Published: September 01, 2008
When a cover story last year in The Economist forecast provocatively the ‘end of the cash era’, some in developing and transition countries were thinking ‘not yet, for us at least’. Surely the high-tech electronic substitutes for cash described in the issue as taking Japan by storm would take quite a while to reach poorer countries. And yet, the transformation from cash to electronic value, stored and conveyed by mobile phones, is hitting developing countries too. 1 In Kenya, the M-PESA mobile wallet service offered by Safaricom attracted one million registered users in 10 months (in a country where fewer than four million people have bank accounts). And in the Philippines, the country’s two mobile network operators offer the functional equivalent of small-scale transaction banking to an estimated 5.5 million customers.
Transformational branchless banking extends to customers who would not be reached profitably with traditional branchbased financial services.
In a fast increasing number, policy makers and regulators in other developing and transition countries are embracing ‘transformational branchless banking’- the use of information and communication technologies (ICTs) and non-bank retail channels to reduce costs of delivering financial services to clients beyond the reach of traditional banking. Much of the current buzz is around mobile phones. But other branchless banking approaches are gaining traction as well. In Brazil, banks have established more than 95,000 banking ‘correspondents’-local merchants, post offices, and lottery dealers equipped with card-swipe and barcode-reading point-of-sale (POS) terminals. These correspondents provide access to financial services in the 1,600 Brazilian municipalities (one quarter) that lacked any financial service outlets seven years ago. From Afghanistan to Zambia, policy makers and regulators find themselves facing the question of how to approach regulating this new and fast-developing space at the convergence of technology and financial services. Regulation will go far in determining not only whether branchless banking is legally permitted, but also which models of branchless banking are economically feasible and how far they will go in reaching previously unserved or underserved poor people.
The questions surrounding regulation of branchless banking specifically targeting the unbanked poor have only recently begun to receive comprehensive and systematic attention. The research on which this article is based sought to expand our evidentiary base. To this end, during the first half of 2007, we visited seven countries where policy makers and regulators find themselves on the frontlines of policy making about regulation of branchless banking targeted at the unbanked poor: in Africa, South Africa and Kenya; in Asia, the Philippines, India, and Pakistan; in Europe/Central Asia, Russia; and in Latin America, Brazil. Despite the many obvious dissimilarities among these countries and their situations, policy makers and regulators in the countries studied share a common challenge: how to formulate proportionate regulatory policy that gives space for innovation and permits branchless banking to scale up safely. [[[PAGE]]]
Additive versus transformational branchless banking
Branchless banking can be either additive or transformational (DFID 2006). It is additive when it merely adds to the range of choices or enhances the convenience of existing customers of mainstream financial institutions. It is transformational when it extends to customers who would not be reached profitably with traditional branch-based financial services. By tapping into existing infrastructure that already reaches unbanked people-such as mobile phones and local retail outlets that might be used as agents for the cash-in/cash-out function-delivering financial services through branchless banking can be radically cheaper than delivering such services conventionally. Transformational branchless banking moves into uncharted regulatory waters. In its application to branchless banking, existing financial system regulation is likely to be both over and under-protective simply because it was not designed with the types of actors and relationships in mind that are critical to transformational branchless banking models.
Technologies of transformational branchless banking
In transformational branchless banking, technology plays the key role of inexpensively transmitting transaction details between the customer, the retail agent, the financial service provider, and third parties. The devices typically used are mobile phones (e.g. Globe Telecom’s GCash service in the Philippines) and networks of POS devices that capture client details from plastic cards (e.g. Caixa Economica in Brazil). Sometimes providers offer both mobile phone-based and card-based services to clients (as in the case of WIZZIT and MTN Banking in South Africa and Smart Money in the Philippines).
Behind every transaction under the bank-based model, there stands a fully prudentially licensed and supervised financial institution.
From a regulatory perspective, it is useful to think of branchless banking as consisting of two basic models (CGAP 2006). In the bank-based model, customers have a direct contractual relationship with a prudentially licensed and supervised financial institution-a transaction account, a savings account, a loan, or some combination-even though the customer may deal exclusively with the staff of one or more retail agents hired to conduct transactions on the bank’s behalf. In the non-bank-based model, customers have no direct contractual relationship with a fully prudentially licensed and supervised financial institution. Instead, they exchange cash at a retail agent in return for an electronic record of value. This virtual account is stored on the server of a nonbank, such as a mobile network operator or an issuer of stored-value cards. Once customers have a relationship with the non-bank provider, they can order payment of funds to anyone else participating in the system and can receive payments from them. If the system relies on a POS network and plastic cards, customers must visit a participating retail agent every time they want to conduct a transaction. If the system is mobile phone-based, customers need to visit a retail agent only to add value or to convert stored value back into cash. The bank-based and non-bank-based models also can function in combination. For example, Globe Telecom’s GCash service in the Philippines (which offers virtual stored-value accounts to cell phone customers) has teamed up with member banks of the Rural Bankers Association of the Philippines. Customers can bring cash to a GCash agent to store in their virtual account and then can use an SMS sent from their cell phones to effect loan repayments, deposits, withdrawals, or transfers from a savings account with a participating rural bank. [[[PAGE]]]
The regulatory significance of the distinction between the bank-based and nonbank-based models lies in the fact that behind every transaction under the bank-based model, there stands a fully prudentially licensed and supervised financial institution. However, evidence from the countries studied shows that, in some cases, the bank involved in the bank-based model may have outsourced so much responsibility-and risk-to non-bank actors that it, in effect, shifted the primary focus of regulatory concern from the prudentially licensed bank to its unlicensed partner.
Beyond payment services to a full range of financial services?
Payments and other money transfer services are, by far, the most significant transaction type driving volume (and hence revenues) in the branchless banking models found in most of the countries studied. Remittances, in particular, both cross-border and domestic, are targeted by mobile network operators in countries, like the Philippines, that have huge foreign and domestic remittance flows. However, growing numbers of providers see potential in branchless banking going well beyond simple payments and other money transfer services. They are eager to extend their reach into the business of lending and deposit taking-even insurance brokerage. The risks vary as branchless banking providers move along a spectrum (see Table 1) from the simplest payment services (which may present little risk to customers or the financial system beyond clearing and settlement risk) all the way to full retail deposit taking (which triggers the complete range of depositor and systemic protection concerns that motivate prudential regulation and supervision). As the risks vary, the kind of regulation that will be proportionate does as well. E-money and similar stored-value instruments occupy a special place along this spectrum. The stored-value accounts offered using the nonbank-based model by GCash in the Philippines and M-PESA in Kenya may appear like the functional equivalent of a transaction banking account, even if the individual transactions are small. Yet regulating this activity in the same manner as transaction bank accounts of a fully prudentially licensed and supervised bank may be disproportionate to the risk and may drive costs beyond the reach of the unbanked poor.
The concerns underlying prudential regulation and supervision constitute only a fraction of the policy and regulatory issues in regulating transformational branchless banking. The diagnostic approach used in the countries studied considered the impact of the following policy and regulatory domains:
Each domain is complex and, in many cases, the policy-making and regulatory authority for each domain operates more or less autonomously from the authorities for the other domains. Consequently, there is a significant risk the different authorities will not coordinate with each other and that they may even work at cross-purposes. What constitutes a proportionate regulatory approach to branchless banking in this current, fast-developing context? Faced with these challenges, policy makers and regulators may be tempted to defer action until clear good practice standards for regulating transformational branchless banking have emerged. But evidence from the countries studied shows that the industry will not wait to innovate while policy makers and regulators deliberate over an ideal course of action. Moreover, existing regulation, given that it was not developed with the convergence of telecommunications and finance in mind, typically leaves many gaps and ambiguities through which innovation might pass-including innovation of a sort that should cause policy makers and regulators legitimate concern, as several examples from the studied countries illustrate. The most significant risk of doing nothing may be a spectacular accident that could have been averted with appropriate regulation-an accident that causes both customers and their policy makers and regulators to sour on the whole idea of transformational branchless banking. [[[PAGE]]]
Another risk is that branchless banking will not take off because of barriers in existing regulation unnecessarily prohibiting certain approaches that are central to transformational models. Even significant uncertainty about what is permitted could have a similar effect.
The dissimilarities among the countries studied in terms of political systems, economy, geography, demographics, state of development and nature of their financial systems, profile of their unbanked poor, and legal and regulatory traditions all contribute to the challenge of extracting general key principles. Nonetheless, a surprising consensus surrounds the short list of most critical topics policy makers and regulators should address to formulate regulatory policy for transformational branchless banking.
‘Necessary but not sufficient’ condition
Two key topics might be seen as ‘necessary but not sufficient’ regulatory preconditions for transformational branchless banking to emerge in a given country. The first is authorisation to use retail agents equipped with ICTs as the cash-in/cash-out point and principal customer interface. The second is a risk-based approach for combating money-laundering and terrorist financing, adapted to the realities of remote transactions conducted through agents. Without these two preconditions, transformational branchless banking will not be legally and economically feasible.
Evidence from the countries studied shows that the industry will not wait to innovate while policy makers and regulators deliberate over an ideal course of action.
Agents
The common element across transformational branchless banking models is the use of agents to reach customers who are either unable (e.g., because of physical distance) or unwilling (e.g., because of the fees charged or simply negative perceptions) to take advantage of financial services delivered through traditional bank branches. The parties to whom direct customer interaction is outsourced may or may not be ‘agents’, in the true legal sense, of the bank or non-bank on whose behalf they interact with poor customers, depending on the regulatory system and contractual arrangements made. Regardless, they are indispensable for the following reasons:
They can be outfitted with the necessary ICTs and can operate at a fraction of the cost of opening and operating conventional bank branches (making it possible to reach vast new groups of poor customers profitably). They offer customers both convenience and a milieu in which they are already comfortable transacting business. Brazil, India, and Kenya provide illustrative examples of the range of current regulatory practice with respect to the use of agents.
Regulations issued by Brazil’s central bank permit a wide range of entities to serve as agents. The Central Bank of Brazil established the notion of ‘banking correspondents’ in 1973, permitting banks to engage third parties to collect and process payments. In 1999, the National Monetary Council substantially broadened the scope of activities that could be outsourced to correspondents, including receiving documents for account opening and handling deposits and withdrawals. Use of bank correspondents began to grow rapidly with this regulatory shift, combined with demonstration of the model’s viability after several banks (in particular Caixa and Bradesco) invested in establishing large agent networks. The number of correspondents grew by more than 50 per cent between 2000 and 2006 to more than 95,000 (Marques Soares and Duarte de Melo Sobrinho 2007). In Brazil, nearly any retail establishment with a cash drawer can act as a banking correspondent. But the central bank also notes some restricting conditions.
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Among other conditions, it requires the following:
By contrast, the Reserve Bank of India’s ‘Business Correspondent and Facilitator Circular’, issued in early 2006, permits only a narrow range of cooperatives, non-profit entities, and the postal system to be used by banks as agents. Indian policy makers say this restriction is in place because of the generally positive reputation of community-based nongovernmental organisations and the postal system and the comparatively poor reputation of many local businesses and widespread fraud reported in the past when commercial entities were used for small-scale deposit mobilisation on behalf of licensed financial institutions.
Brazil and India shed light on some potential consequences of defining the regulatory space for the use of agents more or less broadly. Although causality would be hard to establish given the range of possible contributing factors, it is striking that almost two years after the promulgation of the restrictive Reserve Bank of India. Circular, India has seen only relatively modest uptake of transformational branchless banking. In Brazil, where an extremely wide array of retail establishments is permitted to serve as agents, and where parties enjoy substantial freedom to determine the commercial details of their relationship, more than 95,000 agents currently operate. They serve every municipality in the country, and an entire industry has grown around identifying and servicing agent networks.
The dissimilarities among the countries studied all contribute to the challenge of extracting general key principles.
In Kenya, the mobile phone-based M-PESA stored value accounts are carefully structured so as not to constitute a ‘banking activity’ under the Kenyan Banking Act. This leaves M-PESA’s provider, Safaricom (jointly owned by the Government of Kenya and Vodafone) free to choose its agents based on its business judgment alone. Both Safaricom and Vodafone have their own reasons to choose and manage agents carefully, given the potential reputational risk to their core telecommunications business. However, they do not stand behind their agents in the way Brazilian banks are required to do by regulation. In fact, the fine print in the M-PESA account holder agreement states specifically that Safaricom bears no responsibility or liability for any default or negligence on the part of agents providing M-PESA services.
And although the general absence of regulation in the nonbank-based model of branchless banking practiced by M-PESA leaves its sponsors free to innovate in agent selection and management, it also leaves Kenya exposed to the possible entry of new promoters of the non-bank-based model of branchless banking. Some of these entrants will be start-up issuers of electronic stores of value, accessed through prepaid cards, who may have comparatively little to lose (other than possibly their customers’ funds) in the event of fraud or bad management. AML/CFT. In many countries, the next most critical regulatory prerequisite for launching transformational branchless banking is adopting a risk-based approach for combating money laundering and terrorist financing. Unless the rules are adapted to the realities of low-income clients who may have limited access to formal documentation and remote transactions conducted through relatively unsophisticated retail agents, they risk preventing transformational branchless banking from getting off the ground.
In many countries, the next most critical regulatory prerequisite for launching transformational branchless banking is adopting a risk-based approach for combating money laundering and terrorist financing. Unless the rules are adapted to the realities of low-income clients who may have limited access to formal documentation and remote transactions conducted through relatively unsophisticated retail agents, they risk preventing transformational branchless banking from getting off the ground. The Financial Action Task Force (FATF) sets international AML/CFT standards and oversees compliance monitoring. It calls for national-level regulatory regimes to require that adequate customer due diligence (CDD) (also known as ‘know your customer’ [KYC] rules) be undertaken on all new accounts and on one-off cash transactions over designated thresholds.
Depending on how FATF CDD/KYC standards are implemented at national level, they pose potentially formidable challenges to serving the unbanked poor using transformational branchless banking approaches. There is a critically important distinction to be drawn between what the FATF recommendations themselves permit and how they end up in national regulations. In numerous instances, these regulations fail to take advantage of important flexibility allowed for by the FATF recommendations, with an access-constraining result. [[[PAGE]]]
Many low-income individuals have difficulty presenting documentation required to establish their identity and other particulars. Being able to perform CDD/KYC beyond bank branches is also an important shift in the ease and cost of opening accounts, for clients and financial service providers alike. At present, national AML/CFT regimes in many countries are fashioned without space for non-face-to-face account opening, including CDD/KYC entrusted to staff of nonbank retail agents, or remote account opening, with customer data submitted electronically and verified through independent, third-party information.
In Brazil more than 95,000 agents currently operate, serving every municipality in the country.
These types of barriers may stop branchless banking before it starts. However, the experience of South Africa and the Philippines offers some encouragement to policy makers and regulators in other countries who want both a FATF-compliant AML/CFT regulatory regime and transformational branchless banking. In the Philippines, policy makers managed to tighten AML/CFT regulation and enforcement sufficiently to get the country removed from FATF’s blacklist of non-compliant countries and regions. At the same time, they arrived at regulatory accommodations that permitted the launch of both the bank-based (Smart) and non-bank-based (Globe) models of branchless banking. This includes mechanisms that enable CDD/KYC to be conducted by agents (Circular 471), a key characteristic of both Smart’s and Globe’s mobile banking models. They also allow a multiplicity of formal identity documents to be presented for verification purposes (Circular 562).
In South Africa, a carefully tailored exemption to otherwise applicable CDD/KYC measures (Exemption 17) and a special allowance for remote account opening (Circular 6) permitted the launch of two different mobile phone-based branchless banking ventures (MTN Banking and WIZZIT). At roughly the same time, South Africa was meeting the stringent standards necessary to gain admission as a full member of FATF in 2003 (even holding the FATF presidency for 2005-2006).
Despite these successes, AML/CFT compliance is still viewed by providers in the branchless banking space as a factor limiting the speed at which their operations can gain scale. Rules on record keeping and agent training can be expensive, adversely affecting the business case for transformational branchless banking.
In Kenya, for example, the draft AML Bill would require providers to collect extensive records for every transaction, including customer’s name, physical and postal addresses (an impossibility in the case of many clients in a country with a lot of informal housing), and occupation, as well as the name and address of the officer, employee, or agent who prepared the record, and to retain these records for seven years (two years longer than the minimum suggested five-year record retention period of FATF Recommendation 10 ). In the Philippines, merchants must complete a one-day AML/CFT training to obtain accreditation as an agent under Circular 471. The training is typically available only in Manila. As a result, less than 1 per cent of Globe airtime dealers are accredited GCash agents. This could become a bottleneck if Globe hopes eventually to make GCash available at a substantial number of the approximately 700,000 merchants selling airtime throughout the Philippines. And when the lens is widened to include the rest of the seven countries studied, a picture that is even more mixed emerges.
Policy makers and regulators in the countries studied have not limited their concerns to preconditions that might prevent the launch of transformational branchless banking. To varying extents, they also have given attention to regulation that might mitigate the risk of a catastrophic failure that could turn the public off to the very idea of branchless banking. Some also are looking ahead to future market development and are at least beginning to think about issues that will affect the scaling up and sustainability of branchless banking. The following next generation topics are particularly important:
Some of the money transfer service providers that dominate the branchless banking landscape in most of the countries studied (particularly the simple bill payment service providers) have built their business around providing one-time transactions. But branchless banking innovators more typically hope to develop ongoing relationships with customers and expand the range of services they can market to increase transaction volumes. A growing number have already moved beyond pure payment services to offer a virtual transaction account where customers can ‘park’ repayable stored value in electronic form for an indeterminate period and make payments and other money transfers when they choose to. These models, to the extent that they facilitate payments via mobile phones, offer great potential for transformational branchless banking because they effectively constitute a retail payments network far beyond the current banking and POS networks. Where the electronic stored value is issued by a bank, the funds, or float, backing the stored value will be monitored as a component of the overall prudential supervision of the bank, even if it is not considered a normal bank deposit. [[[PAGE]]]
In some countries, such as the Philippines, a prepaid card account-such as the accounts Smart mobile customers can open with Smart’s bank partners-is considered an account payable on the books of the bank, rather than a deposit. This results in the bank facing a lower cost regulatory regime and customers receiving a lower level of protection (because customers’ funds are not counted for deposit insurance purposes). Nonetheless, in general, branchless banking services provided through the bank-based model offer at least some measure of regulatory oversight. However, in the case of the non-bank-based model, where a mobile network operator or issuer of prepaid cards creates a virtual stored-value account for a customer and the customer does not have a contractual relationship with a prudentially regulated and supervised bank, there may be little or no regulatory oversight. Even if net proceeds received by the provider from customers are deposited in a bank, the funds are pooled, often in an account in the provider’s name, and a client may have a claim only against the provider and not the provider’s bank. Moreover, unless there is regulation in place addressing these issues, there is no guarantee the provider will have the liquidity to honour customers’ claims, and customers’ funds have no priority over the claims of the provider’s other creditors.
Being able to perform CDD/KYC beyond bank branches is an important shift in the ease and cost of opening accounts.
The regulatory treatment of nonbank-issued e-money and other stored-value instruments in Russia and the Philippines illustrates two ends of a spectrum among those of the countries studied where nonbanks are not prohibited entirely from offering electronic stored value accounts. In Russia, WebMoney offers stored value accounts in unlimited amounts that can be topped up, among other means, via electronic cash acceptance terminals or through the purchase of scratch cards. WebMoney faces no prudential oversight, and customers’ funds are not protected from the firm’s other creditors. In the Philippines, the central bank used its broad regulatory powers to bring Globe Telecom’s GCash subsidiary GXI under its supervision. The central bank limited the risk of GCash, by requiring, among other things, daily and monthly transaction caps, as well as a low cap on the amount customers may leave in their virtual account. Moreover, GXI submits monthly reports on its activities to the central bank, which monitors it closely.
To address these issues, developing countries such as Russia and the Philippines but also countries throughout the developed world are enhancing their regulatory approach to e-money and stored value instruments offered by non-banks. In Russia, defining and appropriately regulating e-money and similar electronic stored-value accounts are high on the priority list of the central bank. In the Philippines, policy makers feel the one-of-a-kind accommodation worked out for GCash has served the country well during the period of early experimentation but a national payment system law is now being prepared.
Where the stored value can be used only to purchase goods or services offered by the issuer or closely related businesses, most countries that have addressed the question have left the matter unregulated (aside from perhaps establishing transaction and balance thresholds). But where the stored value can be used as the virtual equivalent of a transaction banking account, the trend among developed countries is to impose minimum capitalisation and liquidity thresholds, prudent investment standards, and possibly transaction thresholds along the lines of those agreed with Globe Telecom’s GCash product in the Philippines. This approach allows space for innovation among nonbank providers, and it allows their potentially lower cost approach to compete with banks and others whose monopoly position may constrain access. It also allows space to calibrate the level and type of regulation to the scale of the nonbank providers’ activity, leaving room to make adjustments as the market develops and experience is gained with the new or enhanced risks involved.
Policy makers in the countries studied are concerned about the challenges of protecting customers of transformational branchless banking. The following aspects of branchless banking contribute to a generally held sentiment that consumer protection requires special regulatory attention:
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Furthermore, many of the countries studied started out with consumer protection-related challenges not directly related to branchless banking. In Russia, for example, consumer protection for all matters, from consumer product safety complaints to credit card fraud, falls within the jurisdiction of a single, centralised, and lightly staffed body. On the other hand, in India, primary legislative jurisdiction for consumer protection lies at the state level, meaning providers face a patchwork of different requirements depending on the location of their agents. In all seven countries studied, to a greater or lesser extent, poorer and more remote clients may not know about or understand their rights even if adequate regulatory protections are in place. The countries studied also illustrate some steps that might be taken to mitigate the new or enhanced consumer protection challenges of branchless banking. India requires banks working through agents to set up complaint-filing procedures for customers, designate a Grievance Redressal Officer within the bank, and publicise these mechanisms ‘widely’ through electronic and print media (Reserve Bank of India 2006).
Branchless banking innovators typically hope to develop ongoing relationships with customers and expand the range of services they can market.
Brazil’s 2001 banking client protection code applies to all facilities used by banks and requires them to post the telephone number for the bank’s consumer care mechanism and the central bank’s ombudsman in all facilities (including agents) (National Monetary Council 2001). Both India and Brazil have put in place banking ombudsmen as an alternative means of redress. To simplify things for customers in case of alleged fraud or other misconduct by agents, both Indian and Brazilian regulations hold banks liable for the conduct of their agents (helping to shift the burden of vigilance from the customer to the financial service provider) (RBI 2006; National Monetary Council 2003). Brazilian regulation also requires the agent to post information that explains, in unequivocal terms, its status as simply a provider of services for the bank and enjoins agents from charging additional fees (National Monetary Council 2003). In Brazil, the general consumer protection code, the banking client protection code, and a central bank resolution on bank fees all require transparency of pricing for services rendered. In 2001, the banking client protection code was amended to add the phrase ‘and in the facilities where their services are delivered’. In December 2007, new regulations were issued to state explicitly that agents are also governed by price transparency requirements (National Monetary Council 2007).
On data privacy, consumers in the countries studied are likely to have some measure of regulatory protection, depending on the model of branchless banking and the country in question, under general consumer protection regulation, bank secrecy provisions, and sometimes ‘right to privacy’ provisions of the Telecommunications Act, as well as under common law privacy doctrines, where applicable. But this patchwork of provisions often fails to address clearly some of the thornier issues and is typically untested in the branchless banking context.
Dedicated consumer data privacy and protection laws and regulations are being developed in several of the countries studied. In Pakistan, provincial consumer protection laws currently present no effective barrier against consumers having their personal data released, though this may be ameliorated under an Electronic Data Protection Bill that is being drafted. In South Africa, the Electronic Communications and Transaction Act provides voluntary standards for data protection, which the draft Protection of Personal Information Bill would commute to compulsory requirements.
Finally, in all the countries studied, there is strong political will to address the real challenges of consumer financial literacy. Policy makers candidly acknowledge that, without financial education and outreach, customers of transformational branchless banking are unlikely to take full advantage of the protections afforded by regulation.
Around the world, policy makers and regulators increasingly recognise that retail payment transactions, although insignificant when viewed individually relative to large-value payments, carry system-wide and possibly even systemic significance when viewed in the aggregate. Given the current predominance of payment transactions in branchless banking, as the phenomenon reaches scale in particular countries, the importance of appropriate oversight looms large. Payment system regulation holds potential significance for transformational branchless banking beyond countries’ interest in appropriate oversight of systemically significant transaction volume. The new nonbank actors that branchless banking introduces to the payments sphere-particularly mobile network operators-may enter the space and prosper only if they can link with existing payment system participants, such as banks- directly or indirectly-on an economically viable basis. Inclusive payment system regulation that promotes interoperability and therefore market development has a potential role to play.
Dedicated consumer data privacy and protection laws and regulations are being developed in several of the countries studied.
Russia, the Philippines, and Kenya, none of which has a comprehensive national payment system legislation, are nonetheless the leaders among the countries studied in the development of alternative, nonbank, technology-based payment services platforms. They prove that national payment system legislation is not necessarily a prerequisite for launching transformational branchless banking. In the Philippines, some officials say that the flexibility afforded by the absence of specifics regarding the central bank’s power to regulate the payment system proved useful in structuring a proportionate regulatory and oversight approach for Globe Telecom’s GCash stored-value product. However, perhaps because all three countries already have such vibrant activity in the micropayment services realm, top policy makers and regulators in each of the three are eager to put some legislative order to the picture. Kenya and the Philippines have already embarked on initiatives to adopt comprehensive national payment system legislation, and some policy makers in Russia are considering this step. India has also embarked on this course, and a Payment Systems and Electronic Fund Transfers Ordinance was recently passed in Pakistan. In each case, this could offer an opportunity, not only to establish a level playing field for bank and nonbank payment services providers, but also possibly to clarify other important issues, such as the boundaries between payment services, e-money and other stored-value instruments, and deposit taking requiring a banking licence.
South Africa has had a national payment system law in place long enough to give insights into how such legislation might affect payment system development. A recent review (South African Reserve Bank 2007) of the 10-year strategy to develop the national payment system concluded that substantial progress had been made toward developing a robust, wide, and deep payment system, but that further effort was necessary specifically to promote retail instruments that reach more people. [[[PAGE]]]
Concerns about market dominance and unfair competition may appear premature when numbers of customers remain low. However, in the market for payment services, which is often subject to strong positive network effects competitive dynamics need to be considered early on for the following reasons:
Both points relate centrally to the question of interoperability. To what extent will customers of competing financial service providers be able to transact business with each other? And what role, if any, should regulation play-and on what timetable-in answering this vital question?
Regulation mandating interoperability could be imposed ex ante, if policy makers convince themselves that they must intervene to avert a significant market failure (such as ‘tipping’ the market for mobile phone-based branchless banking to a single dominant mobile network operator). Or it could be imposed ex post-once there is evidence that a dominant player or players (such as a clearing and settlement platform owned by a group of large banks) have begun to exploit such a market failure. Mandating the interoperability of branchless banking systems at an early stage can reduce the incentives for firms to enter the new market and compete. No policy makers in the countries studied have intervened ex ante to mandate interoperability and avert exploitation of a dominant market position before it manifests itself clearly. South Africa is currently considering ex post action on interbank charges. An ongoing Competition Commission inquiry launched last year into the fees set by retail banks has focused closely on the workings of the payments systems and, in particular, the payment utility company owned mainly by major banks.
The field of transformational branchless banking is so new, so dynamic, so rapidly developing and changing that it is challenging to make strong normative policy recommendations. The evidence gathered from observing current regulatory practice in the countries studied reveals as much about unresolved challenges and tough trade-offs as it offers in the way of concrete ideas for proportionate regulation of branchless banking that other countries might wish to pursue.
Process-related recommendations for policy makers and regulators
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