This blog was co-written by Jose Sanin and Jennifer Frydrych.
Honduras and El Salvador both released e-money regulation this year, an important first step towards a sustainable mobile money environment. However, in both markets, the regulation lacks clarity and incorrect implementation could hamper ambitious financial inclusion objectives. This blog aims to address some of the concerning elements in the latest drafts.
Last year, both El Salvador and Honduras were among the top 15 mobile money markets globally in terms of active accounts  as a proportion of the total adult population—despite lacking regulations which enable mobile money-specific licenses. Identified as a key priority in both markets, regulators at the time were reviewing considerations to create frameworks that allowed non-banks to issue electronic money.
In 2016, new regulations were issued in both countries, opening the playing field to non-banks. While an important first step, there are several concerning elements to both regulations which could risk the long-term success of mobile money, outlined below. We call on the respective regulators to review these details to ensure proportionality in implementation.
Regulation in El Salvador
On the 13th of August 2016, El Salvador’s Legislative Assembly approved the Financial Inclusion Bill. The GSMA, in support of industry players in El Salvador, is concerned about two particular elements of the new regulation:
1. Customer money being safeguarded by the Central Bank (as opposed to a commercial bank)
Mobile money carries intrinsic risks and the GSMA advocates a proportional risk-based approach to mitigate these, both for customers and for the financial system. However, risk mitigation is a balancing act and over-regulation can compromise impact on the business models that drive usage.
To ensure customer funds are safeguarded, regulators typically mandate that a mobile money provider maintains liquid assets equal in value to the amount of electronic money. One common approach is for assets to be ring-fenced and held in a bank account or trust account. The funds can be deposited in one or several commercial banks that are fully prudentially regulated. Any amount that passes through the mobile money system is backed 100% by the pooled account or accounts.
While Article 10 of El Salvador’s Financial Inclusion Bill effectively mitigates the risk of losing the customers funds, it is not proportionate. By demanding that mobile money providers store customers’ funds in the Central Bank rather than a commercial bank, regulators have unnecessarily increased the cost of operation, compromised the business sustainability, and decreased providers’ investment capacities.
Commercial banks are a natural business partner for mobile money providers for two reasons: (1) banks benefit from holding the mobile money customer funds because their licenses allow them to intermediate these resources; and (2) mobile money providers can easily access the bank’s infrastructure—even many times per day—to deposit cash. Central Banks do not have branches, creating a huge operational challenge for a mobile money provider who can only deposit cash at the Central Office. Moreover, using a commercial bank via an automated clearing house would impose prohibitive costs on the provider, as there are no other incentives for the bank to act as a pass-through pipe for the mobile money provider.
2. Interest-bearing mobile money accounts
A second concerning clause in Article 10 relates to the inability to earn interest from the deposit held by the Central Bank. In this scenario, the mobile money provider (and their customers) will have to assume the cost of inflation (loss of value of money over time). When funds are held by one or more commercial bank(s), the bank shares interest earned on the deposit with the mobile money provider, which in turn can partially subsidize operations or even be passed on to customers.
It is the GSMA’s position that non-bank mobile money providers should be allowed to pay interest on an e-float linked to a customer’s account balance. Our statement has been backed up by many publications, including a paper written by CGAP’s Ehrbeck and Tarazi. The inability to earn interest from the deposit adds an additional layer of costs and does little to materially mitigate risk.
We recommend the Central Bank of El Salvador re-evaluate the impact of both these issues, as we believe both increase costs to such a degree that renders the business model unsustainable for providers.
Regulation in Honduras
The Comisión Nacional de Bancos y Seguros has done a great job implementing the “Acuerdo No.01/2016” issued by the Central Bank. Through industry consultation, they have interpreted the rules in a proportionate way, providing clarity over some of the rules issued by the Central Bank. Nonetheless, their legal authority is limited and some of the issues of the regulation remain an obstacle for mobile money and financial inclusion. These include:
1. High requirements for agents and ATCs
Article 2 defines two different players in the mobile money distribution network: Agencies and Authorized Transactional Centers (ATC). ATCs are legal entities authorized by the mobile money provider to offer transactional services to customers. Agencies are legal entities authorized by the mobile money provider to buy and sell mobile money, and they can also own a network of ATCs. This is similar to the traditional agent and super-agent model (but in this case, the agency is the super-agent and the ATC is the agent).
The problem is that both agencies and ATCs have to be functioning and formal legal institutions. This means that small informal merchants are immediately excluded from acting as mobile money distributors. For customers, particularly those in rural areas, this limits the accessibility and convenience of mobile money, ultimately hurting the sustainability of the business by increasing costs to extend geographical reach. Regulatory best practices admit the use of physical persons as agents and have proven to be secure and reliable for customers and the system.
2. Ecosystem limitations
Article 2 defines the Circuit of Mobile Transactions, noting that each provider can manage transactions ONLY between their clients, agents, ATCs and affiliated merchants. Affiliated merchants are legal entities formally incorporated in Honduras. This excludes informal merchants (similar to the point above for agents and ATCs), but also excludes the possibility of foreign companies expanding the portfolio of services and bolstering the payments ecosystem, such as international remittance companies or technology companies such as Uber, Apple Pay, etc.
3. Taxes on the trust account
Perhaps the most harmful issue with this new regulation lies, unintentionally, within the definition of electronic money. The definition states that distributed e-money must be accounted for as a liability by the mobile money provider. This is something normal and present in most regulations. The problem arises when, in order to balance their financial statement, mobile money providers must include the trust account balance as an asset;—in Honduras, this type of financial asset is heavily taxed, thus imposing a unfair cost on the operation (these are not real company assets, but instead customer funds), potentially hurting the financial viability of the business and the overall financial inclusion strategy in Honduras.
Honduras recently launched their National Financial Inclusion Strategy, marking a great milestone and positioning themselves as regional champions for financial inclusion. Nevertheless, regulators, including Central Bank, Comisión Nacional de Bancos and the National Government, need to work together in a coordinated fashion, and establish an open dialogue with the industry to understand the obstacles that the new regulation is presenting and come up with ways to fix them.
 Active accounts on a 90-day basis.
 Article 10 of the financial inclusion law mandates that all customers’ money must be backed-up by a non-remunerated deposit in the Central Bank.