Regulation and the Potential for Low-Value Mobile Remittances: Addressing Exchange Controls
As domestic mobile money deployments reach scale in more and more countries, mobile money providers and financial inclusion advocates are looking at ways to offer other formal financial services via the mobile money channel. One area of interest is low-value remittances and other cross-border payments. A mobile-to-mobile service could facilitate low-value payments that currently must be made in bank branches or at authorized agents. Anecdotal evidence from countries with high adoption of domestic mobile money services suggests that this is already happening informally: migrants cash-in at unlicensed local “agents” and send funds through their home-country mobile money accounts while roaming.
In addition to the added convenience and potential lower cost for personal remittances, such a service could improve the efficiency of low-value cross-border trade, which is particularly common in many parts of sub-Saharan Africa (for example, see this report on informal cross-border trade and the potential for mobile payments in southern Africa). Currently, microentrepreneurs trading across borders need to visit banks or exchange bureaus to convert currency. They must carry significant sums of cash across borders to purchase goods or after they sell goods, which subjects them to risk of robbery. In addition, it may be difficult for these traders to properly estimate how much foreign exchange they need, leaving them with excess foreign currency or insufficient funds to take advantage of buying opportunities.
In recent months, mobile-to-mobile cross-border products have sprung up in a number of markets in East and West Africa. Since July 2013, Orange Money users have been able to send funds to or from Côte d’Ivoire, Mali, and Senegal. In February 2014, Tigo launched the first mobile-to-mobile product with integrated currency conversion between Rwanda and Tanzania (the West African initiatives are between countries that are members of the West African monetary union). In April 2014, MTN Côte d’Ivoire and Airtel Burkina Faso created the first African cross-border mobile payment service linking different mobile money providers. And in October 2014, both MTN and Airtel announced plans to launch cross-border mobile payment services in East Africa in the near future.
So what is keeping mobile money providers from further expanding cross-border wallet-to-wallet services, particularly in regions with high levels of migration and cross-border trade? Many of the challenges are commercial, including the need for domestic mobile money deployments to achieve scale and for providers to connect their systems. However, regulatory obstacles also exist, a number of which were highlighted in a Guideline Note on Mobile-Enabled Cross-Border Payments recently published by the Alliance for Financial Inclusion.
In this blog, I’d like to address one of the issues highlighted in the Guideline Note: exchange controls. Generally speaking, exchange controls are rules aimed at restricting the purchase and sale of local and foreign currency. Typically, exchange controls are put in place to control foreign currency outflows, although some countries use controls to limit inward flows as well. In countries where exchange controls exist, some or all cross-border transfers may be subject to review and/or government authorization before a transfer may occur. As a result, these transactions typically must occur in a bank branch or other authorized dealer in foreign exchange. Such a requirement could prevent remote wallet-to-wallet services from developing.
By restricting competition and saddling providers with high compliance costs, exchange controls increase the cost of cross-border transfers. According to the World Bank, the five most expensive remittance corridors to send USD 200 are all between South Africa and other southern African countries. This means that low-income migrant workers lose about 20% of the value of a USD 200 remittance each time they send money home using formal channels.
South Africa still maintains exchange controls. While these controls have been loosened over the years, even individuals are subject to annual limits on personal outgoing transfers. While the annual limits (currently approximately USD 90,000) are high enough for low-income migrants, the need to route all such transfers through banks and to track even low-value transfers raises costs and discourages migrants from transacting through formal channels.
As mobile money services begin to reach scale in South Africa and other countries in southern Africa (such as Zambia and Zimbabwe, both of which have more mobile money accounts than bank accounts), the opportunity for cross-border wallet-to-wallet services is growing. One of the proposals in the aforementioned AFI Guideline Note is for regulators to develop risk-based exchange controls that would either (1) eliminate reporting and authorization requirements for low-value cross-border transfers; or (2) allow simplified exchange control self-reporting using a basic mobile money application. It would be exciting to see such a product develop in the southern African market, where most low-value remittances go through informal channels. A lower-cost, more convenient wallet-to-wallet service could incentivize the use of formal channels and put more money in the pockets of low-income families.
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