To promote effective regulation of mobile banking, CGAP, DFID, and the Alliance for Financial Inclusion (AFI) have organized the second Global Leadership Seminar for high-level policymakers and regulators who set policy for branchless banking, including mobile banking. CGAP’s Technology Program and AFI are supported by the Bill & Melinda Gates Foundation. This week we’ll be blogging from the seminar. First up is this dispatch from Timothy Lyman, who leads CGAP’s current pioneering work on proportionate regulation of branchless banking. You can also download his presentation from the seminar.

Amid all the uncertainties of the financial crisis and resulting economic downturn, one might expect financial policy makers and regulators to be cautious about embracing novel-seeming approaches for delivering financial services to the world’s poor.  In joining in this event, leading bank supervisors, payment system regulators and other financial sector policy thinkers from 18 countries on the forefront of branchless banking are demonstrating their conviction that these new models can be implemented safely – even during a crisis of proportions we haven’t seen in generations.

And they are demonstrating they recognize its potential to reach scale incredibly quickly, including among the poor (if circumstances are right) – and therefore branchless banking is a potentially powerful anti-crisis tool.  (Poor people, after all, are the ones most vulnerable to the shocks of the crisis and the global economic downturn.)

The enormous potential of branchless banking as a vehicle for financial inclusion is often cited by CGAP.  Recent numbers show that globally there are more than a billion people who have a mobile phone but don’t have a bank account. From a policymaking perspective, harnessing that potential means recognizing the essential roles played by organizations other than banks in successful branchless banking models – “nonbanks” – notably mobile network operators and the retail establishments that perform the “cash-in/cash-out” function of converting cash to electronic value and back into cash (a necessary function for mobile banking, as well as all other branchless banking models).  Establishing a proportionate regulatory approach for nonbanks – one that balances financial safety with space for innovation – is therefore absolutely key.

Because of its potential to save costs, branchless banking can reach customers that can’t be served profitably by conventional branch-based financial services.  What we’re talking about is giving poor people options other than stuffing cash under a mattress or moving money physically, for example, by giving it to a bus driver to take it to relatives many miles away.

For the foreseeable future, even where branchless banking is extremely successful, poor people will live with one foot in the world of cash.  One of the challenges for branchless banking is that, in moving poor customers from cash and into the formal financial system, they become “visible” – their economic affairs are known and traceable by service providers as well as the government.  This raises questions: Why give up cash? Why use branchless banking and move into the formal financial system? The driving issue for customers – especially now – is about trust:  Will they trust the new providers? Will they trust policymakers to protect them from the misuse of their new visibility?  And will policy makers protect the reputation of branchless banking from the loss of trust that would result from a preventable failure of a significant branchless banking provider?  Against the backdrop of the crisis (and general erosion of trust it has already engendered), this last point seems particularly vital.

The policy makers and regulators from every region of the world who have gathered here in Windsor will grapple with the delicate issues of proportionate regulation of nonbank actors in branchless banking, as well as the issues around preserving consumers’ trust.  In their regulatory approach to branchless banking, these policymakers are ideally positioned to lead the world toward establishing that perfect balance between access to formal financial services, consumer protection, and financial stability.  And in doing so at this challenging time, perhaps they will contribute to the development of a potentially important crisis mitigation tool for the world’s poor.