Imagine you’re an entrepreneur who wants to start up a cash-in/cash-out (CICO) network for all mobile money users in your community. You just seek regulatory permission and get on with it, right?
Unfortunately, it’s not that simple.
In most developing countries, regulators treat CICO as an integral part of a digital money system. The same license (whether of the banking, mobile money or e-money issuer kind) that entitles you to operate a digital money system entitles you to run a CICO network. It´s like having two licenses stapled together. You cannot get one without the other. If you’re a small entrepreneur, this means the only way to get into the CICO business is to become a contractor of a licensed financial institution.
This regulatory binding of digital platforms and physical cash networks is unnecessary, and it’s stifling the growth of mobile money.
Digital money platforms and CICO networks can be run by separate businesses
CICO is certainly an integral part of digital money from the customer point of view. For some time to come, few will be interested in digital money that can’t be converted to and from cash. But digital money networks and CICO networks need not be integrated on the supply side. There is no reason for the provision of digital money and CICO to be consolidated in a single firm.
In fact, digital money and CICO exhibit different economic drivers and require vastly different core competencies. Digital money networks are based on network effects: the more customers, the better the offer. As the chief operating officer of a digital money system, you'd worry about things like the reach of your communications network, server up-time, data security and phone menu usability.
CICO networks, like most retail activities, exhibit far fewer scale economies. A small entrepreneur could reasonably aspire to be king of cash in his village, but it would be delusional to think he could be king of digital money. Offering personal service to customers, managing physical premises and cash security and traveling to the bank to rebalance liquidity are the core CICO activities. All the rest are provided to the CICO outlet by the digital money platform.
The question is how to regulate these two services that customers want to enjoy seamlessly but which exhibit different supply-side characteristics and business models. It´s not a rare situation in business when players specialize in different elements of a value chain, and often they are subject to different regulations. A computer needs to have hardware and software, but these components are generally provided by different types of companies. Fish and chips is a popular dish, but to deliver it you don´t have to integrate the fishing and potato growing businesses and bind them tightly to the same regulations. Yet this is essentially what is happening in mobile money.
Why aren’t we regulating digital money platforms and CICO networks separately?
What if these two licenses were unstapled? Doing so would enable a country´s digital giants to run their digital money platforms, while giving small local entrepreneurs the freedom to build CICO networks. Each would be allowed to operate under a license embodying consumer protection rules relevant to its part of the business. Digital giants could even obtain both licenses by demonstrating the requisite range of competencies and ability to handle the operational complexities. This arrangement is appealing because it does not subordinate small, local entrepreneurs to digital giants. These entrepreneurs’ right to help solve the cash challenge should come from publicly minded regulation, not from private contracts.
Of course, it might be impractical for central banks to license every individual CICO outlet. Granting licenses to CICO outlet aggregators may help ensure regulators don’t become a bottleneck. If you were a small, local entrepreneur, this would mean you would have three options: get your own CICO license, find a licensed CICO aggregator who can sponsor and support you (with a technology platform, a brand, an operational process) or find a digital money provider you can line up behind. That´s two more options than what entrepreneurs have today.
Freeing, and potentially deregulating, CICO networks in this way could have several benefits.
First, it could spur the growth of independent CICO networks that want to serve all customers and providers. Today´s restricted CICO networks are designed for the customers of only one provider, which limits the value proposition of mobile money. If you are thinking that shared CICO networks are starting to appear now so all is fine, think again. Local entrepreneurs do not have deep pockets. They need to be able to offer service to any customer with any provider from day one, not after years of protracted negotiations with digital giants.
Second, it could enhance competition between local CICO outlets. CICO remains the toughest part of the digital money ecosystem. Yet with today´s nationally managed, provider-dominated CICO networks, we have removed the branding and pricing elements from the local competitive CICO equation. Let different CICO networks compete for the same — not different — customers. One may have the brand of the digital money provider, playing on trust. One might have cheaper pricing because a local entrepreneur requires a lower return on investment than the digital giants and their complex, outsourced CICO management chains. One might be more expensive but offer more reliable service because it is prepared to rebalance as often as needed. Who wins depends on the competitive environment. I suspect independent CICO networks would take rural areas by storm.
Third, it could enable more innovation in digital financial services. Digital money services providers who want to go beyond the standard money transfer and bill payment service would be able to enter markets without having to accept the burden of putting together their own CICO networks. They could sign up with pre-existing, independent CICO networks that have a desire to play with all providers. In this way, they could acquire a national CICO footprint without having any of the attendant legal responsibilities and operational headaches. Vibrant independent CICO networks would create a much-needed level playing field on the digital side of the service.
The financial inclusion community now has ample experience with CICO. We know the needs, challenges and risks. Let´s do the right thing. Let´s free up cash networks by adopting a regulatory framework that allows multiple regional and local entrepreneurs, not just the digital giants, to advance CICO and solve last-mile problems.