To promote effective regulation of mobile banking, CGAP, DFID, and the Alliance for Financial Inclusion (AFI) have organized this week’s 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. The following is based on a session led by Dominic Peachy, Technical Specialist & Senior Policy Adviser at the UK Financial Services Authority. You can download his presentation here.

Is a non-bank more (or less) risky than a bank when it comes to delivering financial services for poor people? If a bank is involved, does that mean there is less risk? Not necessarily. Most so-called branchless banking services entail partnerships between banks and non-banks. In such a partnership it may be unclear who is doing what and therefore where the risk resides.

For many poor people, the distinction between a purse for spending and an account for saving is irrelevant. What they need is the ability to safely “store” value, and smooth out what may be erratic cash flows. When we are talking about stored value – whether it is a payment instrument or payment tool, how is this different than cash?  Or a deposit? And how is it defined from a regulatory perspective?

The phrase “e-money” gets thrown around quite a bit in this field, and put simply, we can consider it a virtual replacement for currency. When this virtual e-money is held not in a physical wallet but a mobile wallet on a cell phone or a smart card, we call it stored value. An appropriate regulatory framework would identify how institutions are expected to manage risk. Proportionate rules on capital, liquidity, asset-liability management, management, systems and controls are all ways to establish a safe operating environment for stored value to operate as a cash substitute.

It’s also important to fully understand the risks involved in branchless banking before making the rules. Open and vigorous dialogue with industry can help. Regulatory space can be established to allow officials to monitor and supervise branchless banking business models while creating incentives for the market to develop innovative products that are more likely to take hold among customers.

To be clear: this is not a call for “hands off” regulation. It may be more of a “hands clasped” approach, as a continuous and hearty relationship between regulators and market players can establish a model to ensure that service providers have clear incentives while  customers are protected.