Here is a report from the Business Standard on the move. Excerpt:

The wait for rolling out mobile banking seems to be over, with the Reserve Bank of India’s (RBI) issuing draft operative norms for such payment system. Now, RBI said, it will be easier and safer to use mobile phones for carrying out a gamut of banking transactions.

Banks can offer mobile-based services only to their own customers. Banks should have a system of registration before commencing mobile-based payment service to a customer, RBI said.

If they want to convince central bankers that hold the keys to the payments space, mobile operators will make persuasive arguments about how mobile financial services meet traditional thinking about deposits, the new domain of payment system regulation, and the hot button issue of anti-money laundering, especially when sending money across borders.

No operator better illustrates this than Vodafone and its M-PESA money transfer service.

M-PESA’s commercial launch in Kenya required months of discussions with the Central Bank of Kenya about why M-PESA is more a payment service than a bank deposit. Once launched, the market responded with an excitement banks must marvel at: 1.8 million registered users in the first year (in a country with only 4 million bank accounts total). Central banks in other countries may be attracted by efficiency gains in the national payments system, but they won’t always be ready to allow mobile wallets if they are treated like deposits.

One solution may be payment system legislation that creates a licensing window for payment service providers that take funds from the public, but solely for the purpose of facilitating a payment or transfer. The EU’s Payment Service Directive will do just that, but much still has to be worked out by individual national governments before the November 2009 deadline. That means EU experience could become an important signpost to emerging market countries down the road. But it’s likely to be several years before a European track record emerges on carving out dedicated rules for firms in the payments business.

In the meantime, mobile operators may be better off pointing to countries that have crafted more ad hoc but, so far, very workable arrangements to oversee mobile financial services. In the Philippines, the central bank constructed accommodations allowing one mobile operator to offer a mobile wallet directly (Globe), and another model in which banks outsource the vast majority of functions to the operator (Smart). Both required some flexibility on the part of the regulator, as banking laws could easily have stood in the way. Together, Globe and Smart have over 7 million registered users for mobile financial services.

But the hurdles don’t stop here, as Vodafone seems to be finding out in switching on its UK-Kenya remittance service via M-PESA, according to this report. Moving money across borders immediately attracts concern about money laundering and terrorist financing. Vodafone is partnered with Citi, but it seems regulators still have questions about KYC. At the Kenya end, M-PESA customers open accounts via agents, who are neither employees of Citi or Safaricom, Vodafone’s Kenyan affiliate.

And that may be the one quick lesson for mobile operators: partnering with a bank may not automatically solve all your regulatory problems.

The report is the latest or progressively more encouraging signs from RBI that it plans to provide additional guidance for mobile banking to take off. In its Financial Sector Technology Vision document, released in October, RBI indicated it sees high potential for electronic banking to increase efficiency in retail banking. But RBI is also concerned about mobile security, particularly authenticating users accessing bank accounts remotely.

RBI is also closely watching several pilot schemes using mobile connectivity to improve access to financial services among low-income Indians. As the Economist reported earlier this month, one program in Andhra Pradesh is testing how to deliver pensions and unemployment benefits to around half a million people in villages, via specially-equipped mobile phones in the hands of local payment agents and smart cards issued to recipients. A parallel POS-based system is also being tested. So far, 40,000 cards have been issued.

What’s not yet clear is whether RBI guidance on mobile phone banking will be mostly concerned with mainstream banks providing mobile as an additional channel for current customers, or whether RBI will extend permission to some more far-reaching initiatives. Will mobile operators get a window to become licensed to provide electronic wallets for international remittances, bill payments and other payment services?

The G2P pilot in Andhra Pradesh also makes extensive use of local payment agents, and we understand at least some of these to be local merchants. In rural areas, its often the local store owner who has enough liquidity to pay out cash on the government’s behalf. But so far, RBI regulation on outsourcing doesn’t provide clear permission for banks, microfinance institutions or mobile operators to follow suit and use local merchants to extend banking services in places where bank branches may otherwise be too expensive to build. Will RBI make regulatory changes on issues like this, too?

How about completely outsourcing information systems (IS) to an external technology provider, so that the MFI can focus on its main business: handling client relationships and providing financial services?  

Here now, an exciting development. IBM has developed a “microfinance processing hub,” i.e., a shared infrastructure and software platform that provides groups of MFIs with a centralized core banking system, data center, operations management, and transaction processing. “When we started to work on the Microfinance initiative of IBM, we found that gaining access to appropriate back-office technology was the single most important obstacle for the growth of small institutions and the microfinance industry in general,” says Alberto Jimenez, Global Business Advisor for the Financial Services Sector of IBM.

In Africa, IBM has partnered with CARE to develop an “African Financial Grid.” The Grid is a “shared services and infrastructure model designed to help MFIs reduce operating costs, streamline lending processes, scale rapidly, and integrate with other resources such as credit bureaus, financial institutions and international payment networks.” Initially the plan is to cover 11 countries and is open to all kinds of financial institutions.

IBM acquired some valuable knowledge on what it takes to establish and operate a processing hub for microfinance institutions, which some also refer to as a core banking application service provider (ASP) solution. One of the main challenges to do this is not even a technical one, but lies in the concern of MFIs to outsource client information to a third party.  However, according to Alexander Bloch, who leads IBM’s Global Microfinance Initiative, “these concerns can be effectively addressed through a rigorous governance  associated with the management of client information, which IBM implements for MFIs”. Connected institutions will have to slightly standardize their business processes and product features. Since MFIs access their new outsourced IS over the Internet, some rural institutions may run into connectivity problems, which is one of the problems IBM is also working on.

But these challenges seem worthwhile when looking at the long list of benefits:

• MFIs act in a group permitting them to negotiate prices with different service providers; 
• Investment fixed costs are turned into variable costs (e.g., cost per client per year, or by transaction);
• To open a branch, one only needs an internet connection, no installation of hardware or software is needed;
• New products can be added without difficult adjustments to the system;
• Portfolio, accounting, and client information is readily available for internal and external purposes; improving the overall transparency of the industry.
• Local banks feel more comfortable funding MFIs since reporting is transparent and readily available;
• Connecting with additional distribution channels like ATM networks, retail agent chains, etc. is a “plug and play” issue.

Download a presentation.

Mobile banking and other technologies need a balanced regulatory approach

Washington D.C. (January 31, 2008) – Basic, everyday financial services are out of reach for more than two billion people in developing countries. But the rapid growth of branchless banking – including mobile phone banking – is reducing the cost and expanding the availability of such services.

“All of this innovation presents challenges and opportunities for regulators,” says Elizabeth Littlefield, CEO of CGAP. “Policy will determine not only where branchless banking is allowed, but also which business models turn out to make economic sense - and how far they will go in reaching poor people.”

Regulating Transformational Branchless Banking is a product of collaboration between CGAP and the UK’s Department for International Development (DFID), in partnership with the GSM Association, the global trade association for over 700 mobile phone operators. The authors also benefited from conducting three of seven diagnostic missions with the World Bank’s Financial Markets Integrity Unit.

Download the Focus Note at http://www.cgap.org/policy/branchlessbanking

While much of the current buzz is around mobile phones, other branchless banking applications are gaining traction as well. Brazil’s increase in access to finance has been accomplished largely through the more than 95,000 banking “correspondents”—local merchants and post offices that act as agents for banks, equipped with card-swipe and barcode-reading point-of-sale (POS) terminals. In Russia, a broad network of bank ATMs, POS terminals, and online e-money providers offer transaction services outside of traditional branch offices.
In the past five years, technology has brought 13 million people in Brazil into the banking system. In the Philippines, people would rather pay one percent to remit money via their mobile phone network than the 3-18 percent they are often charged by others.

“The market is changing, and that creates an opportunity for regulators to adapt the rules to increase the availability of financial services for the poor while maintaining a safe and sound banking system,” says Catherine Martin, Team Leader of the Financial Sector Team at DFID. “The willingness to change is a good sign for poor people who need access to formal financial services.”

A new CGAP/DFID Focus Note addresses the policy implications of branchless banking. Regulating Transformational Branchless Banking: Mobile Phones and Other Technology to Increase Access to Finance is based on assessments of policy and regulation in seven key countries, including interviews with more than 500 people from governments, the private sector, and international organizations in Brazil, India, Kenya, Pakistan, the Philippines, Russia and South Africa. Read the full report and access country-by-country information at http://www.cgap.org/policy/branchlessbanking.

“For regulators, it’s not viable to simply do nothing. Current regulation tends to be both over- and under- protective,” says Tim Lyman, CGAP’s Senior Policy Adviser and co-author of the Focus Note. “Being too restrictive can mean fewer people in the formal financial system, and higher costs to access services. But policy makers also need to be aware of potential protection gaps.”

Among the countries studied, a surprising consensus surrounds the short list of most critical topics policy makers and regulators should address to formulate proportionate regulatory policy for transformational branchless banking. These include:

• Allowing third parties, such as local merchants to conduct “cash in/cash out” transactions and interact directly with customers;
• Risk-based anti-money laundering (AML) rules, as well as rules for combating the financing of terrorism (CFT) adapted to the realities of remote transactions conducted through agents;
• Appropriate regulatory space for the issuance of e-money and other stored-value instruments (particularly when issued by parties other than fully prudentially licensed and supervised banks);
• Effective consumer protection (on a variety of fronts);
• Inclusive payment system regulation and effective payment system oversight as branchless banking reaches scale;
• Policies governing competition among providers (which balance incentives for pioneers to get into the branchless banking business against the risk of establishing or reinforcing customer-unfriendly monopolies and which promote interoperability).

“In all these areas, regulators are best guided by balancing the costs and benefits against the objectives, a proportionate approach to regulation,” says David Porteous of Bankable Frontier Associates, who was commissioned by DFID as a co-author of the Focus Note.

For branchless banking to reach its potential, consumer protection is essential. Issues include problems with retail agents, redress of grievances, price transparency, and consumer data privacy. Regulators should aim for policy that fosters, rather than inhibits, innovation so market participants are not unduly restricted from launching new financial products and services.

“Based on our research, regulators should avoid limiting the range of possible branchless banking models. They should dialogue with industry, but the private sector ought to have answers on how they’ll ensure services are safe and sound,” says Mark Pickens, CGAP microfinance analyst and co-author of the Focus Note.

About CGAP
CGAP (the Consultative Group to Assist the Poor) is a consortium of 33 bilateral and multilateral development agencies and private foundations committed to building financial systems that work for the poor in developing countries. Headquartered in Washington, D.C., and housed at the World Bank, CGAP is a global resource center for the microfinance industry, setting standards, offering technical and advisory services, training, and information on best practices, in addition to providing funding for innovative projects. CGAP’s Technology Program, co-funded by the Bill and Melinda Gates Foundation, seeks technology approaches that help provide a variety of financial services to poor and excluded people, at large scale and in a viable way, within a regulatory system that encourages their development. For more information, please visit http://technology.cgap.org/.

About DFID
DFID, the Department for International Development, leads the British Government’s fight against world poverty. DFID supports long-term programs to help eliminate the underlying causes of poverty. DFID also responds to emergencies, both natural and man-made. Its work forms part of the global goal to attain the eight ‘Millennium Development Goals’ by 2015. DFID works directly in over 150 countries worldwide, with a budget of some £5.9 billion in 2006. For more information, please visit http://www.dfid.gov.uk.