mBanking Panel 3 – Creating and Taking Advantage of Regulatory Regimes

The third and final panel of CGAP’s roundtable on mobile banking for the bottom billion figured Rizza Maniego-Eala of Globe Telecom, Philippines and Ali Abbas Sikander of Tameer Bank, Pakistan. The panelists represent two different approaches to mobile banking: a nonbank-based model and a bank-based model. At the same time, they share two features in common: engaged, pro-access regulators and dynamic, outside-the-box-thinking industry actors.

The purpose of the panel was to ask how to create or take advantage of regulatory space? Is the space already there? As we know, existing regulation on branchless banking was not created with mobile banking in mind. There are important gaps in regulation, with claims that Safaricom sprung out of a regulation vacuum.

The moderator posed the following questions to the panelists vis-a-vis their branchless banking projects:

1. Which regulatory issues loomed largest at outset?
2. Which seem most significant now? what accounts for change if there has been one?
3. Looking ahead, how would you rank the following challenges (in order of importance) and why (for all actors involved):

• Regulatory space
• Business care
• Client uptake

Rizza spoke about her gCash initiative. They decided upfront that a partnership with the Central Bank was needed. This posed a big challenge and took many meetings to convince the bank about the viability and security of mBanking in the Philippines. They also engaged IFI’s in parallel. The conversations took over 10 months.

Today, the challenge in the Philippines is to continue that engagement with the regulators. “It’s not over, lots more conversations need to be had and many questions remain unanswered,” said Rizza.

In her opinion, the regulatory space is most important of the three challenges identified by the moderator. Money supply was the first major stumbling block put forward b the Central Bank and regulators. The solution was to ensure 100% backfunds. The second challenge was Know Your Customer (KYC) requirements and anti-money laundering measures.

Cash in/out requires presentation of ID in the gCash system. Regulators were quite impressed with the telco’s ability to track transfers, monitor, tracing, etc. Indeed, the head of Philippine’s anti-money laundering unit, said gCash was notably better than cash because cash leaves not traces while mobile transfers do. The moderator added that the Philippines was taken off the US black list thanks in large part to gCash.

Ali Abbas of Tameer Bank addressed the issue of regulation as a context between the banking led model versus the telco led model. The outcome of the competition depends on which side is stronger and more influential in policy circles.

Pakistan regulators are struggling with commercial banking expansion in rural areas. In fact, there is less than 3% penetration in rural areas which comprises 83% of the country’s population. Pakistan’s mBanking regulation had financial inclusion as underlying tone; they named the telco’s and any agents/distribution networks, e.g., grocery stores, as legal agents.

This led to a partnership based model but with banks bearing the responsibility at end of day. The stumbling block, according to Ali Abbas, is deciding between the bank-led model and telco model. There is a lack of clarity vis-a-vis the end to end ecosystem and  concern about pricing regulations or product restrictions.”If someone reads through Pakistani regulations on branchless banking, they will notice that the language is very focused on technology, which means that regulations don’t jive with what existing business models,” he added.

Regulators are fond of focusing on the security transaction but this almost exclusive obsession with secure banking platforms leaves other fundamental issues such as education at the agent end unanswered. In contrast to bank-led regulations, telco guidelines focus more on the required infrastructure.

In terms of priority areas, Ali Abbas would points to the “business case” as biggest challenge for any institution trying to do mobile banking in Pakistan.

Compliance departments dictate what the banking model will look like; they are an independent entity within the financial institution set up. If they place a limit on the value of transactions per day, then this will drive customers away since business starts and stops at first point of contact. This means that agent uptake is important. Transparency, liquidity, cash management issues need to resolved and scalable manner in order to move  mBanking forward.

The moderator asked the first question of the Q&A session: “Regulators in the Philippines and Pakistan appear to be very concerned with consumer protection; are these issues specific to mBanking?”

Rizza noted that gCash is being treated by regulators as a bank even though they don’t have a banking license; so customer protection in mBanking has always been consistent with banking laws. In Pakistan, Ali Abbas pointed out that regulators are concerned about the potential growth in agents and the issue of cash out. They want to be convinced that there is sufficient liquidity at any given time so clients can be assured they have access to their cash at any given time.

Ali Abbas thus stressed the need for a more flexible complaint handling system since this is right now done at branches. Financial institutions want to monitor whether complaints are getting to the regulators. So the regulatory regime in Pakistan deals more with processes where the driving concern is the potential trade-off between scalability and consumer protection.

The remaining questions focused on gCash. Rizza added the following details in response:

• gCash imposes a daily limit $800/day and $2000/month;
• gCash is not allowed to go into lending, interest, etc.;
• gCash is audited twice a day to ensure transactions;

One participant expressed his skepticism about the business case for gCash, since the service requires 100% backfunds. Rizza pointed out that the gCash business model does is not based at the account level but rather on micro-transactions.

In conclusion, the moderator highlighted that as far as CGAP policy is concerned, “if mobile operators are sufficiently and proportionately regulated, they should be allowed to play in the space.”

Patrick Philippe Meier