For a region where the banking sector is highly rooted in the economy, to think about non-bank issued electronic money is almost heretic. In this part of the world, money is the business of banks. Banks think so. And most regulators think so too. But things are changing fast.
Sustained economic growth in Latin American economies has led to the development of retail and telecommunications industries with large number of access points and significant cash management infrastructure reaching deep all across segments and geography. Because banking penetration, though high, is focused in middle and upper urban class, the prospect of reaching many poorer, unbanked citizens away from large towns remains the promise of this alternative infrastructure beyond the banking system.Financial inclusion is not new for banks in the region. The first wave of pro-poor expansion was led by Brazil in the early 2000’s, where banks adopted retail networks as agents to reach more people. Other countries (Perú, Colombia, Mexico) followed since, leading to different forms of agent banking models (some focused on payments, others on decongesting branches). The second wave, still largely in the works, is likely to happen with the adoption of mobiles as the central transactional device where a person from all walks of life (including very poor) can easily store, transmit, exchange, and in general manage their economic assets. Given the depth of the banking system, and the sophistication of commercial banks, one can only imagine (for now) the possibilities if everyone had true access to an affordable, easy to use, super-connected mobile account. In the Latin American context, the daily lives of many would be touched.
One of the key changes that might accelerate this “second wave” is enabling non-banks to issue electronic money (eMoney). This will allow a non-bank company to offer an electronic wallet (in many cases associated with mobile) where a person could store money, pay and exchange money with others, similar to how a banked customer uses a current account attached to a card. Although today, even without eMoney regulation, a number of bank-telco partnerships are out there with live products in a number of markets, partnerships across large players with seemingly different interests and market strategies are hard to cement and often lack the nimbleness needed to penetrate the market effectively.
Three markets are leading the pack allowing non-banks to issue eMoney – Bolivia, Perú and Brazil. Three other countries have prepared drafts for this and are already into the process of consultation – Colombia, El Salvador and Paraguay. México does not seem to have specific plans for this, but has provisions within the banking law that in practice could regulate non-bank eMoney issuers in a way that is similar to how they are regulated in the other LAC countries.
Three distinct forms of regulating electronic money seem to be emerging:
- In one extreme, electronic money is considered a bank deposit and can only be issued by banks, but a provision in the banking law allows the creation of specialized banks with “lighter” regulation. For example, in Mexico, non-banks can acquire a special banking license for issuing payments instruments, under which less capital is required and less reporting burden than what is required from banks. The benefit of this “payments bank” is that it integrates naturally with the rest of the banking infrastructure (card/ATM switches, EFT), and “inherits” the rest of the regulations on AML/KYC/CFT and the use of agents.
- In the other extreme, electronic money is not considered a deposit, and is issued by a third party under a license from the financial sector authority. Perú and Brazil follow this model. Given that it’s a new figure, the regulator has the ability to define in a more specific and targeted way the details of regulation applicable to all aspects of the business.
- In the middle between (1) & (2) above, electronic money is considered a deposit, but can be issued by a licensed institution that is not a bank. Since it is considered a deposit, it is subject to deposit insurance and can accrue interest.
These definitions lead to different schemes under which eMoney may or may not be able to accrue interest, and be covered or not under deposit insurance. Beyond that, another key aspect associated to eMoney is “fair access” to the mobile channel. In a market where a telco can issue its own mobile wallet, banks need assurance that they will gain access to the mobile channel on equal grounds. The reverse is also true – telcos need provisions to have access to existing bank-based cards infrastructure on equal grounds.
The chart below shows the different characteristics of the regulatory frameworks adopted in some of these countries.
Surprisingly (or maybe not), it has not been the telcos in all of these countries who have jumped at the opportunity, but third party payment aggregators and agent network managers who see in this the possibility to monetize the value of their significant footprint and cash management infrastructure by throwing a mobile proposition in the mix. In all of these countries, aggregators seem to be preparing to expand further up in the branchless banking value chain. A lower customer acquisition cost, and the possibility of compliance with a lighter set of requirements applicable specifically to these payment schemes makes one wonder whether this will finally unleash the power of mobiles in the region.
--------- The author is part of the Technology Enabled Business Model Innovation Team, and the regional manager for Latin America at CGAP.
Photo Credit: Fernando Gonzalez
In February of this year Ministerio de Hacienda y Crédito Público de Colombia, the Alliance for Financial Inclusion (AFI) and the Multilateral Investment Fund (MIF), held the first LAC regional meeting of AFI members to discus and compare smart policies for mobile finance in Latin America. Participants at this event included high-level representatives from Latin American and Caribbean member institutions, as well as stakeholders, including high-level representatives from financial service providers and telecommunications companies. At the meeting five countries — Colombia, Guatemala, Mexico, Paraguay and Peru — presented lessons learned from their respective approaches to MFS. (http://www.afi-global.org/smart-policies-mobile-finance-americas-next-f…) It was a very interesting event and in particular it was clear that the overall approach to MFS in LAC was very different to that of African policymakers- and yet with clear and steady progress obvious it would seem that the approach they are taking is the right one for them.
Yet more evidence that the ‘one size does not fit all’ approach promoted by AFI and increasingly by others in the development field is the correct way forward. It would seem that there are many ways to “unleash the power of mobiles” and though the MPESA model gets the most press, it may not be the right model for everyone. Looking forward to seeing how the field develops over the next few years.
Thanks, Xavier and also Peter for your comments. Since the mobile money Americas conference in April 2013 I have been learning with great interest the rapid developments in this market place and look forward to further sharing of analysis and initiatives with CGAP and AFI. IFC forecast a 80% CAGR for digital financial services (DFS) in LAC over the next 5 years and even if we only meet a portion of that we will surely see a major shift in the market for DFS as well as hopefully the impact on financial inclusion. The next step to me is how to leverage these new channels to reach new customers and introduce them to financial services; and, whether starting with G2P, remittances or bill payments, grant opportunities for them to manage crises, productive investment and consumption smoothing via savings, insurance, and sometimes credit products. While the private sector will naturally focus on the most profitable segments, donors and policymakers can encourage it to offer broader products to lower segments, and in some cases (eg M-Shwari) it can happen organically. Let's take advantage of lessons elsewhere in the world and see what we can achieve in LAC in the next five years for digital financial inclusion!
Great review on the recent initiatives in the regulatory landscape in Latin America. The framework in Mexico was published almost 4 years ago and very little progress is perceived in luring new issuers and products in line with the objective of financial regulation. Even a "light" licensing scheme for a bank is too burdensome for any non-bank. The recent rules in the other countries seem to point in the right direction. The issuing market is highly concentrated and dominated by the traditional banking issuers not willing to give up their turf easily. So the key to entice competition is to enable non-banking players to issue instruments capable of taking some form of deposit that conforms to a bank account format, without the regulatory burden of the traditional prudential regulation for banks. Then there is challenge of interoperability. These non-bank issuers should be able to connect to the banking clearing and settlement platform in order to be able to transfer funds to and from traditional bank accounts in financial institutions, if we expect them to issue an appealing payment product. The problem is that traditional regulations prevents non-banks to connect to this network due to their safety and security concerns. This is why most of the new providers to this day need some form of partnership with a bank, but the results have been poor because having a bank as a partner is a difficult relationship. Just remember the same torturous relationship that new entrants experienced in the telco world when they had to interconnect with the dominant carrier. No monopoly enjoys giving up its market share. Somehow the new rules should be able to bridge this gap if they new players are to succeed. It should be interesting to ask potential players in this market place how they feel about the new rules and see if they feel the framework is sufficient to lure them into the market. Let's hear it from them!
Fair access to telecommunications networks in Colombias has been regulated in Resolution 4458/2014 issued by the Regulatory Communications Commission.