Branchless Banking: The Test and See Approach
When it comes to regulating branchless banking, some regulators believe they need to spend a lot of time and energy in developing a comprehensive framework. But putting in place extensive regulations without first observing and understanding how the market is developing can often result in a regulatory framework that is ill-tailored to the risks involved. A more effective approach is to “test and see” – permitting branchless banking business schemes on an ad hoc basis, conditional on measures addressing identified risks. As the market develops and risks are further clarified, regulators will be better positioned to issue more detailed and effective regulation.
This was the approach successfully used by the Philippines and Kenya. In the Philippines, regulators state expressly that their approach is to “follow the market.” After satisfying themselves that the GCash and Smart Money branchless banking schemes adequately addressed perceived risks, regulators approved their operation on ad hoc basis. Four years later, after observing the market’s development Bangko Sentral ng Pilipinas issued e-money regulations in 2009 carefully tailored to the Filipino market. For example, since branchless banking schemes in the Philippines were operated by both banks and nonbanks, the e-money regulation regulates e-money as a service and not by the legal character of the e-money issuer.
In Kenya, before M-Pesa’s launch in March 2007, the Central Bank of Kenya sent a letter to Safaricom which reportedly did not officially approve the product but nevertheless required M-Pesa to take measures – such as keeping an audit trail of transactions and abiding by the AML Bill (then in draft) – to mitigate perceived risk. The letter also reportedly notified Safaricom that M-Pesa would be subject to the National Payment Systems Bill once it became law. The letter effectively enabled M-Pesa’s operations while mitigating many of the risks it presented. Now, a few years after M-Pesa’s launch, Kenyan regulators are drafting e-money regulations based on how the Kenyan market has developed and with a clearer understanding of the risks involved.
By contrast, other countries have spent years preparing regulations or guidelines without any knowledge of how these guidelines would encourage or obstruct the emergence of a viable sector. Tellingly, branchless banking in some of these countries has yet to take off.