Archive for: Regulation

This is a guest blog by Ignacio Mas, an independent consultant who has written extensively on mobile money.  He is former Senior Advisor with the Financial Services for the Poor team at the Bill & Melinda Gates Foundation and at the Technology and Business Model Innovation Program at CGAP. 

Mobile money feels right for mobile network operators (MNOs): it is an extension of the basic prepaid platform and distribution networks they already operate. Mobile money does require greater surveillance against fraud and money laundering measures, but it’s all fundamentally about secure messaging.

From a telecoms regulation point of view, mobile money is another instance of a value added service and those tend to receive a light regulatory treatment. All the specific regulations that pertain to the safety and soundness of mobile money –who can issue accounts, conditions of service, data security and privacy standards, supervisory treatment, consumer protections, etc.— should be the domain of the banking regulator.

But MNO participation in retail payments presents competitive challenges which banking and telecoms operators will need to monitor closely and perhaps address jointly. The problem is that MNOs are both component suppliers and direct competitors to banks wanting to offer mobile financial services. There is a risk that MNOs transfer market power from their core market to the emerging retail mobile payments market, in such a way as to effectively shut banks out of mobile payments. In the future, most financial services can be expected to have a mobile component, so such a situation would have severe implications for competition in the financial inclusion space more broadly.

This is quite understandably spooking many banking regulators into preventing MNOs from playing directly in the payments/banking space. That’s unfortunate, the fact is that we need to enlist MNOs to push the frontiers of financial access, while guarding against any potential abuses of market power on their side. We need to allow MNOs to contest the market without dominating it.

Authorities need to identify specifically those components of mobile communication services over which MNOs have bottleneck control and which are essential for the provision of mobile financial services. One asset MNOs control is the SIM card – a smartcard which identifies every mobile user. Access to the SIM card provides benefits in terms of security, since SIM cards may contain pre-loaded security keys which can implement end-to-end data encryption from the mobile handset all the way to the transaction authorization server. Access to the SIM card might also enhance the usability of services, since the SIM card controls the on-the-phone menu onto which mobile money can be incorporated directly.

However, there is no precedent worldwide for establishing equal access rules to SIM cards, as unbundling the SIM card might have severe implications for the security of mobile networks. In any case, the problem of proprietary control over the SIM card is mitigated if banks can build an equivalent service through other means.

MNOs also control the phone’s communications (or bearer) channel. The more common channels, such as voice, SMS (the protocol underlying text messaging) and packet-data (under various flavors such as GPRS, EDGDE, 3G or HSDPA), are broadly made available by MNOs under standard commercial offers. In this case, it should be fairly easy to establish and monitor a requirement of non-discriminatory access by banks and third-party providers of mobile money services to these channels. Since the market for these bearer services is sufficiently large and lucrative for the MNOs, we can expect MNOs not to over-price their voice and SMS services or to degrade the quality of their service specifically to lock out banks from using them to construct competing mobile money services.

The challenge is with a less common bearer service called USSD (Unstructured Supplementary Service Data), which is not widely commercialized by most operators. (You may recognize it as the service you use when you are asked to dial a sequence of numbers starting with star and ending with hash after you buy a scratch card.)  The session-based nature of USSD presents two strong advantages over SMS as a channel for mobile financial services: it lends itself to implementing network-based menus which makes it easier to use, and it entails no storage of messages anywhere which makes it more secure. It may also be more feasible than using voice in countries where voice tariffs are still expensive, or packet-data in countries where most people still use simple phones. For banks without access to the SIM card, USSD may be the only realistic option.

In this case, simply stating non-discriminatory access to the USSD service may not suffice as long as USSD is used primarily for banking services, since MNOs may price it specifically to preclude competition from emerging in mobile financial services. Therefore, the telecoms regulator ought to monitor USSD pricing to see if it bears a reasonable relationship with the price of alternative access channels such as voice and SMS. Moreover, an operator might be forced to offer USSD to other mobile financial service providers provided that: (i) the operator has an installed USSD capability (even if it is only used for the MNO’s own purposes, such as airtime top-ups), and (ii) the operator is offering its own mobile financial service through a proprietary channel (e.g. SIM-based) not available to others.

These actions –monitoring MNOs for potential discriminatory pricing and service quality on voice and SMS, and monitoring USSD offers to prevent undue denial of service or pricing that does not bear sufficient relationship with the pricing of other channels— fall in the first instance in the domain of the telecoms regulator, since these are purely about the channel and not higher-level financial services. Of course, the banking regulator could play a vigorous role in helping banks present their case to the telecoms regulator if they feel discriminated against, or to competition authorities if the situation warrants escalation or the telecoms regulator lacks the necessary powers to intervene.

Authorities ought to pass a clear and strong message that MNOs can play at the financial services layer if they play fairly at the communications layer. This might be expressed around a protocol or memorandum of understanding signed jointly by the banking and telecoms authorities, stating how the various authorities will work together and laying out the competition standards to which they will hold MNOs.

This regulatory vigilance will be essential until such time when everyone has a smartphone and the phone (rather than the SIM card) can perform locally all security and menu presentation services. At that point, banks will have credible options to build their own mobile financial services with minimal control by the MNOs. Banking will just be an app on your phone, which anyone can download. That competitive nirvana is now more imaginable than ever, but it is still a ways off in developing countries.

- Ignacio Mas

“The improvement of data on financial inclusion is undoubtedly the most immediate challenge to overcome. This must be accompanied by the analysis of the needs and expectations of the population.”

We recently spoke with Elvira Cruvinel, head of a new Brazilian Central Bank team coordinating financial inclusion efforts. Only a handful of countries globally have created such financial inclusion teams at central banks. Elvira is part of this small pioneering group of leaders looking to effect major changes to the financial access landscape.

1. What is the Brazilian Central Bank’s vision of financial inclusion?

In recent years, the Central Bank of Brazil has determined that the promotion of financial inclusion is a strategic contribution to the development of the Brazilian economy. We believe that adequate financial inclusion helps reduce poverty, since meeting the demand for financial services can improve quality of life and the development of the financial industry can spur economic growth. We also believe that financial inclusion is beneficial to economic stability, financial system efficiency and the effectiveness of monetary policy instruments.

2. Your team was created in 2009. What have you been able to do since then?

In 2009, we created the Financial Inclusion Project at the Central Bank, after realizing that it was necessary to integrate various stakeholders to develop effective policies for financial inclusion. This required a great deal of interdepartmental coordination and collaboration with other institutions, both national and international. Another major part of our effort was the collection, organization and analysis of data and research on various issues related to the subject. At the end of that first year, we published the book “Perspectives and Challenges for Financial Inclusion in Brazil: a view of different actors.”

Through our efforts that first year, we were able to solidify the Central Bank’s role on this issue in Brazil. In my opinion, our role in pulling stakeholders together showed clearly in Brazil’s first Forum on Financial Inclusion in 2009, which was organized by the Central Bank but involved multiple ministries and hundreds of participants across industry and policy circles. The second Forum, held in 2010, also shed light on regulatory issues, allowing for the definition of a financial inclusion agenda in Brazil.  The third Forum, carried out in November 2011, shed light on ways to measure financial access, the quality of inclusion and products.

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This is the third post in our series on interoperability and related issues in branchless banking and mobile money. Read the first post that presented the overall framework for the discussion and the second post that looked at the interconnection of mobile money platforms. Today, we discuss interoperability at the agent level as it relates to agent exclusivity. We include agent exclusivity in the topic of interoperability because it raises many of the same issues as platform interoperability.

Agent exclusivity revolves around the ability of a customer of one provider to use the agent of another provider for cash-in and cash-out services related to that customer’s account. Non-exclusive agents can expand financial access by providing more access points to a greater  number of customers, while limiting the rise of a dominant actor which could ultimately reduce competition. But as with platform interoperability, regulators are cognizant that prohibiting exclusive agents could deter private actors from entering the market. What service provider would invest in identifying, training, and equipping agents if competitors can piggyback off their investment?

To be clear, when we speak of agent exclusivity, we are only referring to the cash-in and cash-out services performed by agents – not other services (where permitted) such as customer enrollment, related KYC, and processing of loan documents. Agents providing only cash-in and cash-out services are often called “cash merchants”. We distinguish the cash merchant services from other services because cash merchant functions arguably present less risk to the financial service provider since agents typically transact against their own accounts. Think human ATMs.

We identify at least four different ways to share cash merchants:

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On June 20, 2011 the State Bank of Pakistan (SBP) introduced a new circular that significantly modifies the regulation for branchless banking in Pakistan. We talked to Mr. Mansoor Hassan Siddiqui, the Director for Banking Policy and Regulations Department at SBP about why they made these changes and the impact that they expect to see as a result.

Photo courtesy of Craig Kilfoil, ExactConsult

In March 2008, the State Bank of Pakistan introduced some of the first regulations anywhere in the world designed specifically to encourage branchless banking. The regulations allowed a number of different business models and permitted agents to deliver financial services on behalf of banks. Three years later the State Bank has significantly amended the regulations. Among the changes are:

• Rationalization of account opening process and requirements by removing the need to capture biometric fingerprint information at the time of account opening for the lowest value accounts. The requirement to capture a digital image of the account holder (which can be done at far cheaper cost with a low cost camera-phone) remains to ensure the physical presence of the customer at the time of account opening.
• Substantial increases in the transaction limits and elimination of the maximum balance, which remedies the situation that previously existed where a customer could perform more transactions “Over-the-Counter” than they could through their own account. Bill payments are no longer included in the transaction limits.
• Introduction of a new “Level 0″ account with the lowest transaction limits which can be opened electronically with no physical paperwork required.

We asked Mr. Mansoor Siddiqui, the recently appointed Director for Banking Policy & Regulations Department at SBP, about the reasons for introducing these modifications and their expectations for what this will mean in terms of the take-up of branchless banking in Pakistan.

1. Why did the State Bank of Pakistan think that the branchless banking regulations that were only introduced in 2008 needed to be updated?

Well, as we are all aware, branchless banking is rapidly evolving as a major arena for financial inclusion and the regulators around the world have to keep abreast of the fast paced changes in this area. After issuance of initial branchless banking regulations in 2008, we have been constantly encouraging the banks to enter into this business field. At the same time, we have also been monitoring the progress of branchless banking service providers by getting regular market feedback. This two pronged approach helped us in developing an insight of the problems that the customers faced while opening and running the branchless banking accounts. These obstacles to some extent were limiting the quick take-up of branchless banking in the country. Despite a couple of successful branchless banking deployments with significant agent/merchant networks, we were witnessing very slow take-up of financial services. The total number of branchless banking accounts was only about half a million. Given the widespread financial exclusion and very low visible success of branchless banking deployments, SBP considered it necessary to review of the branchless banking regulations in line with the industry’s feedback and international best practices. Therefore the updated branchless banking regulations have been issued to tackle the bottle necks in the take-up of branchless banking through accelerated account opening and ease of operations of these accounts.

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We’ve been profiling the state of play of the branchless banking industry in various countries over the last few weeks. Today we look at a region of the world that is in many ways in a class by itself. The West African Economic and Monetary Union (WAEMU), or UEMOA in French, is a customs and monetary union of the republics of Benin, Burkina Faso, Côte d’Ivoire, Guinea Bissau, Mali, Niger, Senegal, and Togo. The Central Bank of West African States (BCEAO) is the common central bank of the eight member states. Here is our summary note on the branchless banking industry in WAEMU. Et voici la version en français.*

The other country notes we’ve released are for countries that are already considered middle-income or are very near to reaching this status (Brazil, Mexico, Pakistan, India, Ghana, South Africa). I would argue that WAEMU is the most challenging of the countries/regions from this list for the development of branchless banking. The 8 countries in WAEMU have a total population of 95 million and include many of the poorest countries in the world. 74% of the region’s population lives on less than $2 per day, and all countries in the region rank in the bottom 12% of countries in the human development index.

Access to finance in WAEMU is very low, even by comparison to other regions of Africa.  The rate of bancarization announced by the BCEAO in December 2010 was 9.5% and 12.7% of the population had an account with an MFI.

Yet the WAEMU region has recently seen a significant amount of private sector activity in branchless banking (see a summary chart of activities). The single overarching regulatory framework in the BCEAO enables private actors to leverage regional investments at lower costs. This regional diversity also provides the opportunity to understand the impact that market aspects have on branchless banking in an environment where the regulation is constant. For these reasons, WAEMU is a unique place to push branchless banking and a region where the need for increased access to financial services is one of the greatest in the world.

Opportunities for branchless banking in WAEMU:

• Regulation allows for nonbank e-money issuers leading to different and unique business models. The BCEAO was one of the first regulators globally to pass regulation expressly permitting nonbank e-money issuers in 2006, and it remains one of a few central banks that allow this role by nonbanks. Interestingly, none of the MNOs have opted for this license, while MNOs in other parts of the world long to have this option. Three nonbank institutions have received the e-money issuer licenses from the BCEAO. This regulation expands the realm of possibility in terms of the actors that can get involved in branchless banking and the types of services that can be offered. Read the rest of this page »

Over the past several months, we have taken a close look at the branchless banking industry in a few key countries. You can see all our postings here for Brazil, Mexico, India, Pakistan and Ghana. Today we continue with our analysis of South Africa and share this summary note on the branchless banking industry.

South Africa has often been used as a case study by those with an interest in financial inclusion. The country has an advanced banking infrastructure with nearly 10,000 ATMs and over 100,000 POS devices deployed. The Government has for a long time been committed to expanding access to financial services to the bottom of the pyramid and around 63% of South African adults now have a bank account, higher than the other countries featured in this series. They have employed a number of policy levers that have helped to achieve this:

• The “Mzansi account” – a basic entry-level bank account which has attracted 6 million customers – was launched in October 2004 by the four largest banks as well as the state owned Post Bank as part of a compact between government and the private sector. Recent evidence, however, suggests that a large number of these accounts are dormant and banks complain that the accounts are not profitable. Policy makers and banks are now looking for other approaches to advance the access frontier. 
• Government payments of R88 billion (USD 11 billion) are made to 14 million individuals – approximately one-quarter of all South African adults every year. Recipients can choose to be paid into a bank account which is the mechanism that has been chosen by one-third of recipients. This has been one of the primary drivers of uptake of banking services, but there is still un-tapped potential to offer financial services to beneficiaries. 
• The government has also made efforts to promote an enabling environment for innovation. A proportionate approach to KYC procedures for account opening has been introduced by removing the requirement for customers to give proof of address when opening low value accounts and non face-to-face account opening is permitted. The regulatory framework also allows for the use of agents to provide banking services beyond the branch network.  

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This blog is written by Xavier Faz, CGAP & Denise Dias, independent consultant; with contributions from Carlos Lopez-Moctezuma & Brenda Samaniego, both from CNBV.

Regulators around the world today are beginning to realize that the chances of expanding access through branchless banking can be very limited without reducing the account-opening requirements through agents and mobile phones. The challenge is to strike the right balance between reducing account-opening requirements while maintaining basic controls for AML/CFT.

Enforcing full account-opening procedures often excludes important segments of the population from formal financial services, keeping them “operating” in the informal economy.  There are countries where many people (particularly among lower income segments) lack formal identity mechanisms, and other cases where people do have identity documents, but the requirements to fulfill KYC procedures make it too cumbersome and/or expensive to effectively carry out. In either case, the risk is to inadvertently push these services beyond the reach of the poor (even if geographical reach exists). Therefore, maintaining the same level of KYC requirements as for bank branches supports the prevalence of informal financial systems which in turn acts against the AML objective that was sought in the first place.

Most regulators would agree that some middle ground would be needed, but striking the right balance is not an easy thing. Early examples of this are regulations in South Africa and Colombia, which established exemptions to enable opening of deposit accounts at agents or by the individual themselves through their mobile, relying on broadly adopted national ID mechanisms and population registries that could be checked online at the time of account opening. The BCEAO in West Africa allows the use of anonymous electronic money accounts with caps in the balances.  The actual implementation of these schemes have varied in practice.

Financial sector authorities in Mexico have gone a step further in adopting an approach that addresses the challenges above.  Authorities followed a ‘tiered’ approach that implements flexible account opening requirements for low-value, low-risk accounts that are subject to increasing caps and restrictions on permitted transactions. Opening requirements increase progressively as such restrictions on transactions are eased.  This incorporates several innovative aspects:

• Five different types of deposit accounts, targeting different market segments and income brackets, with varying KYC requirements
• At the “lowest” tier (Level 1), an anonymous account enabling e-wallets as a substitute for small amounts of cash
• Non face-to-face account opening
• Paperless record keeping for the four lower levels
• Outsourcing of KYC to third parties

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1. PlaNet Finance and Oliver Wyman published a joint report called Beyond payments – Next generation Mobile Banking for the Masses. Sponsored by the Bill & Melinda Gates Foundation, the report looks at distribution strategies and second generation mobile microfinance products via pilots in West Africa and Southeast Asia. Two distinct innovative models were explored through the pilots: 1) the distribution of microfinance through mobile money via existing microfinance banks; and 2) the distribution of microfinance through a virtual microfinance bank operating as a pure mobile player. You can download the full report here or here.
2. Colleagues at the World Bank recently published the book Protecting Mobile Money against Financial Crimes: Global Policy Challenges and Solutions. Given the boom in the mobile money industry, the authors are responding to the fact that regulators often struggle to craft a regulatory regime that expands access to financial services to the poor through the development of mobile phone financial services, while at the same time being compliant with AML/CFT standards. The paper 1) takes stock of new AML/CFT regulations relevant to mobile money; 2) designs guidelines for drafting AML/CFT regulations that cover mobile money; and 3) proposes examples of best practices for the industry to include AML/CFT in their own business model. The book is available for sale at http://publications.worldbank.org. Read the rest of this page »

Over the past several months, we have taken a close look at the branchless banking industry in a few key countries. Last week we presented our learnings from Brazil. Today we continue with our analysis of Mexico and share this summary note on the Mexican branchless banking industry.

Mexico’s financial sector is beginning a significant transformation. It is setting the stage for a broad commercial offering through innovative products that reach lower-income segments of the population. Appetite to reach lower-income segments grew in the past decade following the notable growth of Banco Azteca and Compartamos. More recently, regulation enabling the use of non-bank correspondents (or banking agents) has expanded the possibility to increase the reach of financial institutions at a reduced cost both for banks and for potential customers. These regulations proactively reduce competitive barriers in the banking sector and open opportunities for banks to serve lower-income segments historically served by other financial service providers (financial cooperatives, MFIs, microfinance banks and retail stores-cum-banks). Large retail chains (including Telecom, the state-owned telegraph network) are developing shared correspondent networks, and most major players are adopting aggressive outreach strategies.

However, most of these strategies are still about reducing the cost to serve existing customers and much less about growing towards new lower income segments. The price points of shared channels, the lack of sensibility to poor people’s needs, and to certain extent, the mandate to banks to give away free transactions on their own ATMs are slowing the development of a meaningful offering. New partnership models and ambitious experiments involving key players may drive the market towards more efficient models and more affordable low-income offerings beyond credit, but the learning curve is uncertain and is likely to require time.

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Over the past several months, we have taken a close look at the branchless banking industry in a few key countries. We start here by presenting our learnings from Brazil and share our summary note on the industry. We will continue in the coming weeks to look at several other markets, including Mexico, India and Pakistan.

Financial inclusion in Brazil needs to now turn urban (Photo Credit: André Mantelli)

The job of financial inclusion in Brazil is arguably done. Brazil’s banks have made it a global leader in branchless banking. The underlying retail payment infrastructure is in place. There are agent locations in almost every municipality. New agent management companies from around the world regularly visit more than 30 of their counterparts in Brazil to understand how the business works. And Brazil’s Bolsa Familia program, already successful in moving beyond G2P payments to credit and savings, is considered a global flagship.

And yet, financial inclusion in Brazil still has a long way to go. CGAP has studied the branchless banking market in Brazil over the past few months and has written a country note available here. In this blog series, we discuss some of the challenges identified in that note. We start the series here on the CGAP Technology Blog, but we will continue the conversation on a joint blog to be developed by Center for Microfinance Studies at FGV (Fundação Getulio Vargas).

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