and security rules.

Perhaps most important, as branchless banking cuts across diverse regulatory domains and industries, enforcement will work only if there is coordination among different supervisory agencies.