M-payments – a regulatory approach

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David Porteous is the founder and director of Bankable Frontier Associates, a niche consultancy based in Boston, which specializes in advising regulators and operators on the development of mobile money models.

Financial regulations shape mobile money models in many important ways:

1. They govern who may offer what: for example, in some countries, mobile operators and other non-banks are allowed to provide m-wallets; in many, only regulated banks may do this. This factor alone has a large effect on the choice of feasible business models for different players.

2. They govern how an offering may be made in two key respects: regulations often govern first, how clients are required to register for a financial service (and therefore, who may be a client); and second, how they get cash into or out of the mobile money system.

3. They may even affect the choice of technology: in some countries, regulators may set minimum standards of security for the encryption and transmission of electronic transactions which may limit the ability to use certain channels and processes.

Understanding exactly how the regulation in a country limits or opens options is an essential first step in designing a new mobile money model. Unfortunately, this is not always easy to do. The issues surrounding mobile money cut across a number of different traditional regulatory domains – for example, from prudential regulation to payments system oversight; from consumer protection to anti-money laundering (AML). The applicable laws, regulations, rules and codes applying to each domain are complex and have often been promulgated at different times. They may even be contradictory.

Making things harder still, different regulatory agencies are often responsible for each domain; and each may have its own culture of interpretation and enforcement. In many countries, the key issues fall under different units within the Central Bank; but I have been in meetings in some countries where the four relevant units had not even met previously, let alone considered together how to address the emerging challenges created by mobile payments or banking. The only safe bet is that the telco regulators in most places have little or no direct influence on mobile money models, since they generally consider this to be outside of their purview. However, their indirect influence on issues such as competition among mobile operators, pricing of data flow and number portability can have a big impact on the market.

In developing countries, the existing regulatory framework often does not cater at all for mobile money models. If they are not prohibited, they may as a result encounter greater space, or openness, for innovative approaches to be tried. In this vein, it is not surprising that some of the earlier m-payment schemes started in countries like Zambia (with Celpay from 2001); and some of the fastest growing, like M-Pesa in Kenya, are based in countries where non-bank based models are not regulated directly at all yet. However, the openness which comes from not having many laws on the books may come at the price of greater uncertainty: financial regulators often have a sufficiently broad mandate and enough de facto influence that they can interpret a wide range of issues to fall under their authority. In the absence of a clear legal framework addressing how to handle them, this vacuum may give arbitrary power to officials which they could use to block new developments, or even worse, to close them down after large initial investments have been made. For these reasons, an enabling policy framework should have a balance of sufficient openness and sufficient certainty. The need for this balance was pointed out in a report for the UK’s Department for International Development (DFID) in 2006 entitled The Enabling Environment for Mobile banking in Africa.

Since then, international agencies such as DFID and CGAP, a global resource centre connected to the World Ban