Challenges to Regulation of Mobile Transaction Services, E-Money, and other Branchless Banking Technologies

Jun 17, 2009 | Microcapital on Microfinance and Microcredit

In March 2007, when Kenyan cellphone service provider Safaricom launched its mobile payment service M-Pesa (‘M’ for mobile; ‘Pesa’ meaning money in Swahili), it predicted the service would attract 450 thousand customers by January 2008. The service caught on, and fast.

When January 2008 rolled around, M-Pesa had more than doubled its goal, registering more than 1 million users in ten months. People began using M-Pesa credits to pay for everything from well water to cab fare. According to Wired magazine, almost a third of Kenya’s population now pays their electricity bills via mobile device. M-Pesa has now registered over 5 million users, and continues to register 10 thousand more each day. As discussed in this MicroCapital article, many banks and microfinance institutions (MFIs), such as Equity Bank in Kenya, have begun to adopt cellphone cash-transfer services as a way to minimize administrative costs and penetrate markets otherwise unreachable by traditional banking. Mobile transaction services, e-money, and other branchless banking technologies have also flourished in a number of developing nations beyond Kenya, most notably Brazil, India, Peru, the Philippines, South Africa, Russia, and Colombia. However, where the rapid growth of branchless banking has sparked the imagination of many, others’ optimism is shadowed by apprehension and concern that inadequate regulation in the nascent industry may place customers’ already vulnerable finances at risk. One major concern is the fact that many non-bank entities have begun to provide bank-like products and services. Unlike prudentially licensed and supervised financial institutions, these businesses currently operate outside existing banking regulations, which according to this MicroCapital article, has spooked financial institutions who claim that some users treat such services as a bank deposit accounts. The article “Consumer Protection a Key Issue for Branchless Banking” published by the Consultative Group to Assist the Poor (CGAP), discusses other cases in which businesses act as third parties providing transaction services between a bank/MFI and the customer. By adding intermediate parties, it becomes less clear which organization bears responsibility for the services rendered. Without clear consumer protection regulations, a case of fraud or bankruptcy could cause long-term economic damage. For example, the CGAP article discusses a card-based pyramid scheme in Columbia and Bolivia, in which non-banks fraudulently offered prepaid accounts with high interest rates and then made off with the money. Another common issue with technological innovations is lack of customer service. In Russia, customers of a network of 100 thousand automated payment terminals have found that minor problems such as forgotten passwords, illegible receipts, and malfunctioning keypads, go unfixed due to scarce customer service. Brazil has approached similar issues by creating legal provision limiting the waiting time in call centers, and succeeded in improving providers’ responsiveness to complaints. The CGAP article points out that as branchless banking technologies continue to rapidly evolve and increase in scale, regulators are likely to see more sophisticated frauds and new consumer safety issues. Regulations will need to evolve with the changing technologies. Existing loopholes must be addressed, and non-bank providers of branchless banking services must be required to disclose prices and service offerings, and observe agent qualification, data privacy, and security rules. Although appropriate regulatory approaches will vary from country to country and between technologies, CGAP argues that the first step is to define which activities are subject to licensing, regulation, and supervision, and then identify which agency or agencies are in charge of monitoring the banks and nonbanks, and enforcing consumer protection rules. As stated by CGAP: “Regulators should keep in mind that regulatory effectiveness depends not only on the content of regulations, it primarily depends on the consistency of supervision and enforcement.” The key challenge, outlined by a second CGAP article “Regulating Transformational Branchless Banking”, will be to develop regulations that are proportionate to the risk. The regulations must provide sufficient consumer protection, while at the same time permit innovation and scaling-up of mobile financial services that are potentially very valuable to low-income clients. By Ryan Hogarth, Research Assistant