2010 Leadership Forum at MMS in Rio de Janeiro

The following is a guest post we’re pleased to share by David Colby Reed, a graduate student at NYU’s Wagner School of Public Policy.

 

Due to its timing at the end of the conference, the day-long Leadership Forum was a good venue for distilling some of the big-picture regulatory questions that emerged during the preceding sessions. Fairly quickly, Leadership Forum panelists and participants converged on three broad areas of consensus. First, high-quality, accountable agents are necessary for successful mobile money deployments. Second, proportionality in applying customer risk management rules is essential. Third, engagement with financial regulators is a critical success factor for mobile money deployments. The challenge in the Leadership Forum was to discuss just what these broad points meant at a more granular level.

Capitalizing on Agents

Agents act as first-line customer service representatives and provide vital cash-in/cash-out services in mobile money programs. However, most agents’ mobile money work is incidental to their primary jobs—they have other lines of business running shops, restaurants, and bars, and they’re not likely to provide high-quality service and float management if their work as mobile money agents distracts from their primary jobs or is insufficiently unprofitable. The nature of agents’ participation in mobile money offerings has many consequences for the service provider, but the major point of discussion at the Forum concerned agents and risk management: How do we create clear lines of accountability in agent-mediated mobile money offerings?

In several discussions, accountability was treated as a function of agent exclusivity—if an agent is exclusive to a given provider, that provider can be held liable for the agent’s activities. The provider, then, has a strong incentive to screen and monitor its agents for integrity, knowledge, and profitability. This approach makes sense for providing legal predictability and service quality, but it may create issues for mobile money service accessibility and interoperability between providers. In one scenario, certain geographies could become the exclusive domain of a given provider, the functional equivalent of Manhattan becoming Zain-only while Brooklyn becomes Safaricom’s turf. In another, certain remittance corridors like Delhi-Bihar or UK-Nigeria can become uncontestably aligned with a given mobile money provider and its agent network. Balancing the need for provider accountability with competitive markets for mobile money will be a likely future challenge.

Parsing “Proportionality” in KYC

There’s a perception of a trade-off between customer protection and AML-CFT rules on the one hand and financial inclusion on the other. unbanked customers tend to maintain low account balances and execute comparatively high volumes of transactions. In many cases, they will also lack official, permanent addresses and government-issued identification. The economics of account usage by the unbanked and the difficulty of verifying identities using standard practices often results in financial services that providers deem too onerous to administer, thus limiting the business case for extending mobile money services to the poor.

“Proportional” standards have been advocated as a means of reducing the cost of customer due diligence, but their implementation begs the question ”How far can you go in reducing KYC requirements?” Opinions varied from abandoning KYC for low risk accounts altogether to increasing the number of documents permitted for ID verification. Interestingly and perhaps a bit surprisingly, the World Bank and another international authority agreed that KYC is not always necessary if other controls are in place that make a service low risk. Uniform application of KYC rules was discussed as unnecessary in light of other risk mitigation tools. For instance, monitoring systems and account limits can be used to make mobile money a very low-risk service.

At the same time, it was noted that KYC is not solely conducted to meet regulatory requirements. Some mobile money providers mentioned that although the regulations are too stringent on KYC, they would still perform some KYC measures for their own commercial purposes.

Regulatory Partnership

There’s a fundamental, cultural difference between telecoms and banking regulators. Conference attendees agreed that mobile network operators, not typically accustomed to working with financial sector regulators, are sometimes frustrated by what they view as dilatory and overly cautious reactions of financial regulators to mobile money offerings. A large part of these divergent expectations can be traced to institutional mandates: telecoms regulators are charged with overseeing service provision, interoperability, and competition, whereas financial regulators are charged with overseeing systemic risk, price stability, and, in some contexts, full employment. These divergent mandates have created different cultures of risk tolerance and entrepreneurial speed at financial and telecoms regulators. MNOs often find this change in regulatory disposition jarring.

Because mobile money is a financial service, it must be administered by financial sector regulators—partnership is necessary, and a good provider- regulator partnership can reduce uncertainty and speed product development. Discussions of regulatory partnership at the Leadership Forum identified two key lessons for service providers’ partnerships with regulators. First, providers should explain the circumscribed nature of the products offered; mobile money services are typically limited to bill payment and money transfer services and are therefore less complicated than product offerings from banks. Because the deposits that secure e-money cannot typically be used for revenue-generating activities, e-money does not expand the money supply and exerts no inflationary influence. In the words of one participant, “mobile payments do not pose a systemic risk to the financial system like banking does.” Second, providers must work hard to clearly explain the low risk of mobile money services. Financial regulators’ uncertainty about the risk of mobile money offerings can lead them to assess risk in worst-case scenarios, as they often lack risk experience in this new domain. Candor can limit this impulse.

As I mention at the top of the post, each of these discussions was marked by broad agreement on principles and discussion of their operational translation. Next year, it’ll be interesting to learn about providers’ experiences with testing these interpretations of principles.

David Colby Reed specializes in financial services for the poor. David earned his B.A. in Psychology from Harvard University and M.A. in Public Policy at New York University.

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