In a world where new financial scandals are revealed every month, and after the 9/11 terrorist attacks in the US, it’s increasingly difficult to deny the importance of regulation. Nevertheless, it remains true that too much regulation can hinder the success of business and innovation. The mobile payment industry, due to its complex ecosystem and sensitive services, is very affected by regulatory decisions; countless mobile payment services projects have been stopped by the regulators over the last 10 years (usually projects initiated by Mobile Network Operators (MNOs)). This post explores the role of the regulator in mobile payment services and some of the sensitive issues it has to address.First, let’s agree on who the regulator is for mobile payment services: As far as payment services and electronic accounts are concerned, a country’s Central Bank is in charge of regulation and the regulator for Telco services doesn’t have much influence. A Central Bank can be defined as a public institution that manages a state’s currency, money supply, and interest rates. Central Banks also usually oversee the commercial banking system of their respective countries. Mobile Payment Operators (MPOs), by issuing electronic money, are required to report to the Central Bank.
Objectives of Central Banks
Central Banks, in their respective countries, have several objectives:
- Protect the customers by ensuring MPOs don’t take risks with the funds they receive from their customers.
- Fight money laundering and terrorism financing.
- Facilitate economic growth in the country. Research from Moody’s (See the paper: “The impact of electronic payments on economic growth”) shows that a 1% increase in card transaction volume would increase consumption each year by 0.039% and increase GDP growth by 0.024%. Similar results can be expected with mobile payments or other electronic payments.
- Define interest rates.
- Control inflation (not too relevant in this case).
Role of the Central Bank in
the mobile payment industry
Central Banks play a major role in mobile payment projects. Following are some examples of their involvement:
- Central Banks grant operating licences to MPOs. The Central Bank of Nigeria, for example, undertook a lengthy trial program in 2011 to issue operating licences to 11 MPOs – allowing the companies to provide products and services, such as e-payments, via mobile phones. One could say that they issued too many licences for the country and that the process was long but at least it appeared fair and controlled In other countries, MPOs can simply apply at any time for a licence to the Central Bank.
- Central Banks write recommendations and define best practices and rules. MPOs need to comply with these rules which include, for example:
- Limits on the amount that people can store in a mobile money account and spend for transactions
- KYC (Know Your Customer) regulations applicable when subscribers register for the service
- Reports that are communicated to the regulator to compile data from various financial institutions and detect abnormal or suspect behaviours
- Recommendations on security, usually following the Payment Card Industry PCI PA-DSS guidelines. Typical measures include recommendations on data encryption, audit trails etc
- Decide whether interest rates can/should be associated with those mobile accounts
- Impose the management of float accounts to make sure that the electronic money issued is backed by real money that is available in a bank account. This offers protection against the misuse of customer money, in the event the MPO is close to bankrupt, and also offers some protection to customers.
- Central Banks can conduct regular and unscheduled audits to ensure MPOs follow the regulations.
- Process the data collected from the various MPOs to perform studies on the local economy. Indeed, these data are hardly available for cash transactions. Electronic payments data allow for a better understanding of the country’s economy and of customer behaviour. It is to be noted as well that a lot of funds circulate through informal networks, especially for P2P transfers (e.g. people taking the bus to transfer cash from a large city to remote villages), and that mobile money transfers would see more funds going through official channels.
Challenges for Central Banks
First, it’s important to state that Central Banks in emerging economies have a vast and vested interest in the success of mobile payment services. Indeed, as mentioned above, mobile payment services can contribute directly to the economic growth of the country.
Take Kenya, for example; Safaricom launched the M-PESA mobile money transfer service here in 2007. By 2009, 40 percent of the adult population was using the service for P2P money transfers that represented roughly 10% of the national GDP – See the World Bank article: “Mobile payments go viral: M-PESA in Kenya”. Mobile payment services – and the companies that provide them – can also help in the detection of terrorism financing, fiscal fraud and money laundering, which are some of the key objectives of Central Banks. So they need to facilitate mobile payment services but within a defined regulatory framework.
A key challenge for Central Banks in many countries, particularly developing countries, is that MNOs have a more extensive customer reach than banks, but Central Banks prefer working with banks. It’s not unusual in emerging countries to have a banked population of 20% while the mobile population sits at 80%. MNOs are better placed to promote mobile payment services but banks, which are used to managing funds and working closely with Central Banks, are in a better position to operate these services. They are also familiar with all the regulatory constraints linked to payment services. In most cases, Central Banks will require funds to be managed by a bank and not by an MNO. They will also have to define rules for the MNOs.
Promote inter-connectivity and cooperation. It’s common sense to say that interconnectivity between MPOs (traditionally close-loop systems) will increase the odds of success for mobile payment services. If funds can only be transferred between subscribers using the same service, it reduces the potential number of transactions and as we all know, most of the current mobile payment services are close-loop solutions. To make the matter more complex, standards don’t exist and MPOs tend to protect their business and shun interaction with other MPOs/make it difficult for other MPOs to interact with them. The regulator is actually in a position to promote or impose standards and interconnectivity but there is still resistance between competitors. Even while I truly believe that interconnectivity will help increase overall revenues, many MPOs see it as a potential threat to their service, even as they try to benefit from a network effect.
Find a compromise between simplicity and security. Mobile wallet accounts can be seen as prepaid services, or as simplified bank accounts. Limited funds can usually be stored and the transaction accounts will also be capped. Such accounts are supposed to be easier to open and manage. Simplicity in the registration process will facilitate mass-adoption, for example but still, some basic rules need to be respected in order to protect against abuses such as money laundering, for example. At the same time, imposing heavy rules on MPOs will increase their costs and might discourage them from offering such services. One would imagine that for limited accounts controls and security requirements might be less stringent…
Promote fair collaboration. When it comes to mobile payments, banks and MNOs can be partners and/or competitors. MNOs need the banks to store the electronic money and the banks need the MNOs to provide mobile access. Central Banks, as the regulators, are in a position where they sometimes need to sanction a party that doesn’t want to collaborate with others. A classic example is when an MNO is slow to respond to bank requests to access its network because the MNO has its own mobile payment service. The key escalation point for the bank would then be the regulator.
Facilitate innovation. There are countless projects, usually initiated by MNOs, which have been aborted before launching because the regulator wasn’t involved in the project. In some cases, the regulator was protecting its banks from new competitors but in many cases, those huge administrations (the Central Banks) were simply caught unprepared and needed to form a better understanding of the challenges involved in authorising projects. That has slowed down and even killed many projects. In other cases, in other countries, the mobile payment service was launched under the radar, without the regulator’s knowledge, which then had to adapt and make the best of the situation. Today, the situation is better. Central Banks know about mobile payments and even speak at many industry events. However, the Central Banks are not always easy to work with. The challenge for Central Banks is to remain ahead of the new potential services and technologies to facilitate their development.
Conclusions
It’s always a challenge for Central Banks to find the right balance between necessary regulation and flexibility. The way I see it, Central Banks should regulate mobile payment services and grant licences subject to certain rules. Those rules should include a certain amount of limits around the use of the service and those limits could vary depending on the level of KYC performed: A basic KYC would only limited transactions while full KYC would potentially have similar limits as the ones applied to bank accounts. I also believe that once the service is launched, Central Banks should encourage inter-connectivity between the different close-loop solutions to encourage higher usage of mobile payment services in the long run.