Regulation of Mobile Banking Called Key to Vibrant African Market
Mobile phones are bringing much-needed financial services to “unbanked” African consumers, creating a previously untapped -- and potentially multibillion-dollar -- market for telecommunications operators, the GSM Association said this month. Vodafone’s M-PESA, started in 2007 and run by Kenyan mobile provider Safaricom, was followed Feb. 18 by Zain’s new service, Zap, which will deploy first in Kenya, Tanzania and Uganda. But to succeed, the new business opportunity must first ease regulatory qualms in the banking industry, sources said.
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Under the “transformational” banking system, mobile phone customers are automatically given a bank account tied to their mobile account which in all respects functions like a traditional bank but without branches or checkbooks, said Hannes van Rensburg, CEO of South Africa-based platform solution provider Fundamo. Users can debit their accounts, credit other accounts, pay bills and make person-to-person payments, all by phone, he said. To add money they pay cash to an agent, usually their mobile operator’s dealer, who serves as a human ATM, he said. Each provider has its own business model and fees, he said.
From bankers’ standpoints, mobile banking has “dangerous” sides, van Rensburg said. Central banks’ main goal is to prevent money creation and resulting inflation, he said. And mobile banking operators aren’t doing enough to reassure banks that their systems can’t be hacked and individuals’ balances changed, he said.
Protecting consumers against loss of their money is another issue, van Rensburg said. Central bank regulators usually combat this risk by requiring banks to have reserves, and the same principle should apply to mobile banking “wallets,” he said. M-PESA has no reserves but Vodafone does, and they should be earmarked and controlled by Kenya’s central bank to protect consumers, he said.
A third regulatory issue is ensuring that mobile accounts aren’t used as a conduit for financing illegal or terrorist activities, van Rensburg said. One way is to limit users to no more than a set amount of transactions per day, he said. A fourth worry, for central banks, is the “systemic settlement” problem, he said. Drawing cash from, say, a Lloyd’s TSB ATM with an HSBC debit card leaves HSBC owing money to Lloyd’s, he said. If HSBC can’t satisfy the debt, it could fail, dragging other banks down with it, he said. The same holds for mobile banking, he said.
Rules tightened after Sept. 11 require banks to “know your customer” to trace money-laundering and other activities, said Simon Batchelor of Gamos, which calls itself a company working with social factors surrounding development. The stricter regulation created a climate where no central bank, particularly in Africa, wanted to allow a system vulnerable to money-laundering, he told us.
Kenya’s central bank, to its credit, allowed M-PESA to launch with a much lower “know your customer” requirement, Batchelor said. Users register with only a mobile phone and a national identity card, he said, but the numbers and amounts of their daily transactions are limited, reducing the risk. Merchants register as M-PESA agents, with Safaricom having very limited control over their cash flow, he said. To a central bank, the agency relationship is “a huge step forward,” he added.
Regulation can involve hard-and-fast rules that can hamper innovation, or “proportional risk,” he said. Kenya’s central bank chose proportional risk, making some other domestic financial institutions uneasy. Five million people now use M-PESA, he said.
Kuwait-based mobile provider Zain launched Zap together with international and regional banks including Citigroup and Standard Chartered Bank, the company said. It will allow customers to pay bills, buy goods and services, withdraw cash, top up airtime and send phone minutes to other Zain customers in East Africa, the company said. Its partnership with Citigroup and Standard Chartered Bank will ensure that the services meet “all the required in-country banking regulations,” it said. Kenya’s central bank reportedly held up Zain’s license over security concerns before approving Zap.
Regulatory issues have grown complicated because African central banks are aware of the U.S. “breathing down their neck,” Batchelor said. They are reluctant to do anything that might earn them a spot on the watch list, he said. Central banks tend to err on the side of caution, said van Rensburg. Anyone who wants to start a mobile banking service should deal with the issues and banks upfront instead of trying to fix problems later, he said.
A “Mobile Money for the Unbanked” program introduced Feb. 17 by the GSMA and the Bill & Melinda Gates Foundation will fund regulatory research to help overcome some of the barriers facing mobile money services, they said. The program will support around 20 projects in developing countries, focusing on Africa, Asia and Latin America, they said, with the aim of reaching 20 million previously unbanked people with mobile financial services by 2012. Zain and Safaricom didn’t get back to us right away.