Today we welcome Denise Dias as a new blogger for the CGAP Technology Blog. Denise works on policy and technology issues. Before working with CGAP, she was employed by the Central Bank of Brazil most recently as a bank examiner and previously as a senior advisor for the licensing department. –Jim

A meeting at CGAP yesterday made me think about a recent blog from Mr. Hannes von Rensburg, founder and CEO of Fundamo. He believes regulation is not a barrier for mbanking projects around the world and to bank the unbanked. Does he have a point? Yes, he does. First, the “regulatory barrier” is the easiest scapegoat for nonbanks (read mobile network operators) that are not used – or willing – to negotiate with financial services providers and deal with prudential regulators. Regulation will not be an insurmountable barrier to a variety of branchless banking models in many jurisdictions. Providers (banks AND nonbanks) will probably find a workable solution with financial regulators by agreeing upon minor regulatory changes or alterations in the proposed business model. Second, there are other major obstacles for branchless banking to take off, such as finding the balance between profitability, client adoption/usage, and security.

But, is Mr. Hannes also wrong? Yes, he is very wrong. Regulation can certainly be a barrier for both banks and nonbanks and there is concrete evidence here. The absence of some regulatory preconditions for the development of transformational branchless banking may pose real obstacles for innovative models, even when fully licensed and prudentially regulated financial institutions are involved. In Peru, for instance, commercial banks may use retail agents but cannot outsource KYC procedures, which impedes account opening for new clients. (Account opening through mobile phones is also prohibited).
Mr. Hannes correctly pointed out that regulators are reactive, giving a time advantage to providers. However, legal uncertainty may cast a dark shadow on investments, especially for those who cannot afford reputation risk in a large-scale branchless banking project. Working within regulatory gray areas may imply assuming considerable risks, as showed by M-Pesa, constantly under attack for its regulatory status. Even when there are no explicit prohibitions to a branchless banking proposition in a given country, and even if providers do not act irresponsibly at home or elsewhere, the regulator may have an excessively conservative interpretation of the legal wording or simply resist a branchless banking proposition for lack of understanding of the risks, antagonist pressures from competitors and other stakeholders, lack of supervisory capacity, or different combinations of these. The Salvadorian supervisor recently required Banco Agricola, the largest commercial bank in the country, to close the few agents that were processing bill payments on its behalf. Changing a regulator’s mind and addressing regulatory ambiguities may be a Herculean task. This is nothing but a barrier; it delays and inhibits innovations.

There are, nevertheless, positive experiences out there. Mexican banks had been delivering services through agents for years before agency regulations were issued last year. The regulation came, in this case, to improve the rules of the game, not to stop providers. The Philippines is another famous example of a flexible regulatory approach that enabled the development of branchless banking. The bottom line is that prudential regulators in different jurisdictions will react differently. What do they have in common after all? It’s simple. They all work to balance policy goals that justify their own existence: systemic stability and inclusive financial markets. They impose obstacles exactly when there is a trade-off between policy goals.

Hence, the relevant discussion is not whether regulation poses or lifts barriers, but whether it creates – in the eyes of the regulator – a fertile ground for achieving policy goals. Providers that understand the regulator’s concerns will be better positioned and open to negotiate and establish partnerships to accommodate such concerns. The interests of providers, regulators and consumers converge at healthy access to finance. Should we all emphasize this convergence when pressuring for regulatory changes? Hmmm… Mr. Hannes may be right again!