What is an excise duty?

An excise duty is similar to a VAT as its value is based on the price of the service. However, unlike VAT, excise duty is applied on the amount sold by an operator, as opposed to being applied to the retail price.

This difference is important because from the perspective of the consumer, the tax is not distinguishable. Operators will be required to pay this tax directly based on the revenue generated by the transactions.

How could this impact the market?

As the operator pays the tax directly, the operator could decide to take the tax hit completely, leaving retail prices unchanged, and to absorb this extra cost entirely, but this would significantly harm its profitability and in the medium term prices would have to rise. Alternatively, the operator could pass part of this cost through, and the burden of the tax will be reflected in a proportional increase of the price of mobile money services for the customer.

Therefore, in general, excise tax either:

• Makes the market less profitable for a provider which would decrease their willingness to invest and develop, e.g., products and distribution networks
• Makes the market prices higher, increasing the barrier for customers to use the service.

Is the transposition of the excise duty on the consumer legal?

The Kenyan Finance Minister Njeru Githae has declared that the duty will not affect the consumer, adding that it will be paid by the service providers.  He went further to warn operators that the government will monitor the mobile operators to ensure they don’t make any secret adjustments to transpose the cost to the customer.

While I am sure that the Ministry will check collusive pricing behaviour, the Minister shall be aware that it would be perfectly rational and economic for operators to increase retail prices by the same amount of the new tax, as it is a legitimate cost increase they are facing. This transposition would be legal.

What’s next?

Mobile money transfer services in Kenya are an integral part of the country economy, with almost 20 million Kenyans using this service. The Central Bank of Kenya estimates that in the first half of 2012 KES 726.23 billion (approximately USD 8.6bn) were transferred through the mobile money platform. It’s hard to understand the rationale of this new tax on a service that is greatly benefiting the whole Kenyan society. Voice services in Kenya are taxed at a rate of 26% ( 16% VAT + 10% excise Duty). Adding this new 10% tax on mobile money transactions will stifle a nascent and important driver of commerce and socio-economic development. Unfortunately there was no consultation or engagement with stakeholders before the amendment was introduced.

The President must assent to it for the tax to become law. Our hope is that he will deny his assent.

There are two things to keep in mind when discussing interoperability in mobile money. First, the maturity of the mobile money deployments in the market will define the content and timing of the discussion. Most mobile money deployments are busy building the foundation of their services, such as a strong agent network and an active customer base, and cannot invest in connections to external parties. This becomes more possible for advanced deployments.

Second, it is important to be open to the opportunities that a better-connected mobile money environment can realise, and not prematurely focus on the technical solution or which assets should be shared. Interoperability is a tool and not an end goal by itself. Market players will likely drive this development if there are clear strategic and financial incentives to do so.

Interoperability and regulation will be discussed further at the Leadership Forum at the NFC & Mobile Money Summit in Milan next week. That discussion will take up from a previous MMU engagement on interoperability and regulation at the AFI Global Policy Forum, which highlights can be found here.

Download the full report Expanding the Ecosystem of Mobile Money: Considerations for Interoperability. Keep an eye on this blog as MMU will focus more on different forms of interoperability in mobile money in the months to come. Please send us your feedback by posting comments below or via email.

I was invited to join the panel on how to break the barriers that are impeding mobile financial services to make financial inclusion real. AFI members from Mexico, Pakistan, and Ghana were on stage with me, as well as one representative of MasterCard. We ended up spending all the session talking about interoperability in the form of enabling e-money to flow between wallets of different mobile money providers. The position of the GSMA was perfectly in line with those of the Mexican and Pakistani regulators. Today the key takeaways of that panel are on the first page of the GPFconnect, the magazine that is distributed every morning to all participants with the news and the views from the 2012 GPF. They are:

1. Interoperability is a means to an end. Financial inclusion should be a key focus rather than interoperability itself. Although it is a tool that can contribute to financial inclusion in certain circumstances, it does not guarantee it.

2. Interoperability must make business sense. Regulators need to be cautious about intervening and ask whether they are creating risks and extra costs for service providers by launching products and services in a market that is not ready to support them. Without a strong regulatory framework and customer confidence in the security of the system, interoperability will not succeed.

3. Timing is everything. There is no question that we need interoperability – the question is when and how. The maturity of the market must be taken into account and data and information need to be gathered that reveal the right time and the right source to launch services.

MMU released a position paper on interoperability early this year. Another contribution to the discussion of interoperability will be published in October in the MMU 2012 Progress Report.

In October during the MMU Leadership Forum we will have one session on this topic, with both operators and regulators among our guests speakers.

The core session of the first day of the GPF was dedicated to the country updates on the progresses made to advance financial access for poor households and small enterprises, particularly by those AFI members (93 financial sector authorities from global south) that joined the Maya Declaration and made specific financial inclusion commitments at last year’s GPF. Policymakers from Fiji, Equatorial Guinea, the Philippines, Malawi, Mexico, and Rwanda presented their achievements and challenges in building a support framework for financial inclusion. During the second part of the panel, the regulators left the stage and some representatives from the private sector, as well as CGAP and the Bill & Melinda Gates Foundation, joined AFI Executive Director Alfred Hannig to discuss possible ways to support the Maya Declaration.

Seema was one of panellists who was invited to discuss the potential impact of the Maya Declaration on the global financial inclusion landscape, the development of new forms of collaboration with regulators at global and country level, and the possible role that industry stakeholders can play in achieving these financial inclusion goals. MMU fully supports the Maya Declaration, and the push towards greater financial inclusion by so many countries across the globe. We see value in these commitments where they lead to policies and regulatory frameworks that support growth but do not stifle innovation. Probably one of the best outcomes of the Maya commitments at national level is that policymakers will improve coordination and engage in consultation with the private sector. When designing new policies, the implementation aspects need to be carefully assessed, particularly when the industry that is going to be regulated is young (out of around 130 deployments that active today over 70% of deployments launched in 2010 or thereafter) and the private sector needs to make significant upfront investments into mobile money services if they are to be successful.

Since 2009, MMU has helped to foster dialogue between regulators and mobile network operators through the GSMA MMU Leadership Forum (GSMA’s annual event on mobile money policy and regulation), in country, in collaboration with AFI and more recently through collaboration with the AFI Mobile Financial Services Working Group. MMU is already working with AFI members, such as the BCEAO, to help them to design and implement mobile money regulation.

MMU can help to facilitate discussion and consultation with the private sector, to shape policies regulation that most effectively supports the growth of mobile money industries that contribute to financial inclusion. Regarding the implementation of national objectives that each country sets up, MMU can also help to monitor progress towards financial inclusion and the accomplishment of the Maya commitments. The Global Mobile Money Adoption Survey provides data around the performance of the mobile money industry, such as the rate of customer adoption, which is a key indicator of success of mobile money policies.

PS: Nestor Espenilla, Deputy Governor of the Bangkok Sentral ng Pilipinas (BSP) is the new chair of the AFI steering committee. This is very good news. Mr Espenilla has contributed significantly to the growth on mobile money in the Philippines, and has collaborated with MMU in different circumstances helping the GSMA to advocate for enabling policies sharing the experience of the BSP. Under his leadership we hope that the AFI network will be even more active in the promotion of better regulations for mobile money.

This post is the fourth and last part of a series on the CGAP and the Mobile Money for the Unbanked blogs on the topic of mobile financial services in francophone West Africa. This short series features prominent voices from the region and discuss new developments and implications for the industry as a whole. Also read part 1, part 2 and part 3 of the series.

MMU was invited to participate in the Regional Consultation on Mobile Banking organized by the Banque Centrale des Etats de l’Afrique de l’Ouest (the Central Bank of West African States or BCEAO)  to discuss the state of mobile money in the Union Economique et Monétaire Ouest Africaine (the West African Economic and Monetary Union or UEMOA) and whether there is any policy intervention that could possibly advance the development of mobile money. It was encouraging to see the BCEAO undertake a participative approach to inform its decision making process. The regulator considers the private sector’s experience in delivering mobile money an important resource, and is keen to design any policy intervention using the lessons learnt by other regulators (representatives of the Central Bank of Kenya, the Bangkok Sentral ng Pilipinas, and Bank of Tanzania attended the consultation) and the evidence provided by a comprehensive set of data, including those presented by the GSMA, the Consultative Group to Assist the Poor (CGAP), and the African Development Bank (ADB).[1]

MMU presented the state of the market based on the quantitative information from the 2011 Global Mobile Money Adoption Survey, and based on that data formulated some observations on the possible development of the policy and regulatory frameworks for mobile money. The analysis highlighted three key themes:

• Customer Adoption – Of the 7 mobile money deployments in the UEMOA which participated in GSMA’s survey, the number of registered and active customers (3.1m and 190,000 in June 2011 respectively) show that mobile money in the region has faced difficulties in reaching scale. However, the growth rate between 2010 and 2011 is encouraging, with the West African deployments growing at the same rate as the rest of Africa and faster than in the rest of the world. Among the eight UEMOA countries, Côte d’Ivoire in particular is experiencing fast growth.
• Product Diversification – Given the range of diverse needs that the unbanked face, a broad range of service offering is advisable. Most services in the region offer a good mix of products. Niger stands out as a positive example with healthy customer uptake of P2P transfers, bill payments and bulk payments.
• Distribution – Another key element for the success of mobile money is the distribution network. The number of mobile money agents in the region is not vast in absolute terms, but the market is still in an early phase of development. A comparison between the current size of the distribution network in the UEMOA and the data on the ratio of customers to agents in the experience of M-Pesa was shared to support this opinion. On average, active mobile money agents in the UEMOA serve 78 active customers and do 4.7 transactions per day.

At the end of the presentation MMU was invited to formulate suggestions to the regulator, which are as follows:

• In UEMOA all players are at an important time of their learning curve. New providers are entering the market increasing competition and professionalism. Today there are 14 mobile money deployments in the region – the latest one to be launched was Airtel in July, with a product called “M-Ligdi” or “Airtel Money” that is now offered in Burkina Faso. Furthermore customer adoption in the Côte d’Ivoire and product diversification in Niger can provide relevant case studies and learnings. Therefore, this is not the time for a revolution of the regulatory framework that the BCEAO has designed for the UEMOA, because the market in the region is not broken, and creating regulatory uncertainty could deter the providers from keeping their level of investments and slow or reverse the current trend of market growth.
• Rather, at this point it is interesting to observe in the detail what level of development the market will reach in 6 to 12 months, and to continue the dialogue with the providers in order to assess what corrections could make the current regulatory framework work at best, reducing market entry and compliance costs and favouring the quality of the offer while keeping the highest standards of technology security and consumer protection. For instance, to encourage new actors to enter the market, and in particular operators to directly request an e-money license, it shall be considered to speed up the licensing process, for example by reducing the paperwork (i.e., asking the providers to submit part of the contracts with their partners sometime after the license has been granted), or to lower the capital minimum requirements (which is currently 300M CFA franc).
• To increase customer adoption, the provision of financial education programmes would be relevant. The BCEAO could significantly contribute to increase awareness of the advantages of digital currencies compared to cash among potential mobile money users (in the eight countries of the UEMOA notes and coins are still the prevalent mean of payment by far) and to develop customers confidence in mobile money and the providers.
• Regarding the agents, we have explained why their number shouldn’t be an issue, although there are initiatives that could help to improve the efficiency of the distribution networks: the BCEAO could support market development by making available to the private sector all necessary data in order to better inform their decisions on the localization of the agents. In this sense the work done by the Comisión Nacional Bancaria y de Valores (CNBV) in Mexico has been much appreciated by the Mexican stakeholders and could serve as an example to the other regulators (see, i.e., the financial inclusion data report as well as the report on banking agents).
• Finally, early this year the Financial Action Task Force (FATF-GAFI) has released a new framework of recommendations on Combating Money Laundering and the Financing of Terrorism & Proliferation. The updated international standards allow now more flexibility for simplified measures to be applied in low risk areas such as mobile financial services. The risk-based approach allows regulators to apply AML/CFT precautions proportionally and incrementally, and the BCEAO could draw on its own experience and on international practices to test new solutions for know-your-customer (KYC) procedures that would help the promotion of financial inclusion though mobile money while safeguarding the objective of fighting terrorist financing and money laundering.

L’approche participative de la BCEAO en matière de réglementation : l’engagement du programme MMU auprès de la Banque Centrale des Etats de l’Afrique de l’Ouest sur les initiatives visant à accroître l’adoption des services d’argent mobile

Le programme MMU a été invité à participer à la consultation régionale sur le « mobile banking » organisée par la Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO)  afin d’échanger sur l’état du secteur de l’argent mobile dans l’Union Economique et Monétaire Ouest Africaine (UEMOA) et de discuter dans quelle mesure une nouvelle intervention en matière de réglementation était nécessaire pour avancer le développement de l’argent mobile. Il est encourageant de voir que la BCEAO a entrepris une approche participative afin d’être autant informée que possible lors de son processus décisionnel. La BCEAO considère que l’expérience du secteur privé en matière de provision de services d’argent mobile est une ressource importante. Afin de définir toute nouvelle intervention, la BCEAO souhaitait d’un part, utiliser les leçons apprises par les autres autorités réglementaires compétentes à l’étranger (des représentants de la Banque Centrale du Kenya, de la Bangkok Sentral ng Pilipinas, et de la Banque Centrale de Tanzanie ont assisté à la consultation), et s’appuyer sur un ensemble de données exhaustif incluant notamment celles fournies par la GSMA, le CGAP et la Banque Africaine de Développement (BAD).[2]

Le programme MMU a présenté l’état du secteur, se basant sur les données quantitatives de l’Etude 2011 sur l’Adoption des Services d’Argent Mobile et, à partir de ces données, a formulé un certain nombre d’observations sur le possible développement du cadre réglementaire sur l’argent mobile. Cette analyse mettait l’accent sur 3 thèmes en particulier :

• L’adoption de l’argent mobile – 7 services d’argent mobile de l’UEMOA ont participé à l’étude de la GSMA. Le nombre total de clients enregistrés d’une part et actifs d’autre part (3.1 millions et 190.000 en juin 2011 respectivement) dénote une certaine difficulté à atteindre une échelle importante. Toutefois, les taux de croissance sont très encourageants, avec les services de la région UEMOA grandissant à la même vitesse que les services du reste de l’Afrique, et plus rapidement que ceux dans le reste du monde. Des 8 pays de l’UEMOA, la Côte d’Ivoire est le pays qui présente la croissance la plus forte.
• Mix-produit et diversification de l’offre – Etant donné le nombre de besoins différents de la population non-bancarisée en matière de services financiers, on peut recommander une offre de service large et diversifiée. Le Niger s’illustre ici comme un exemple en raison de la forte adoption des transferts de personne à personne, paiements de factures et paiements groupés via la plateforme d’argent mobile.
• Distribution – Un autre facteur clé de succès pour l’argent mobile est le réseau de distribution du service. Le réseau d’agents d’argent mobile dans la région n’est pas vaste en termes de nombres, mais le marché est encore relativement jeune et est en plein développement. Une comparaison de la taille actuelle du réseau d’agents dans l’UEMOA ainsi que du nombre de clients actifs par agent actifs par rapport à M-PESA a été partagée afin d’étayer ce point. En moyenne, les agents d’argent mobile de l’UEMOA servent 78 clients actifs et effectuent 4.7 transactions par jour.

A la fin de cette présentation, le programme MMU a été invite à formuler des suggestions pour le régulateur. Ces suggestions sont les suivantes :

• Dans l’UEMOA, les acteurs du secteur de l’argent mobile sont en pleine phase d’apprentissage. De nouveaux acteurs sont en train d’arriver sur ce marché, ce qui contribue à accroître la compétition et la professionnalisation du secteur. Aujourd’hui, il y a 14 services d’argent mobile dans la région – le dernier à avoir été lancé est le service “M-Ligdi” or “Airtel Money” de l’opérateur Airtel au Burkina Faso en juillet. De plus, l’adoption en Côte d’Ivoire et la diversification de l’offre au Niger offrent des cas d’étude intéressants. C’est pourquoi ce n’est pas le moment d’engager une révolution du cadre réglementaire mis en place par la BCEAO dans l’UEMOA. Le marché dans la région n’est pas en état de disfonctionnement, et la création d’incertitudes quant à la réglementation pourrait décourager les fournisseurs de services à poursuivre leurs investissements, et ralentir voir inverser la tendance en matière d’adoption.
• A ce stade, il est davantage intéressant d’observer précisément quel sera le niveau de développement du marché dans 6 et 12 mois, et de poursuivre en parallèle le dialogue avec les fournisseurs des services d’argent mobile afin d’évaluer quelles corrections éventuelles peuvent être portées au cadre réglementaire actuel afin qu’il fonctionne au mieux, en réduisant le cout d’entrée sur le marché et de mise en conformité et en favorisant la qualité de l’offre tout en conservant les plus hauts standards de sécurité technologique et de protection des consommateurs. Par exemple, pour encourager de nouveaux acteurs à entrer sur le marché, et en particulier pour encourager les opérateurs à demander des licences directes, il devrait être considéré d’accélérer le processus d’obtention d’une licence, par exemple en réduisant les formalités administratives et la paperasserie (par exemple, en demandant aux fournisseurs de service de soumettre une partie des contrats avec leurs partenaires après l’accord d’obtention de la licence), ou en diminuant le capital minimum requis (qui est actuellement de 300 millions de francs CFA).
• Il serait également pertinent de mettre en place des programmes d’éducation financière afin d’accroître l’adoption de l’argent mobile. La BCEAO pourrait ainsi contribuer de façon significative à la sensibilisation de la population aux avantages des monnaies digitales en comparaison à l’argent liquide (dans les 8 pays de l’UEMOA, les pièces et les billets sont toujours le moyen de paiement le plus largement utilise) d’une part, et à développer la confiance des clients dans l’argent mobile et les fournisseurs de service.
• Pour ce qui est des agents, nous avons expliqué pourquoi leur nombre n’était pas un problème, bien qu’ils y aient des initiatives qui pourraient aider à améliorer l’efficacité des réseaux de distribution : la BCEAO pourrait soutenir le développement du marché en mettant à disposition des fournisseurs de services les données nécessaires susceptibles d’informer leurs décisions en matière de localisation de leurs agents. Le travail en ce sens effectué par la Comisión Nacional Bancaria y de Valores (CNBV) au Mexique a été largement apprecie des acteurs Mexicains et pourrait servir d’exemple à d’autres régulateurs (lisez par exemple le rapport sur l’inclusion financière ainsi que le rapport sur les agents).
• Enfin, en début d’année, la Financial Action Task Force (FATF-GAFI) a publié un nouveau cadre de recommandations pour combattre le blanchiment d’argent et le financement et la prolifération du terrorisme. Ces nouveaux standards internationaux permettent maintenant plus de flexibilité pour la mise en place de mesures simplifiées pouvant être appliquées aux services à bas risques comme les services financiers sur mobile. Cette approche basée sur la compréhension des risques permet aux régulateurs d’appliquer les règles de LAB/CFT de façon proportionnelle et incrémentale, et la BCEAO pourrait utiliser sa propres expérience et ces pratiques internationales pour tester de nouvelles procédures de connaissance du clients (KYC) qui pourrait aider à promouvoir l’inclusion financière à travers l’argent mobile tout en préservant l’objectif de lutter contre le financement du terrorisme et le blanchiment d’argent.

MMU: Sergio, why is financial inclusion a priority for Namibia?

SdS: Namibia has a population of approximately 2.1 million, spread thinly across 824,292 square kilometres. As a comparison, Germany, with a population of 82 million, is only a third the size of Namibia. Namibia is classified as a middle-income country with GDP per capita of US$7,300, but that income is unequally distributed resulting in one of the highest Gini coefficients in the world. The high costs and difficulty associated with serving a low-density population has excluded much of the poorer population from the formal banking sector. Against this background, the Bank of Namibia in recent years has set a strategic focus on promoting financial inclusion in Namibia. This is currently documented as part of the Bank of Namibia (BON, the national central bank) Strategic Plan 2012 – 2016.

MMU: What makes mobile money functional to achieve financial inclusion?

SdS: According to a recent study 62% of Namibians are banked, but for 49% of them it still takes more than one hour to go to a bank. Low population density spread across the country means that traditional brick-and-mortar solutions are not cost-effective to reach the 38% of people who are financially excluded. There are 2,681,339 mobile connections in Namibia; alternative distribution channels such as mobile phones are key to driving financial inclusion, and also to making the financial system more efficient for the people who are banked but cannot easily get daily access.

MMU: The Central Bank has adopted a “test and learn” approach, with at least one deployment launched before the regulation was issued. Is that correct?

SdS: BON received its first application from a non-bank to provide Mobile Payment Services (MPS) at the end of 2009. The first full license for MPS in Namibia was issued in 2010, before any specific regulation for mobile payments was in place. Driven by the objective to promote financial inclusion and seeing the potential of MPS in contributing to this goal, BON used the existing regulatory framework for payment systems to issue this license.

MMU: Then BON has decided to develop a regulation for electronic money…

SdS: After issuing this first license, BON realised the need to develop a specific regulation that catered to the uniqueness of MPS and the adopted technology. The aim was to develop a regulation framework that safeguarded the national payment system and the public; enabled innovation and competition in payment services that could promote financial inclusion; and provided clear guidance to potential electronic money (E-Money) issuers.

In the process of developing a regulatory framework, the bank decided to focus on regulation for e-money and not only MPS. The rationale behind this change was that E-Money would enlarge the scope of the regulation which would cover MPS as well as any similar services that may emerge in the future including payments via mobile phones, computers, cards, etc.  This is consistent with the National Payment System Vision 2015 of Namibia to promote access to payment services by providing market access to non-banks that offer alternative innovative payment services such as mobile money. The oversight of the first deployment has given us the opportunity to learn important lessons that we have used for the development of the new regulatory framework.

MMU: Tell us about the new regulatory framework. What are the main points touched by the regulator?

SdS: After much investigation and consultation (within BON as well as with all relevant stakeholders, including banks and mobile network operators) on 28 March 2012 the Bank issued the new “Determination on the Issuing of E-Money” (PSD-3). PSD-3 was issued under the Payment System Management Act, 2003, as amended. The regulation considers numerous key policy issues such as protection of customer funds and the use of agents, and covers a number of services including opening an electronic money account; loading value onto an electronic wallet (cash-in); redeeming value from an electronic wallet (cash-out); paying bills; sending domestic money transfers; and receiving/disbursing domestic money transfers.

This regulation is accompanied by guidelines for issuers of electronic money and other payment instruments, and a circular on the transaction and balance limits for electronic money accounts and the fees payable. The objective of this regulation is to encourage more players to enter the E-money space by providing an enabling environment for innovative financial services that promote both financial inclusion and customer protection.

MMU: Both banks and mobile network operators can apply to receive a license that would allow them to issue E-Money. What is the rationale?

SdS: A key policy decision taken was to allow both bank and non-banks to become E-Money issuers. The reason for this is to allow for greater competition and innovation. It is believed that with more players in the market there is a greater likelihood of reaching more of Namibia’s predominantly rural population. While some may have fears to allow non-banks to play in this space, BON believes that the risks are sufficiently mitigated in the approved regulatory framework to allay such concerns.

In the Declaration, members recognize the key role that financial inclusion policy plays in bringing stability and integrity, its role in fighting poverty, and its essential contribution toward inclusive economic growth in developing and emerging countries. The Declaration reaffirms the importance of peer-to-peer knowledge exchange and learning among financial regulators and policymakers to help develop and implement innovative and relevant policy solutions.

Several countries used the forum to announce new initiatives to expand their population’s access to financial services:

• Brazil agreed to launch a National Partnership for Financial Inclusion in November.
• Peru pledged to enact a new law regulating electronic money within the next year.
• Mexico committed to establish banking agents or branches in every municipality in the country by 2014.
• Tanzania pledged to raise its financial access level to 50% of its population by 2015 through mobile banking and other initiatives.
• Nigeria said it would work to reduce its unbanked by 50% by 2020.
• Malawi will introduce agent banking in 2012.
• Zambia said it would raise financial inclusion to 50% within two years.
• Rwanda set a target of 80% by 2017.

Other members making commitments included members from Kenya, Uganda, Ethiopia, Burundi, Pakistan, Fiji and the Philippines.

AFI will provide the necessary support to its members in achieving their commitments and will continue to monitor development. The progress review will be showcased at the 2012 GPF in South Africa.

Surprised? You should be. The two services I’m referring to are MTN MobileMoney and Vodacom M-PESA. MTN Uganda and Vodacom Tanzania take responsibility for branding and marketing these services. They have set up and manage network of cash-in/cash-out agents. They provide customer care. And they selected and manage the technology vendors who supply the transactional platforms which underpin the service. Perhaps more to the point, they have made the significant investment that has been necessary to scale mobile money, and they will reap the benefits if mobile money is a commercial success.

Yet neither MTN nor Vodacom holds a license to offer a mobile money service from their financial regulator. Instead, their bank partners hold such licenses, and then authorize the operators to run the service under their regulatory umbrella. That’s because the Bank of Uganda and the Bank of Tanzania, like a number of other central banks in the developing world, do not issue payment or e-money licenses to non-banks.

This is a bit surprising. Consider two of the biggest names in payments globally, Paypal and Western Union. Neither is a bank. Rather, they are regulated (depending on the jurisdiction) as payment providers or e-money issuers.  A bank license, and the supervisory obligations that go with it, would be unsuitable for these players, because they, like mobile money providers, do not engage in the risky business of financial intermediation: converting customer deposits into loans. Money that they hold on behalf of customers and agents is entrusted to a regulated bank.

There are a variety of reasons why certain central banks decline to license non-banks directly. But the arrangement comes with its share of problems, to the detriment of operators and (more importantly) customers.

• First, it can significantly slow down the speed at which non-banks can launch services, because they must first find a bank partner that is willing to secure a license on their behalf. We know of operators who have been negotiating with potential bank partners for more than a year, in part because banks legitimately worry about taking on the risks associated with mobile money when operationalizing the service will be up to another entity.
• Second, it can limit the degree to which non-banks can forge effective distribution networks. By appointing banks to act as superagents to support agent liquidity, operators can improve the service level that customers experience at retail. But it’s often important to appoint multiple banks as superagents, particularly if an operator’s partner bank has a limited branch network in rural areas. But license-holding bank partners are sometimes reluctant to let their operator partner work with other banks.
• Third, it can slow the integration of mobile money into the broader financial system. M-PESA in Kenya has integrated with at least a dozen banks so that customers can easily move money between their bank accounts and their M-PESA wallets. Operators who are tied to a single bank may find that that bank wants to offer this functionality to their, and only their, customers—good for the bank, but not for customers of other banks.
• Finally, it can restrict the range of services that non-banks offer customers. We know of one operator which sought to offer a kind of bulk payment functionality to its mobile money customers, only to be told ‘no’ by its bank partner—which feared that the new service would cannibalize its own wholesale offering.

Most of the operators we know in this situation would prefer to be directly regulated by their central bank as an e-money issuer or payment services provider. Doing so gives regulators better visibility into and oversight over mobile money services, and makes it more likely that customers will have more services from which to choose in the financial services space. It’s a win for everyone involved.

Mobile operators are directly licensed to offer payment services by central banks in a number of markets around the world, including the Philippines, Malaysia, Thailand, and Indonesia. To read more about how regulators in those jurisdictions make sure that customers’ money is safe, see Nonbank E-Money Issuers: Regulatory Approaches to Protecting Customer Funds. And for more about the relationship between banks and operators when it comes to mobile money, see Mapping and Effectively Structuring Operator-Bank Relationships to Offer Mobile Money for the Unbanked.

The Financial Action Task Force was established to develop and promote policies that combat money laundering and terrorist financing. As part of this mandate, it has developed a set of measures that financial institutions must adopt to prevent money laundering and terrorist financing. It is important that national financial regulators ensure that their national regulations are in line with these standards. But if they interpret and apply these standards conservatively, they can make it hard for the financially excluded to access services like mobile money.

This paper was written to highlight the flexibility that the FATF standards permit under a risk-based approach and to illustrate how this flexibility can create more enabling environments for financial inclusion.

Some of the important messages in the paper include:

- “AML/CFT measures can negatively affect access to, and use of, financial services if those measures are not carefully designed.”

- “Financial exclusion works against effective AML/CFT policies. Indeed, the prevalence of a large informal, unregulated and undocumented economy negatively affects AML/CFT efforts and the integrity of the financial system. Informal, unregulated and undocumented financial services and a pervasive cash economy can generate significant money laundering and terrorist financing risks and negatively affect AML/CFT preventive, detection and public investigation/prosecution efforts.”

- “Financial inclusion and an effective AML/CFT regime can and should be complementary national policy objectives with mutually supportive policy goals. Accordingly, international AML/CFT Standards have flexibility, enabling jurisdictions to craft effective and appropriate controls taking into account the relevance of expanding access to financial services as well as the diverse levels and types of risks posed by different products and supply channels.”

- “In line with the FATF Standards, a country may decide to exempt a specific type of financial institution or activity (as listed in the Glossary of the FATF Recommendations) from certain or all of the AML/CFT obligations… The current FATF Standards allow for simplified CDD measures in cases where there is a low risk of money laundering or terrorist financing. In relation to wire transfers for instance, countries may consider applying the so called “progressive or “tiered” KYC/CDD approach” whereby the transaction/payment limits vary based on the CDD; the better the CDD process, the higher the limits.”

• “Relying on a broader range of acceptable IDs: The customer identity verification stage is, in all instances, described by the industry as the most difficult and burdensome to achieve and as being a strong disincentive from a financial inclusion perspective. In order to address these challenges, the list of acceptable IDs in the verification process has been extended in some countries to include a broader range of documentation such as expired foreign IDs, consular documents or other records that undocumented people can typically acquire in the host country (bills, tax certificate, healthcare document, etc.). Usually, local authorities allow such an approach in pre-defined types of business relationships and below account balance limits i.e., using a risk-based approach.”

• “Identification in non-face to face scenarios: While face-to-face interaction is still relevant in certain types of banking activities (e.g., private banking), it is not essential to many banking and non-bank relationships. Non face-to-face financial operations that may serve the undocumented and financially excluded population require specific verification processes which should not necessarily include submission of a conventional government-issued form of identification with photograph. The process of reliance on third parties with respect to CDD is permitted under the FATF Standards.”

- “Record-keeping of CDD data and transactions: The information on the identification document(s) does not always require the retention of a photocopy and electronic storage is acceptable, which is particularly useful in the context of mobile phone banking.”

In situations where mobile operators believe that overly stringent customer due diligence procedures are constraining adoption of mobile money services, this paper can be a useful catalyst for dialogue with regulators about the possibility of a more enabling, risk-based approach.

A supplement to this new guidance paper from FATF is its Report on Money Laundering Using New Payment Methods, which was published last year. For a comprehensive analysis of the nexus between the FATF Standards, AML/CFT policy, and mobile money, see the World Bank’s recent report Protecting Mobile Money against Financial Crimes: Global Policy Challenges and Solutions.

The magnitude of the difference is striking.  The monthly cost of servicing a savings account using a cashier in a bank branch, even assuming full utilisation, was roughly four times greater than doing so using agents outside of the branch. The big driver, as you might expect, is the allocation of fixed costs associated with branch construction and setup: according to the Foundation’s analysis, “a branch cashier incurs more than 78 cents in fixed costs per transaction, compared to just… 4 cents or less for a mobile-enabled agent or mobile wallet.”

The high cost of facilitating deposits and withdrawals in bank branches is a major stumbling block for financial inclusion. You don’t have to be a banker to think that it will be hard to make money offering poor people accounts when it costs you 78 cents to facilitate every deposit and withdrawal, particularly since poor people’s account balances are typically small, meaning you can’t earn much by loaning those deposits out. Banks can solve this puzzle by charging customers fees; but fees drive price-sensitive poor customers away.

Using low-cost agents to facilitate cash-in and cash-out transactions is therefore an obvious way to make financial services more affordable to low-income customers. Some banks, mostly in Latin America, are establishing these networks of cash-in/cash-out points themselves. Others are leveraging networks built by other players; a number of banks in Kenya allow their customers to make deposits and withdrawals via M-PESA, for example.

Reducing the cost of deposits and withdrawals by setting up networks of independent retail agents is one of the most important roles that non-banks can play in financial inclusion—and it’s one of the reasons that banks and non-banks alike need to be able to set up networks of independent agents. If they can’t, bank branches will remain the sole gateways to financial access—at the expense of those who lack it.

For more on the regulation of cash merchants, see “Regulating New Banking Models that Can Bring Financial Services to All” by Claire Alexandre, Ignacio Mas, and Daniel Radcliffe in our Regulation Section. For a more thorough discussion of the cost advantages of agents compared to bank branches, see  “The Economics of Branchless Banking” by Ignacio Mas