Debating the Regulation of Branchless Banking: Agents at the Center

March 8, 2010    

As policymakers around the world seek to encourage the provision of financial services to the unbanked and under-banked poor, they are trying to implement regulatory frameworks that enable the spread of low-cost branchless banking while at the same time protect consumers against fraud. This is a difficult balance to strike, particularly when it comes to regulating agents, which typically play a crucial role in receiving and dispensing cash on behalf of the financial service provider.

Although branchless banking is still a relatively new concept, a handful of pioneering countries, such as Brazil, now have more than a decade of experience in regulating such services. The lessons they have learned are immensely valuable to governments currently developing or revising their regulatory policies. To encourage policymakers and regulators to share their experience, CGAP is hosting a series of annual seminars in partnership with the U.K.'s Department for International Development (DFID) and the Alliance for Finance Inclusion (the AFI), a global network of policymakers in developing countries.

This year’s seminar, Windsor Global Leadership Seminar on Regulating Branchless Banking, will bring together representatives from 18 countries. The seminar includes leaders from the branchless banking sector and representatives of the G-20 economies, which have committed to support the dissemination new modes of financial service delivery capable of reaching the poor.

“Regulatory frameworks, particularly those elements relating to the use of agents, can make or break branchless banking services,” said Michael Tarazi, senior regulatory specialist at CGAP. “Excessive regulation would limit the spread of low-cost banking services, while lax regulation could fuel fraud and money laundering. To help them get the balance right, regulators should tap the knowledge of policymakers in those countries that already have extensive experience of regulating branchless banking services.”

Building on the existing international dialogue between policymakers, the Windsor seminar will explore recent regulatory developments in the use of agent banking, highlighting the advantages and drawbacks of different approaches from around the world. The discussions will focus, in particular, on what kinds of entities should be permitted to act as agents and how best to level the playing field for both banks and nonbanks using agents to provide financial services.

Some countries have taken very different approaches to the regulation of agents. In Brazil, for example, a wide range of entities can serve as agents and they are able to receive documents for account opening, as well as handling deposits and withdrawals, as long as they have been approved by the central bank. By contrast, the Reserve Bank of India permits only a narrow range of cooperatives, nonprofit entities, and the postal system to be used by banks as agents.

In Kenya, Safaricom has carefully-structured its mobile phone-based M-PESA stored-value accounts so as not to constitute a “banking activity” under the Kenyan Banking Act. That means Safaricom, which is jointly owned by the Government of Kenya and international mobile phone operator Vodafone, is free to choose its agents based on its business judgment alone. By September 2009, Safaricom had 7.9 million customers for M-PESA, while the number of agents for the service had reached 13,326, up from 4,230 in September 2008.

“Branchless banking has played a central role in extending the reach of financial services to the poor in Brazil, Kenya, South Africa, and some other developing countries,” said Maheswar Mishra, private sector development adviser for the Financial Sector Team of DFID. “These countries have adopted quite different regulatory frameworks, suggesting that there isn’t necessarily a single ‘right answer’ when it comes to regulating branchless banking. But regulation clearly needs to make it cost-effective to establish agents in both urban and rural communities, while ensuring that consumers can trust these agents to handle their cash and keep their bank accounts secure.”

The Windsor seminar will also debate several other topics, including the forces and uncertainties that will shape the development of branchless banking over the next decade. A further session will consider how to balance the drive for financial inclusion with safeguards to prevent the use of branchless banking services for money laundering and the financing of terrorism. The agenda will also cover potential branchless banking business models, the experience of consumers (drawing on survey data from Brazil, Kenya, and South Africa) and the impact of competition.

“Bringing developing country perspectives to the Windsor seminar will accelerate the international exchange of ideas and best practice, arming more regulators with the knowledge they need to implement proportionate and balanced regulation,” said Alfred Hannig, executive director of AFI.