Are customer funds properly safeguarded?

Regulators want to:

  1. Ensure that mobile money providers set aside sufficient funds to reimburse customers: In the absence of specific guidance, a mobile money provider might elect to intermediate customer funds or use them to cover operational costs. Regulators want to ensure that funds that are cashed in by customers are set aside and are available to reimburse customers upon demand.
  2. Ensure that customer funds will be protected against risk of loss in the event of insolvency of the mobile money provider: If a mobile money provider becomes insolvent, its creditors may attempt to claim funds that were cashed in by customers. Regulators want to ensure that funds that are cashed in are protected so that customers are fully reimbursed in the event of a provider’s insolvency.
  3. Ensure that customer funds will be protected against risk of loss in the event of insolvency of the bank or other entity in which customer funds are placed: Similarly, customer funds may be at risk if the bank or other entity holding customer funds becomes insolvent. At minimum, regulators will want to ensure that mobile money customers receive a similar level of protection to holders of low-value bank deposit accounts.

Mobile money providers need:

  1. Clear guidance on how to effectively safeguard customer funds: The legal instruments for protecting customer funds vary by country. Depending upon the country, regulators have used trusts, fiduciary contracts, escrow accounts, and other mechanisms. Mobile money providers need clear guidance from regulators on how to ensure that customer funds are effectively safeguarded.
  2. The ability to provide mobile money funds with a similar level of protection to traditional bank deposits in a cost-effective manner: Ideally, mobile money accounts should have comparable protection to traditional bank deposits, particularly in the event of insolvency of the bank holding the funds. For example, if low-value bank deposits are covered by a mandatory deposit insurance scheme, similar protection should be extended to low-value mobile money accounts.[1]

How can regulators address these issues?

  1. Too restrictive:
    • Some countries limit electronic money issuance to banks in order to mitigate the risk of loss of customer funds (ex: South Africa).
    • Ecuador limits electronic money issuance to the central bank.
    • El Salvador requires mobile money providers to store customer funds in the central bank.
  2. Good balance:
    • Most countries prohibit mobile money providers from intermediating customer funds and require providers to set aside funds equal to 100% of outstanding mobile money liabilities in safe, liquid investments such as bank accounts (or in some countries, government bonds or other investments).
    • Many countries with a “common law” legal tradition (derived from Anglo-American law) require mobile money providers to use trusts to segregate and ring-fence customer funds from their assets to protect against loss in the event of the provider’s insolvency.
    • Some countries with a “civil law” legal tradition (derived from Continental European law) require mobile money providers to use fiduciary contracts or similar mechanisms to segregate and ring-fence customer funds from their assets to protect against loss in the event of the provider’s insolvency.
    • Funds should be protected against bank insolvency using whichever options are both practical and effective in the particular country context. Depending upon the country, this may include measures such as:
      1. Covering mobile or electronic money funds under the public deposit insurance scheme (e.g., Colombia, India, Nigeria, Kenya (forthcoming));
      2. Requiring use of a bank as trustee, with strict limits on how the bank may invest the funds (e.g., Paraguay);
      3. Obtaining private insurance to cover funds in the event of bank insolvency;
      4. Obtaining a guarantee from the bank’s parent group (for subsidiaries of international banks);
      5. Monitoring the strength of bank(s) holding customer funds;
      6. Diversifying funds across multiple banks (e.g., Kenya); and/or
      7. Establishing ongoing capital requirements that increase as the total value of customer funds increases (e.g., Colombia, Namibia, West African Economic & Monetary Union).

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    [1] This is possible even if mobile money funds are pooled in one or more large accounts, provided that pass-through deposit insurance is recognized in the jurisdiction. See GSMA, Safeguarding Mobile Money:  How Providers and Regulators can ensure that Customer Funds are Protected.

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