As a result, developing countries pioneered several aspects of mobile banking that may, in some form, be copied by developed countries. The first is the use of agents. For example, in Brazil and India, banks use agents in villages, equipped with mobile phones and card readers. Customers can make small deposits, withdrawals and money transfers through these agents instead of visiting bank branches which has greatly expanded the size of the retail banking market. M-Pesa in Kenya is the most famous example, and similar systems have been deployed in Bangladesh, Uganda, Nigeria and the Philippines.
Second, non-banks have begun to enter the market to provide mobile money (e-money issuers) and compete with banks. The World Bank reports that currently e-money issuers exist in Afghanistan, Indonesia, Kenya, Malaysia, the Philippines, Rwanda, Sierra Leone and Sri Lanka. These e-money issuers are often dynamic and innovative, capable of expanding their business practices to squeeze market control from banks. For example, M-Pesa has combined with Western Union to let people in 45 countries send money directly to M-Pesa’s users in Kenya, so taking a sizeable share of the remittance industry, valued by the World Bank to be $US483 billion in 2011. Banks in developing countries have already learned to reinvigorate their activities to compete with e-money issuers, and some have been successful. For example, between 2008-2011, India’s ICICI bank undertook internal reforms, enabling it to increase its share of the remittance market by over 50%.
At this stage, many of the features of mobile banking markets in developed countries are different to developing countries. Most obviously, in developed countries, banks tend to dominate the mobile banking market rather than e-money issuers. However, this may be changing as a variety of institutions that resemble e-money issuers begin to provide mobile banking services. For example, PayPal has established a mobile wallet that can be used to pay for online purchases on a computer, and has begun to provide bank-like features such as loans. Google is designing a similar wallet. As a result, mobile banking markets in developed countries may start to encounter some of the regulatory issues faced in developing countries. Several may be particularly relevant.
The first is the limit to which electronic money should be permitted to operate. Electronic money is a form of credit to be exchanged between customers, and so is not money per se. However, in some countries, it has become a virtual currency that operates outside of the regular banking system. For example, over the course of its existence (2007-212), M-PESA has supplanted traditional banking in Kenya. Now the annual number of payments conducted through M-PESA accounts for almost 58% of the number of electronic payments in Kenya. The regulatory issue here is the extent to which electronic money, as a currency, should be permitted to operate outside of the formal banking system.
The second is the regulation of e-money issuers, many of which are growing and diversifying into fields such as savings and insurance. For example, GCash services in the Philippines allows a wide range of payments, covering domestic and international remittances, utilities payments, interest and amortisation on loans, insurance premiums, school tuition, micro tax payments and business registration, airline tickets, and online purchases. The question here is if e-money issuers are permitted to provide such a range of services, what regulatory infrastructure should have oversight of them?
The third is the regulation of customers’ funds. In most schemes issued by e-money issuers, customers pay cash in exchange for electronic money, which is then kept on trust for the customer to be later reimbursed when necessary. Trusts law has yet to be applied to these particular types of schemes and so it is unclear what obligations will be placed on the e-money issuer, as trustee, when dealing with such funds.
The fourth is fraud. In May 2012, it was revealed that staff members of a mobile money provider called Telco MTN Uganda stole around US$3.5 million of customers’ funds. The Rwandan Telecom regulator, Rwanda Utilities Regulatory Authority, has also reported incidents of fraud, particularly when a person steals a PIN of a client and uses it to transfer money to their phones. These events have prompted many regulators and e-money issuers to consider ways to minimise fraud. For example, on 23 August 2012, Safaricom in Kenya announced that it would partner with a UK-based firm, Neural Technologies to implement a fraud control solution that will further safeguard its M-PESA platform.
It is clear that mobile banking will change the face of banking. As this form of banking develops, banks and regulators in developed countries may wish to study some of the experiences of developing countries. These countries may have mobile banking markets that may be older and more sophisticated than those that exist in developed countries, so providing some guideposts on regulatory issues and how to deal with them.
Jonathan Greenacre is a research fellow in the Centre for Law, Markets and Regulation at University of New South Wales.
This article was first published at The Conversation.
