When is mobile banking not banking?
Small differences in the wording of a law can translate into a loophole big enough to drive a truck through, or a couple of the world’s largest mobile phone companies. In Kenya, the presence of the word “and” in a definition of banking in the country’s Banking Act gave Vodafone ample space to launch M-PESA, a mobile wallet with most of the functionality of a traditional transactional bank account. M-PESA is nearing 1 million registered users (in a country with less than 3 million bank accounts), but Safaricom, Vodafone’s local affiliate, is not currently regulated by the Central Bank of Kenya (CBK). Why? M-PESA isn’t banking, at least right now.
In the Philippines, another pioneer, Globe’s GCash mobile wallet, isn’t classified as banking either, but it is regulated by the central bank, unlike M-PESA (for now). What’s going on? Is there cause for concern? While Vodafone operates in a vaccum, the Philippines central bank crafted a special regulatory window that not only gives Globe’s GCash permission to operate, but gives the central bank the authority it needs to see mobile payments is safe for consumers and the financial system.
Kenya’s Banking Act [SEC. 2(1)] defines business as the acceptance of money from the public on deposit or on current account and the use of this money “by lending, investment or in any other manner for the account and at the risk of the person so employing the money.” Although M-PESA involves accepting repayable funds from the public, Safaricom structured the product in such a way that it falls outside the definition of “banking business.”
Funds collected from M-PESA account holders are held by M-PESA Trust Company Limited in a pooled account with the Commercial Bank of Africa. Interest earned on this pooled account does not accrue to or benefit Safaricom, and therefore M-PESA fulfils only the first half of the definition of banking (taking deposits) but not the second (employment of deposits to make money).
This is not necessarily cause for alarm. Vodafone has substantial reputational risk which tends to make it super careful about tainting its very profitable voice business. But what about a fly-by-night operator, which may be much less scrupulous and have far less to lose? Right now, Kenya does not have a national payment system law, and consequently CBK lacks the powers it wants to control entry into the mobile payments / banking space, require reporting and supervise for safety and soundness.
In the Philippines, the launch of GCash was also facilitated by the definition of banking in the General Banking Law [SEC. 3.1]. Banks are defined as “entities engaged in the lending of funds obtained in the form of deposits.” GCash involves a store of value for clients’ funds, but lending isn’t part of the service. Ergo, it’s not banking, like M-PESA.
But within a relatively short time span after the launch of GCash, the Philippines central bank crafted Circular 471, classifying Globe’s subsidiary, GXI, as a remittance agent. Rather than place the full weight of banking regulation on the GCash model, which may have been prohibitively expensive, the “remittance agent” category is sufficiently light, but crucially gives the central bank the ability to decide who can operate in the mobile payments space, engage with providers to understand their systems, request changes as necessary, and require reporting, so the central bank can actively monitor developments. Latest news from Kenya is the Payment System Bill will give CBK similar powers. However, the bill has yet to clear parliament and likely will not until the first or second quarter of next year, after Kenya’s election.
