THE ENABLING ENVIRONMENT

FOR MOBILE BANKING IN AFRICA

REPORT
Commissioned by Department for International
Development (DFID)

David Porteous

www.bankablefrontier.com
20 Winthrop Square, Boston MA02110 USA
+1 617 368 0104
FOREWORD

The project required collaboration among a number of entities on three continents: the Financial
Sector Team within the Policy Division of DFID UK financed and supported the main project
(Justin Highstead); and two country financial sector programmes, FSD in Kenya (David Ferrand)
and FinMark Trust in South Africa (Jeremy Leach), financed and facilitated the country-level
information gathering processes. Country correspondents Keith Smith (South Africa) and Stefan
Staschen (Kenya) played a vital information gathering and facilitation role in each of the pilot
countries.

We collaborated throughout with a parallel and related CGAP project on branchless distribution
in financial services, of which mobile banking is an emerging part. The CGAP team led by Tim
Lyman and Gautam Ivatury provided valuable insights and context from their reference countries.

In addition, the Central Bank of Kenya convened a project team to complete the country template,
and then hosted a country workshop in Nairobi, Kenya in March 2006. Various providers
completed questionnaires during the projects, and participated with regulators and support
agencies at the final overall project workshop in Johannesburg in late March 2006. Tim Manion
and Chris Lee assisted me with the background research in Boston.

My thanks are due to all these for their help and support throughout.

David Porteous
May 2006

v3.1 2
EXECUTIVE SUMMARY
1. Introduction and objectives
The rapid spread of mobile phones means that the number of mobile users may already
exceed the number of banked people in many low income countries. Mobile phones can also
offer a communications channel for initiating and executing on-line financial transactions.
This channel may not only reduce the cost of financial transactions for provider and
customer, but also allow new entrants to the financial sector, and new relationships to be
formed for distributing services. These changes hold the prospect of accelerating access to
financial services on the back of the mobile infrastructure.

This report investigates the extent to which the expansion of mobile telephony is likely to
lead to the expansion of access to appropriate financial services in developing countries,
especially Africa. In particular, it seeks to answer two main questions:
• Which models of mobile banking are emerging globally, and especially in Africa, and are
they likely to be accelerate access?
• Will it happen spontaneously or is enablement required for this to happen? If so, what
forms of enablement?
To answer these questions, the report investigates emerging models and trajectories of
development in m-payments and m-banking through interviews with emerging African
providers and the use of secondary material. It assesses the policy and regulatory elements of
an enabling environment for this sector based in part on the analysis of circumstances in two
pilot African countries (Kenya and South Africa).

2. Background & definitions

2.1 Mobile payments (m-payments) are financial transactions undertaken using mobile device
such as a mobile phone. Mobile banking (m-banking) includes m-payments but involves
access by mobile device to the broader range of banking services, such as account-based
savings or transactions products offered by banks. M-payments and m-banking are
themselves subsets of the broader domains of e-payments and e-banking respectively.

2.2 The report distinguishes between additive and transformative models of mobile banking.
• Additive models are those in which the mobile phone is merely another channel to an
existing bank account;
• Transformational models are those in which the financial product linked to the use of
the phone is targeted at the unbanked, who are largely low income people.

2.3 Mobile banking has the potential to be transformational because:

• It uses existing mobile communications infrastructure which already reaches unbanked
people
• It may be driven by new players, such as telcos, with different target markets from
traditional banks
• It may harness the power of new distribution networks for cash transactions, such as
airtime merchants, beyond the conventional merchant POS or ATM networks of banks.
• It may be cheaper than conventional banking, if the offering is competitive
The extent to which will mobile banking will in fact be transformational in a country
will depend in large measure on whether the environment is enabling.

v3.1 3
2.4 An enabling environment is defined here as the set of conditions which promote a
sustainable trajectory of market development. Of particular interest here, are the
environments in which widespread access is likely, or in other words, in which
transformational models are more likely to succeed.

In any new market, enablement requires a blend of legal & regulatory openness, which
creates the opportunity to startup and experiment, with sufficient legal & regulatory certainty
that there will not be arbitrary or negative changes to the regulatory framework, so that
providers have the confidence to invest the resources necessary. Countries with low levels of
effective regulation may be very open but highly uncertain, since regulatory discretion may
lead to arbitrary action. Conversely, countries with greater certainty may be less open, in that
the types of entity and approach allowed to start up are restricted. Especially in a new market
sector like mobile banking, where business models are not yet stabilized, enablement in the
policy and regulatory sector means a move towards greater certainty and greater openness.

3. Experiences and emerging models

3.1 Outside of East Asia, most m-payments models have operated at limited scale in most of the
developed world to date. However, micro-payments connected to the purchase of premium
rated services on a mobile phone and to transport solutions have grown fast. Among
developing countries, the Philippines already has around four million users of the mobile
financial services offered by its two major network operators, Smart and Globe. Various m-
payment and m-banking products are on offer in different parts of Africa today, but none has
yet reached substantial scale nor sustainability. Because they are new, the direct impact of the
transformational models on poor customers is not yet known.

3.2 The emerging models of m-banking can be placed in four categories, based on the different
roles played by the parties involved: the bank, the telco and in some cases, a third party
product provider. The models vary from one in which a bank adds on a mobile channel to its
existing product range, through hybrid models where a telco may bring different branding,
product set and/or distribution system to a bank-based product, to a telco-dominated model in
which the telco itself is responsible for the deposits taken.

3.3 This latter model constitutes the issuance of e-money by the telco. Approaches to the
regulation of e-money vary widely, from waiver or neglect as long as the maximum payment
or balance size is low (e.g. Philippines), to restricting the issuance of e-money to banks only
(South Africa) to the creation of an enabling framework whereby specialist e-money issuing
entities can register under an appropriate supervisory framework (EU). The recent official
review of the EU framework concluded that it has not fully achieved its desired objectives.

3.4 Most African providers of m-payments and m-banking services reported that the major
barriers to their growth related to (i) uncertainties over customer adoption, which is common
at an early phase of market development; and, in South Africa at least, (ii) specific regulatory
issues such as remote customer due diligence requirements and access to the payments
system.

3.5 In both pilot countries, South Africa and Kenya, m-banking is at an early stage. The South
African policy environment is relatively more certain, but less open to non-bank entrants; the

v3.1 4
 Kenyan environment is less certain, in that a number of major pieces of relevant legislation
are at various stages but have not yet been implemented, but this has not stopped certain
models from starting up.

4. Regulatory and policy issues

The field of m-payments and m-banking is not only new and fast evolving but also sits at the
overlap of several regulatory domains—those of banking, telco and payment system
supervisors, and anti-money laundering agencies. The overlap substantially raises the risk of
coordination failure, where legislation or regulatory approaches are inconsistent or
contradictory. In such environments, it is likely that m-banking may simply be an added
channel for already banked customers. A comprehensive vision for market development
between policy makers, regulators and industry players can help to define obstacles and
calibrate proportionate responses to risk at appropriate times.

5. Framework of enabling principles

5.1 This report proposes a framework of principles which are necessary, although they may not
be sufficient, for m-payments and m-banking to be enabled in a country. The application of
the principles will vary at different stages of market development. There are two tiers of
principles.

5.2 First tier principles: these are necessary for m-banking to happen on scale at all.
1. There should be sufficient certainty around electronic contracting.
2. Customers should be adequately protected against fraud and abuse in the m-banking
environment.
3. Inter-operability should be encouraged, through ensuring that providers can access
payment platforms and that consumers are able to switch financial providers.

5.3 Second tier principles: for transformational models to emerge and succeed, the following
additional principles are also necessary.
4. Customer due diligence procedures for account opening should be risk-based, and not
unduly prejudice remote account openings by small customers.
5. Customers should be able at least to make deposits and withdraw cash through agents and
remote points outside of bank branches.
6. Adequate provision must be made for the issuance of e-money by appropriately
capitalized and supervised entities which are not necessarily banks.

5.4 The complexity involved in this sector creates a prima facie case at least for technical
assistance to policy makers and regulators who desire to enable transformational models of
m-banking, through the application of principles such as these.

v3.1 5
TABLE OF CONTENTS

FOREWORD .................................................................................................................. 2
EXECUTIVE SUMMARY ............................................................................................ 3
1. INTRODUCTION ...................................................................................................... 7
1.1 The prospect and the proposition.......................................................................... 7
1.2 Report objectives and approach ........................................................................... 9
1.3 Report Structure ................................................................................................. 10
2. CONTEXT................................................................................................................ 12
2.1 The Enabling Eanvironment ............................................................................... 12
2.2 Phasing Enablement: Industry Growth Trajectories ........................................... 12
2.3 Openness and certainty at the early stage ........................................................... 14
2.4 Additive and transformational approaches to banking ....................................... 15
2.5 Summary ............................................................................................................. 16
3. EMERGING MODELS AND DEVELOPMENTS IN M-PAYMENTS &
BANKING ............................................................................................................... 17
3.1 Definitions........................................................................................................... 17
3.2 The context of e-payments.................................................................................. 17
3.3 E-Money ............................................................................................................. 19
3.4 Emerging experiences of m-payments................................................................ 22
3.5 Categorization of m-banking models.................................................................. 26
4. REGULATORY & POLICY ISSUES..................................................................... 28
4.1 Overlapping issues .............................................................................................. 28
4.2 Developed country financial regulator approaches............................................. 34
4.3 Enablement at work ............................................................................................ 37
5. PILOT COUNTRY & PROVIDER ASSESSMENTS ............................................. 38
5.1 Legal & policy environment ............................................................................... 38
5.2 Provider obstacles reported................................................................................. 39
6. ENABLING PRINCIPLES FOR M-BANKING...................................................... 41
6.1 General enabling environment............................................................................ 41
6.2 Proposed enabling principles .............................................................................. 42
6.3 Approaches to implementing the principles ....................................................... 43
7. CONCLUSION......................................................................................................... 50
REFERENCES ............................................................................................................. 52
ANNEX A: PROVIDERS ............................................................................................ 56
A1. M-payment/ banking providers participating:.................................................... 56
A2. Other providers mentioned................................................................................. 56
ANNEX B: GLOSSARY............................................................................................. 57

v3.1 6
1. INTRODUCTION
1.1 The prospect and the proposition
Many commentators have highlighted the rapid growth of mobile phone usage in Africa. Using
ITU data, Gray (2005:1) points out, “In 2004 alone, the African continent added almost 15
million new mobile cellular subscribers to its subscriber base, equivalent to the total number of
(fixed and mobile) telephone subscribers on the continent in 1996, just eight years earlier.”
Figure 1 below compares the trajectories of growth in usage of mobile phone in three places:
• South Africa (SA), where there is some evidence of slow down as the number reaches the
mid-forties, compared with:
• the rest of Sub-Saharan Africa (SSA) (i.e. excluding SA), where explosive growth continues,
albeit from a lower base; and
• Western Europe, where the market has matured and penetration has exceeded 90% overall.

Figure 1: Mobile phone take-up in different regions

100 4
90 3.5
% mobile subscribers

80
3
70
60 2.5
50 2
40 1.5
30
1
20
10 0.5
0 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

SA (lhs) Western Europe (lhs) SSA (rhs)

Source: ITU (2005); numbers for 2004, 2005 are forecasts

Wireless coverage continues to rise: although only 8% of people in Africa use a mobile phone,
52% of the population in low income countries as a whole live in areas with wireless reception.
This difference fuels the expectation that growth will continue at rapid rates, with some analysts
predicting that there will be close to 200 million mobile subscribers in Africa by 2010.1

By comparison, the penetration of retail banking systems in most African countries is very low.
While no reliable figures for the proportion of people banked yet exist at continental level,
national household surveys are providing more reliable information for certain countries. Table 1
highlights the cases of Kenya and South Africa, which are the focus of further research in this
report: within a decade or less of rollout, as many or more people have mobile phones as have

1
IT Web Market Monitor 5 May 2006

V3.1 7
bank accounts in many low income countries, even though the latter have been available for much
longer. Subscriber numbers in Kenya apparently doubled in 2005 so that mobile penetration now
substantially exceeds the percentage banked there.

Table 1: Mobile phone and bank account penetration

No of mobile Mobile Adults with Mobile Internet
subscribers penetration bank population access
(2004) accounts coverage
Kenya 2 546 000 7.9% 10% 70% 1.3%
South Africa 19 500 000 43.3% 45% 96% 9%
Source: mobile phones: ITU 2005; banking data: Kenya: Beck et al 2005, SA: Finscope 2005;
Internet: World Bank World Development Indicators

In many developed countries, the internet has become the lowest cost most accessible retail
banking channel. Relative to mobile phones, internet usage is low: outside of South Africa, barely
1% of Africans access the internet.2

The sheer momentum behind the takeup of mobile phones raises the prospect that financial
services provided via mobile phones, in other words, mobile payments and banking, will similarly
takeoff. This could have positive developmental consequences, including:
• Increasing the efficiency of payment systems and reducing reliance on cash as a
transactional medium;3
• Broadening access to financial services by increasing the accessibility and lowering the
cost of offering formal financial services.
The prospect of change as a result of m-banking goes further, however: low income countries
may leapfrog the deployment of widespread earlier generation infrastructure such as ATMs or
even dedicated Electronic Point of Sale (EFT POS) devices. Some proponents of m-payments go
further still: airtime may become a widely accepted form of e-money in developing countries. For
example, in a recent article entitled “Money talks”, Simon Batchelor states that “the innovative
use of airtime as ‘virtual currency’ promises to provide the poor with a more secure way of
transferring money”.4

The proposition on which this prospect of acceleration in financial access is based is the
following: as unbanked people start to use mobile phones, so they become reachable at lower
cost, and therefore more bankable—at least, in the sense that a basic transactional service
becomes viable to offer via the phone. More than a quarter of unbanked adults in South Africa
already use or have access to a cell phone.5 The expansion of mobile phone usage will therefore
pull in its wake, access to basic banking. Figure 2 depicts this: arrows showing continued growth
on the vertical axis (mobile usage) in turn pull more to becoming banked (horizontal arrows). As
a result, the proportion of people with access both to formal communications and to formal
financial services will rise in excess of the level previously predicted by income levels alone.

2
ITU (2004) Africa Telecom projections 1995-2005. Available via http://www.itu.int/ITU-D/ict/statistics/
3
VISA (2003) shows that a growth in the use of electronic payments is associated with faster economic growth
4
http://www.developments.org.uk/data/issue31/money-talks.htm.
5
FinScope 2004, 2005

V3.1 8
Figure 2: The proposition: Mobile use drives financial service usage
Figures in brackets are GNI per capita, PPP
97%
% mobile
phone Finland
usage ($29 560)

45%

South
Africa
10% Kenya ($10 960)
($1 050)

10% 45% 96%

% banked
Source: Mobile & banking data: Kenya & SA: Table 1; Finland: ITU; Claessens 2005 Table 1.
GNI per capita: World Bank WDI 2004.

Attracted by the market potential, several m-payment and m-banking services have started up in
various African countries in the past five years—including Zambia, DRC, South Africa, Nigeria
and Kenya. Most of these are low income countries, a fact which seems to underline the
leapfrogging potential of this technology.

Notwithstanding the prospect, the reality today is that m-banking is at an early stage. While
accurate numbers are not available, it is likely that fewer than a million people in Africa currently
make use of their mobile phones for financial transactions (other than the purchase of value added
services such as ringtones, which turns out to be an important part of the story here—see Section
3.3). What is required for the number of m-banking users to increase exponentially, following the
precedent of mobile phone adoption? In particular, will m-banking inevitably follow the
explosive trajectory of mobile phone usage?

1.2 Report objectives and approach

This report is primarily about addressing these general questions, arising from exploration in two
African countries in particular—Kenya and South Africa. Both have active m-payment and m-
banking initiatives currently underway; but, as low and middle income country respectively, they
come from different starting points and face different issues. As such, they help to frame the
particular questions which are the focus of this report:
• What is happening in mobile banking in these developing countries, and is it likely to
lead to greater access?

V3.1 9
 • Will it happen spontaneously or is enablement required for this to happen? If so, what
forms of enablement?

In particular, this project set out to investigate and identify the elements of an environment which
would maximize the likelihood that access to financial services would be expanded greatly in
Africa. Because of its restricted time and focus, the project was designed to be exploratory, rather
than definitive: seeking to understand what was happening in the pilot countries at least, and in
the process, develop an approach towards market development which could be of wider value
across the continent or in developing countries in general.

The project comprised the following elements:

• Research on existing models of m-payments and m-banking and into the different
regulatory approaches adopted in different places;
• Administering questionnaires to selected major providers of m-payments and m-banking
models in Africa, in order to categorize their approaches and understand the obstacles
they face (see names in Annex A);
• Completing templates in the two pilot countries of relevant information on the state of
law and regulation in areas affecting mobile banking, and engaging regulators.

The Kenya template was discussed in detail at a workshop for policy makers and regulators
hosted by the Central Bank of Kenya in March 2006. The overall findings were presented and
discussed in March 2006 at a workshop in Johannesburg at which the providers, regulators and
funding agencies with an interest in the area were present.

1.3 Report Structure

The report is structured as follows.

Section 2 defines the concepts which are at the heart of the report: what is an enabling
environment; and how does it change as markets grow and develop? The section also introduces
the concepts of additive versus transformational mobile banking, as a way of distinguishing those
offerings which are likely to change the banking market fundamentally, rather than simply adding
on a channel for existing bank customers.

Section 3 discusses m-payment and m-banking approaches in Africa and elsewhere in order to
map the emerging landscape and to categorize the new models.

Section 4 overviews the range of policy issues involved and considers the regulatory stances
emerging especially in developed countries.

Section 5 reports the results of a legislative and regulatory scan in the two pilot countries, and of
the current obstacles encountered by the providers of m-banking.

Section 6 proposes a high level framework of Enabling Principles for Mobile Banking as a type
of road map which would help to enable deeper and faster market development in this sector.

The Conclusion returns to the core questions.

In any new and rapidly evolving field like this, there is a proliferation of new articles and of
technical reports on specific sub-topics, rather than accessible overviews which can guide the

V3.1 10
newcomer. This report aims to consolidate some of the specialist reports in a manner which is
useful for regulators and providers. Detailed references to the wealth of underlying material are
provided at the end in a topic-related fashion, hyperlinked for easy access. Annex A lists names
and websites of providers participating in the project. Annexure B contains a glossary to help
those who may otherwise drown in the inevitable sea of new acronyms and jargon spawned by a
new and evolving sector.

V3.1 11
2. CONTEXT
2.1 The Enabling Eanvironment
An enabling environment is defined in this report as a set of conditions which promote a
sustainable trajectory of market development in such a way as to promote socially desirable
outcomes. These conditions are forged by larger macro-political and economic forces, as well as
sector specific policy and laws. However, this report focuses on the latter category as being
within the power of policy makers and regulators to control and influence.

What are the socially desirable outcomes? In Creating an Enabling Environment: towards the
MDGs, the UN ICT Task Force defines them as “Investment, innovation and entrepreneurship”
6
which build the private sector. More specifically, policy makers and regulators in the financial
sector usually seek the following key outcomes:
• Financial stability: That the safety and soundness of the banking and payments system
is not compromised;
• Economic efficiency: That the efficiency of the financial system as payments mechanism
and intermediation system is maximized and in turn, contribute towards overall
economic growth;
• Access to financial services: That broader access to appropriate, affordable financial
services is promoted;
• Financial integrity: That the financial system is not compromised by its abuse for
criminal or terrorist financing purposes;
• Consumer protection: That consumers, especially vulnerable consumers, are adequately
protected against abuse and loss.

Mobile banking offers the prospect of increasing efficiency of the payments system; and
potentially, expanding access to financial services. However, these objectives may be in tension
with existing approaches which target other objectives, such as financial integrity or consumer
protection. While market enablement is often understood as the process of simply identifying and
removing regulatory and legal barriers to growth, in fact, it requires the managing these complex
trade-offs over time.

2.2 Phasing Enablement: Industry Growth Trajectories

Understanding the dynamic nature of market development is crucial to appropriate enablement.
This is because the need for regulation, and the risk of not having appropriate regulation, changes
as a market develops: regulation which was unnecessary at an early stage may become necessary
in order to stabilize and protect against much larger scale risks to society arising from market
failure.

Figure 3 below traces a conventional s-shaped market development trajectory, similar to that
observed in Figure 1 for mobile phone take-up in various regions. This has been discussed in
7
more detail in other places. The objective of maximizing access can be understood as ensuring,
at least by maturity phase, that the usage line is at the highest level possible.
6
UN ICT Task Force is now defunct but due to be replaced by a Global Alliance for ICT Policy and Development. See
http://www.unicttaskforce.org/
7
Attributed originally to Rogers but described in Freeman (1988), Chapter 3 in Innovation, Technology and Finance, Ed.
A Heertje, Oxford: Basil Blackwell.

V3.1 12
Figure 3: Stages of Market Development: moving up the S-curve
No of customers

1. Pioneer 2. Breakout 3. Consolidation 4. Maturity

In Figure 3 above, four distinct phases of market growth are delineated:

(i) The pioneer phase when a few early entrants launch and test out their products and start to
find success;
(ii) The breakout phase when the success of the pioneers is noticed, leading to rapid entry of
new firms and expansion of the market;
(iii) A consolidation phase when a shakeout of firms occurs due to increased competition or
external factors such as regulation, although the number of customers continues to grow but
at a diminishing rate;
(iv) A final maturity phase when the number of firms in the industry and its norms and rules
have been settled, and the market grows at a steady, natural rate.

In each phase, providers encounter different barriers to growth; and policy makers and regulators
encountered different risks. Table 2 below highlights some of the latter.

Table 2: Barriers and Regulatory issues in each Market Development Phase

1. Pioneer 2. Breakout 3. Consolidation 4. Maturity
Barriers • Technology • Interoperabil • Failures/ • Barriers to
stability ity to get to shakeout entry for
• Customer scale & ongoing
understanding usefulness innovation
& trust • Customer and
• Business trust competition?
model • Customer
scaleable education &
adoption
Public policy • Gaps in • Fly by night • Depositor/ • Promoting

V3.1 13
issues current laws? entrants/ payer losses as a access
• Contraventions fraud result of failure?
of existing • Interfaces to • Systemic
rules vs space existing stability
for innovation systems • Emerging
• Interoperabi market
lity structure

Regulatory • Monitor/ • Facilitate/ • Supervise • Ensure

strategies engage Coordinate ongoing
• Roadmap competition

A phased approach to market enablement requires an understanding of which stage a market is

currently; and of the barriers and uncertainties which will shape its possible development
trajectories. This understanding itself requires dialogue between regulators and providers,
especially in a new market where uncertainties abound.

2.3 Openness and certainty at the early stage

In the early stages of a new market, two dimensions in particular affect the market development
trajectory:
1. Openness: does the policy, legal and regulatory environment allow for (or better
encourage) the entry of new providers and approaches? If not, there is little room for
innovation to come to market.
2. Certainty: does the policy, legal and regulatory environment provide sufficient certainty
that there will not be arbitrary changes in future which may prejudice the prospects of
entrants? If not, entrants (at least those with a longer term horizon) will be discouraged
from incurring the cost and risk of entry.

Ideally, therefore, an enabling environment is one which is sufficiently open and sufficiently
certain; but in reality, there may well be trade-offs between these two dimensions. It is often the
case for new markets that one or other dimension is neglected: for example, countries with few
laws or regulations and with limited regulatory capacity may be very open to new developments,
but, if there is a high level of uncertainty, for example, as result of the possibility of arbitrary
action in vague areas of the law, there still may be little market development. This position is
represented in Box 2 in Figure 4 on the next page. Equally, regimes with more certainty are likely
to have better defined laws, but the wider coverage may well restrict new entry (as in Box 3 in
Figure 4).

V3.1 14
Figure 4: Enabling the Environment: increasing openness & certainty

2. Low certainty; 1. High certainty;

High Openness High Openness
Openness

4. Low certainty; 3. High certainty;

Low Openness Low Openness

Certainty

Enabling a new market may be therefore understood as moving in the direction of the arrows
from the starting point, towards greater openness and certainty. To be sure, openness and
certainty remain important in later phases of market development too, but are crucial if a market
is to develop at all.

Later in this report, we will attempt to apply these concepts to mobile banking by asking what
constitutes sufficient openness and sufficient certainty for it to develop from the early stage.

2.4 Additive and transformational approaches to banking

Mobile banking holds out the prospect of increasing access to appropriate formal financial
services by those who presently lack it. It could also make banking more convenient, possibly
even cheaper, for those who already have financial services. The two approaches are not
necessarily exclusive—greater convenience for existing clients could also lead more accessible
products for current non-clients—but neither are they necessarily linked.

This report distinguishes between:

• Additive approaches, which primarily target existing banked customers, and which offer
the mobile channel as an additional channel, alongside or as part of others (such as
internet); and
• Transformational approaches, which intentionally reach out to markets beyond the
existing banked groups, through a product offering which meets the known needs of the
unbanked groups.

Unbanked people, by far the majority in most developing countries, are in fact a heterogeneous
group, including people who may have adequate incomes but from an informal source, as well as
poor, rural dwellers. As the result of ongoing research in the field of microfinance, we now have a
better sense of the elements required for a basic financial service to meet the needs of unbanked

V3.1 15
people, and in that sense, to be transformational. A recent MicroSave briefing note (Wright et al
2006) lists the elements of transaction banking which constitute a suitable value proposition for
poor customers:
• A safe place to keep money
• The ability to cash in and cash out at convenient locations (since cash is still pervasive) at
a reasonable fee; and
• The ability to transfer money, both to make payments and to remit money to friends and
relatives.
Research by CGAP and others in different contexts confirms the basic elements of this list, which
therefore will be regarded as the essential elements of a transformational proposition.

2.5 Summary
The introduction of this report described the prospect that mobile banking will enable widespread
access to financial services. For this to happen, mobile banking offerings must be in some
measure transformational. This section has defined this concept, against the background of the
main elements of a dynamic enabling environment. The next section describes the emerging
models of mobile banking; and subsequent sections go on to identify the basic elements of
openness and certainty in the environment which may be required for these models to take root
and grow in developing countries today.

V3.1 16
3. EMERGING MODELS AND DEVELOPMENTS IN M-PAYMENTS
& BANKING
3.1 Definitions
Mobile payments (m-payments) are a small but growing subset of the broader world of electronic
payments (e-payments). While consumer may initiate and authorize e-payments through a
number of other electronic channels such as the internet or card-based acquiring devices like
ATMs, mobile payments are made using a mobile device such as a cell phone or PDA. M-
payment is simply the transference of value from payer to payee, as in a remittance or bill
payment.

Mobile banking (m-banking) in turn is a subset of e-banking in which customers access a range
of banking products, such variety of savings and credit instruments, via electronic channels. M-
banking requires the customer to hold a deposit account to and from which payments or transfers
may be made.

This report considers both m-payments and m-banking. The focus, however, is on m-banking,
since the transaction costs of payments are greatly reduced when there is an electronically
accessible store of value. In most regulatory regimes, creating account-based stores of value is
regarded as banking-related business. The question of who may hold the deposit balance turns out
to be a crucial issue affecting the development of these models. Even if the focus is on the wider
aspects involved in m-banking, the spread of m-banking depends to a large extent on
developments in the technology and regulation of m-payment.

3.2 The context of e-payments

The BIS Committee on Payment and Settlement Systems (CPSS) produces a regular Survey of e-
money and internet and mobile banking, which scans developments in this sector. The most
recent (2004) CPSS survey reported that payments using the internet and mobile phones have
advanced rapidly in recent years, compared to the usage of e-money which has lagged, at least in
8
e-purse form.

Figure 5 below, drawn from the Mobey Forum White Paper (2003), distinguishes four distinct
zones in the e-payments landscape, based on:
• Size of the payment, using $/€10 as the conventional threshold size between micro and
9
macro payments on the vertical axis ; and
• The location of the payer relative to payee: either in separate locations (remote) or in
close proximity (local).

8
CPSS (2004) available via http://www.bis.org/publ/cpss62.htm
9
The new micro payments threshold is €50 today in the EU proposed payments directive.

V3.1 17
Figure 5: e-Payments Landscape

Macro payment 1. Ordering/ paying for 2. Retail shopping

physical goods (EFT POS)
(internet purchase)
Remittances

$/€10

3. Digital content 4. Vending

Micro payment (ring tones/PRS)/ (e.g. soft drink machine; toll pass)
Airtime transfer

Remote Local

Above the conventional micro-size threshold, the ‘macro’ payment space (Zones 1 & 2 above)
has been the traditional preserve of banks. Over the past decade, in developed countries at least,
banks have provided easy internet access as a convenient means of paying for goods and services
from remote vendors (Zone I above). Innovation has also enabled non-banks to enter this space:
new payment providers such as US-based PayPal have developed effective internet payment
models to support remote purchases over the internet and even enable person-to-person payments.
However, they generally work to provide convenient means of making payments from (bank)
account to account. For purchase in-store, banks which are members of international card
associations such as VISA and Mastercard have developed an extensive electronic acquiring
infrastructure at point of sale (Zone 2).

To date, mobile phones have been used for payment mainly in the micro, remote space (i.e. Zone
3 above). A recent Mercator study found that annual micro payments by mobile in the US have
10
increased from $2 billion to $5 billion between 2003 and 2004. The biggest single size
category is payments of between $5-49 each, suggesting that the accepted micro threshold is
already shifting upwards. In this space, telcos have been dominant. They have combined with
other content providers to offer Premium Rated Services (PRS)11 such as airtime top-up, ringtone
purchase or access to information services such as weather or stock quotations. By sharing in the
revenue from such services, telcos are able to increase their revenue per customer and buttress
their proposition vis a vis competitors. However, the purchase of PRS requires the buyer to make
a micro-payment. Since the telco infrastructure has been designed to support billing for small
value, high volume transactions (such as voice calls or SMS’s), mobile operators are able to
collect small payments cost effectively from mobile subscribers, usually by directing debiting
their airtime accounts.

10
Available via
http://www.mercatoradvisorygroup.com/index.php?doc=Emerging_Technologies&action=view_item&id=116&catid=5
11
Also known as Value Added Services (VAS)

V3.1 18
In Zone 4 (micro but local), mobile vending and transport applications have been developed in
several countries: for example, a mobile phone may be used to transmit payment to a vending
machine which then releases a soft drink; or a mobile device in a car may be used to transmit a
signal to a toll gate, deducting payment without having to stop. While some of these individual
applications, such as the much cited Octopus system for HongKong mass transit, are reaching
scale, the number of large-scale deployments, especially outside of developed countries, remains
few. To date, the transport applications have required a separate card or token; however, the
growth and systematization of near field communication (NFC) standards is likely to accelerate
the convergence between mobile phones and contactless card solutions: as The Economist
recently reported, “Near-field communication technology could fuse tickets, key cards and cash
12
with mobile phones.”

The growing use of airtime to make payments for other services raises an important question for
policy boundaries: do such payments amount to the issuance of electronic money (e-money), and
therefore deposit taking by telcos without their being regulated as banks? If the account which is
debited is a post-paid (i.e. contract) airtime account, or indeed, a bank debit or credit card account
, the question does not arise. However, if the debited account is a pre-paid airtime account, then
the telco may be acting as an issuer of e-money.

3.3 E-Money
13
E-money was defined in Europe through the passage of an enabling directive in 2000. This
Directive was intended to enable innovation by recognizing a new class of entity as an e-money
issuer, which would be subject to lighter regulation than banks because of the lower risks
involved. Specifically, e-money issuers could not grant credit, as banks can, and therefore cannot
‘create’ money; but are restricted in the assets in which they may invest. An e-money issuer is
therefore a type of narrow bank, restricted to payment functions as a result of e-money balances
held.

E-money is defined by the EU Directive as “monetary value as represented by a claim on the

issuer which is:
1. stored on an electronic device (in this case, computer system of the telco);
2. issued on receipt of funds of an amount not less in value than the monetary value offered
(when the airtime was bought); and
3. accepted as a means of payment by undertakings other than the issuer.”

This definition is vague and ambiguous however. In addition to covering the purchase of PRS
using pre-paid airtime, it could include other unintended categories of transaction, such as the
airtime itself when used in mobile electronic communications.

Consequently, the European Community (EC) and country regulators have sought to provide
boundary guidance on when the usage of pre-paid airtime balances to purchase goods constitutes
the use of e-money. The UK’s Financial Services Authority found that, provided the services are
delivered on the mobile device as part of a single service (e.g. a stock quote or weather report
14
received by text on the phone), this would not constitute the issuance e-money. However, where
the service is paid for using the pre-paid balance but delivered to another device (e.g. the stock

12
Economist Technology Quarterly 8 December 2005
13
Directive 2000/46/EC
14
http://www.fsa.gov.uk/pubs/cp/cp172_newsletter.pdf

V3.1 19
quote routed to a computer via e-mail), this would constitute e-money issuance, requiring the
telco to register and be licensed as an issuer.

The 2004 EC Guidance note proposes that a key test is whether there is in fact a direct debtor-
15
creditor relationship between the buyer and third party provider of PRS services. The proposed
EU Payments Directive seeks to clarify that it does not apply to those transactions made using a
mobile phone where the telco is closely involved in the goods provided and where the goods
16
cannot be delivered without the telco.

To date, there are only 6 active e-money institutes (EMIs) registered in Europe, although a
number operate under country-level waivers. Other than Vodafone in the UK, no mobile operator
has yet registered. The EU therefore offers an example where enablement has taken the form of
the passage of new legislation.

A recent review of the E-money directive concluded that the legislation had succeeded only partly
17
in its objectives of encouraging new entrants and promoting the development of e-commerce.
National EU regulators differed in their views and approaches to implementation. The greatest
enablement seemed to have occurred when a national regulator (FSA in the UK) maintained an
ongoing dialogue with the providers in the sector. Several non-bank groupings made
representations to the review that, even though capital requirements and supervision requirements
were typically lower than for credit institutes (i.e. banks), they were still too high to make e-
money issuance viable. It now remains to be seen how the EC will respond to the findings of the
review. In the terms developed in Section 2, the EU E-money legislation may have brought
certainty, but it lacked openness in several crucial ways.

By contrast, e-money issuance in the USA is largely unregulated at a federal level, although state-
level regulations apply. Paypal is regulated as a money service business primarily at the state
level, although it also has a UK e-money license for its activities in Europe. US legislators and
regulators have consciously avoided overarching laws to date to allow the space to be open for
innovation. The basic approach to e-money espoused by Alan Greenspan in 1997 remains largely
in place today: “I am especially concerned that we not attempt to impede unduly our newest
18
innovation, electronic money, or more generally, our electronic payments system.” The US
approach is therefore still characterized by openness to innovation. Issuance of e-money in the
form of pre-paid cards has expanded greatly, although the issuance of e-money by banks has
gradually been brought under the same regime as insured and regulated normal deposits.

During the course of this project, the South African Reserve Bank issued a revised guidance note
on e-money in that country, updating the first one issued in 1999. The new note uses the EU
19
definitions of e-money and maintains the position that only banks are allowed to issue e-money.
This note, and its predecessor, have brought clarity in SA, but have closed the process to non-
bank issuers.

15
http://europa.eu.int/comm/internal_market/bank/docs/e-money/guidance_en.pdf
16
Article 3(j)
17 http://europa.eu.int/comm/internal_market/bank/docs/e-money/evaluation_en.pdf
18
P.48 in Dorn (1997); Greenspan also predicted that e-money was likely to spread gradually in the US, in part because
of widely available alternatives: so far he has been right.
19
Available via
http://www.reservebank.co.za/internet/Publication.nsf/LADV/A760BB248F6804C142257145002A8FCF/$File/ecashpos_
Apr06.pdf

V3.1 20
While few developing countries have e-money legislation or guidance, the question of e-money
issuance is even more relevant in developing countries than developed countries for the following
reasons:
• 79% of mobile subscribers in low income countries and 55% in middle income countries
20
are pre-paid , hence the issue of e-money is more likely to arise; and
• In many low income countries, telcos have much stronger retail brands and distribution
networks than often weak banks, therefore may face less competition in the payment
space.

It is therefore more likely that telcos in developing countries will find it attractive to issue e-
money. Indeed, many do already.

3.3.1 Can airtime serve as e-money?

Mobile operators in Kenya and SA offer popular airtime transfer services, such as Me2U (from
MTN in South Africa) or Sambaza (Safaricom in Kenya). For a small fee, one pre-paid customer
may transfer a portion of her airtime to another user on the same network. The characteristics of
this service have led some to suggest that airtime is a de facto form of e-money or alternative
currency. A BBC commentator comments on the launch of the Sambaza service in Kenya: “What
(Safaricom CEO) Michael Joseph has actually done is to create a new currency --a cyber
currency that can be sent anywhere in the country at the press of a button, without needing a
bank account or incurring high bank charges.”21 The Economist magazine in 2005 reported the
story of a woman in Democratic Republic of Congo (DRC) who settled a bribe to officials across
22
the country by sending them airtime.

Beyond the increasing anecdotes, there is as yet no systematic evidence that airtime transfers are
being used as money on large scale. Survey work is underway in various places which will test
usage patterns.23 However, in the absence of other quick, safe and cheap ways of transferring
money, it is at least plausible that airtime transfer could assume some of the characteristics of
money transfer or remittances.

This is because airtime shares to some degree the basic characteristics of money:
• It uses a commonly accepted unit of account: it is typically denominated in currency
units (not, for example, time units).
• It can be an efficient medium of exchange in societies where the financial system does
not allow easy remote transfers, as in the DRC example, provided that the other party
can and does accepts it; however, transfers are usually limited to users of the same
network, limiting the value for other mobile users.
• It can be a store of value, provided (i) that the telco continues in business, and (ii) the
airtime does not expire (the validity window is often short, for example a month, on pre-
paid airtime).

Within the constraints of airtime validity and same network usage, airtime is very likely already
an alternative currency of sorts. The more interesting question is perhaps how widespread it may
become in developing countries.

20
ITU 2004
21
Jeremy Faludi, A New Kenyan Currency, 5 July 2005, http://www.worldchanging.com/archives/003039.html
22
Economist 29 June 2005
23
For example, a research study on airtime transfers in Egypt through the Vodafone SIM Panel

V3.1 21
The biggest constraint here is its real cost: airtime is not redeemable at par into cash. The issuing
telco would not be able to offer face value on redemption because of paying away a sizable
commission (typically 15%) on the face value of the airtime at first sale. In addition, sales or
value added taxes are often levied on the face value of the airtime. However, these cost factors
alone do not prohibit the redemption of airtime into cash by vendors or indeed, the network
operator itself; they simply translate into a deep discount to face value.

If the relevant comparative price is the cost of a remittance by other formal channels, airtime
transfer may still be appealing. For example, an airtime vendor may accept ‘second hand’ airtime
transfers at a discount of 15% to its face value, knowing that he could re-sell it to other users at
par and effectively match his usual commission. This could compensate for the loss of network
commission on subsequent on-sell. Discounts of this magnitude are quite similar to the add on
fees charged in developing countries: to send $100 net through a money transfer service may cost
the remitter $120; similarly, a remittance of airtime worth $120 (sent for a network fee of around
30c US) may be cashed out at an airtime vendor at a discount of say 17%, to be worth $100 net.

To narrow or reduce this discount will require different models for cashing out airtime. Larger
volumes of acceptance may in themselves reduce the discount that vendors need to earn. It is
therefore much more likely that airtime could function as a de facto e-money in developing
countries. Furthermore, mobile operators may even be in a stronger financial position and have a
stronger retail brand than banks in many.

3.4 Emerging experiences of m-payments

3.4.1 Developed countries

In Europe and the US, other than for the purchase of PRS, there has been limited use of mobile
payments to date, despite earlier expectations to the contrary. Expressing widely held frustration,
24
The Banker magazine recently carried an article entitled: “When will mobile get moving?” The
slower pace of adoption in these countries is perhaps no surprise, however: banked customers
have had little reason to move from accessible, trusted electronic channels such as internet or use
of card at point of sale, to a new approach which is not yet stable or pervasive.

In Western Europe, in particular, there have been a number of attempts to create m-payment
platforms and products. In October 2002, the Joint Vienna Institute identified no fewer than 30
25
operators offering m-payment solutions of different kinds. There has been limited success to
date: several major collaborative m-payment platform ventures such Simpay, a consortium of
four major European mobile operators, have failed to get sufficient critical mass to succeed.
Fragmentation of the European market into unviable proprietary platforms has been described as
one of the biggest risks to the development of the sector here.

In the US, outside of the transport sector, there have few major m-payments products offered, at
least until recently. PayPal’s launch of a m-payment offering in March 2006 in the USA and
Canada is a significant development which could accelerate take-up due to its critical mass of 100
26
million clients. Although these clients are mainly in the US, PayPal has clients in 54 other

24
4 November 2004, available via
http://www.thebanker.com/news/fullstory.php/aid/2346/Will_mobile_get_moving_.html
25
See “E=Payment Trends”, Joint Vienna Institute, Oct 2002, http://www.oenb.at/de/img/epayments_021010_tcm14-
17932.pdf
26
Paypal mobile: https://www.paypal.com/us/cgi-bin/webscr?cmd=xpt/mobile/MobileOverview

V3.1 22
countries, suggesting that diffusion of the service even for international remittances may be rapid
27
once proven and as regulations allow.

M-payments are far more pervasive in parts of Asia than in Europe and the US, reaching early
‘break out’ stage in Japan and Korea.

In Japan, major mobile operator DoCoMo added the functionality of a credit card embedded on
the chip of its mobile phones in 2005. Using contactless FeliCa technology, the account
represented by the chip in the phone can be charged by waving the phone in close proximity to a
FeliCa point of sale device. FeliCa technology is already in use in mass transit systems in Japan.
The Economist comments that DoCoMo’s ability to integrate the hardware (cell phone) and
service offering has enabled it to package its m-banking service in a way which operators
28
elsewhere struggle to emulate, since they control only one of the key pieces but not both.

For m-banking to take off, this level of control by one large player may be helpful, but not
necessary. Despite a more conventional configuration of operators and banks, Korea has also
experienced seen rapid growth in mobile banking adoption in recent years. Since a cooperative
offering across Korean banks was launched in 2003, more than 10m customers (out of 38m
mobile subscribers) have taken up mobile banking. In a recent article, The Korea Times has an
upbeat assessment, although sounding a warning: “Although banking-on the-road services clearly
have a bright future with exponential growth potential, there remain some barriers such as
29
security concerns and disputes over standards.”

Japan and Korea are both high income countries with already extensive penetration of both
internet and mobile phone. They demonstrate that m-payments and m-banking can flourish even
where there are already established payment channels. However, especially since both countries
have very high levels of banked population, there is no evidence that the m-banking offerings are
transformational, nor do they need to be.

3.4.2 Developing countries: Philippines

More relevant to Africa, is the example of Philippines, a middle income developing country. Both
of the major mobile network providers in the Philippines, SMART and Globe, have developed
large scale m-banking offerings. Starting in 2000, Smart has offered a range of SmartMoney-
branded banking products via the mobile phone, in close association with a large bank, Banco
D’Oro. A Maestro debit card is also issued to enable Smart clients to use conventional ATMs and
POS devices. Remittances may also be sent from Philippinos overseas, using the Smart Padala
product. According to a recent Infodev study (2006), 2.5m people (of a subscriber base of 20
million) now use these Smart money services.

Competitor Globe entered the m-payments market only in 2004 with its G-Cash offering.
Described as a mobile wallet, G-Cash is essentially an e-money product. G Cash can be used to
make remittances, transfers and payments, and may be encashed or uploaded at a network of
some 3500 agents countrywide. In 2006, less than two years after launch, Globe reports 1.2m
banking clients, and this number is expected to double by 2007. Globe is now extending the use
of its payment platform, for example, to enable loan disbursements and repayments to rural
banks.

27
http://www.epublishingdaily.com/paypal-reaches-100-million-accounts/
28
Economist “Pay with a wave of your phone”, July 21st 2005
29
See article at http ://times .hankooki.com/service e/print/Print.php?po=times.hankooki.com/lpage/biz/20060..

V3.1 23
Not enough is yet known about the customer base of these two major providers to assess how
genuinely transformational the products have been in reaching customers without bank accounts.
However, the descriptions of both service offerings generally meet the criteria suggested earlier in
Section 2.4; and both have the potential to be highly transformational. The numbers alone mean
that the example of the two Philippino providers is likely to be transformational in demonstrating
the market potential for such products within lower middle income countries.

Apart from the Philippines, there are also reports of recent growth in other middle income regions
such as Eastern Europe and Middle East, where VISA Mobile has been active in Jordan since
30
2004. However, the Philippines is one of the few developing countries markets where m-
payments and m-banking has moved out of the pioneer phase, identified earlier, to the start of the
breakout stage where scale is achieved through rapid growth.

3.4.3 Developing countries: Africa

In sub-Saharan Africa, a number of banks have introduced m-banking products; and a variety of
models is now offered. Most are at an early stage, however.

Most of the offerings to date have been additive. In countries with sufficiently large retail banking
customer base, such as Kenya (inter alia, by Coop Bank), Nigeria (via GloMobile), South Africa
(all four major banks) and Zimbabwe (Kingdom Bank and Econet), banks have added on mobile
offerings as additional channels for their existing products. Although accurate numbers do not yet
exist at continental level, it is unlikely that there are more than a million m–banking users in early
2006.

There are also emerging models in certain African countries which, though at an early stage, at
least have or had the potential to be transformational. Because of the focus of this report, there
was further engagement and interaction with each of these providers to understand their models
and the barriers which they face to scale roll out:
• Celpay Holdings, originally a subsidiary of network operator Celtel, started offering
mobile payment solutions in Zambia in 2002. The Wall Street Journal at the time dubbed
31
this “Africa’s world first in cell phone banking” Although Celpay has retail
functionality, enabling funds to be deposited via banks into virtual Celpay accounts from
which they can be transferred by mobile phone, the focus of its business model has
become business to business payments around the logistics chains of large corporates
with far flung distribution, such as breweries and oil companies. It has also extended its
coverage to adjacent DRC, where it offers a means of payment for airtime vendors. South
Africa’s First Rand Banking Group bought Celpay from Celtel in 2005. It operates using
software developed by Fundamo.
• MTN Mobile Money was launched in South Africa in 2005 as a joint venture between
the country’s second largest network operator MTN and large commercial bank, Standard
Bank. Mobile Money starter packs are available via MTN agents and bank branches; and
account opening takes place remotely through an interactive process during which voice
recordings are taken as biometric identifiers and the Mobile Money menu is downloaded
over the air to a 32 k SIM card. Like Celpay, Mobile Money uses Fundamo software. As
of April 2005, Mobile Money reported 15 000 clients.

30
Total Telecom 9 Jan 2006
31
Wall Street Journal 12 December 2002

V3.1 24
 • M-Pesa is a m-payment platform developed by Vodafone Group, with initial support
from DFID’s Financial Deepening Challenge Fund. M-Pesa was launched on a pilot basis
by country operator Safaricom in Kenya in 2005. In the pilot, M-Pesa is used to disburse
loans from a microfinance institution (FAULU) to its clients, and then to collect
repayments via designated Safaricom airtime agents. Pooled M-Pesa balances are held at
a Kenyan bank. In pilot phase, M-Pesa is primarily a payment provider for the MFI, but
the functionality exists, and is being explored, for person-to-person transfers of balances
which will move the model into e-money issuance.
• Wizzit started in 2005 in South Africa, using software jointly developed with Cointel on
a USSD platform. Wizzit is formally a division of the Bank of Athens of SA, which is
legally liable for the deposits taken. However, the brand is owned and the operations are
run by a separate entity started by independent entrepreneurs who believed in the market
potential for this type of service. The linkage to a clearing bank provides Wizzit account
holders with access to the conventional e-payments system of South Africa, including
obtaining cash via ATMs using a Maestro branded debit card which is issued as part of
the offering. Wizzit bank accounts are opened remotely by commission paid agents called
Wizzkids.

Table 3 below assesses the potential for each of these approaches to be transformational.

Table 3: Transformational Potential of African m-banking models

Criteria: Celpay M-Pesa MTN Mobile Wizzit
Money
1. Targets unbanked No Yes Not Yes
customers specifically,
but as part of
offering
2. Product features:
(i) Safety Funds in float Funds of MFI Accounts held Accounts held
at bank in float at at bank at a bank
bank
(ii) Easy access to cash N/A Yes—airtime Card access Card access
back/in agents to existing to ATMs/
ATMs/ bank bank branch
branch
(iii) Ability to transfer Yes Yes Yes—to any Yes—to any
bank account bank account
(iv) Specific Hardware Yes No 32k SIM No
requirements
(v) Linked to one network No Yes Yes No
operator

These African m-payment providers are all at a relatively early stage; a variety of different
models, platforms and approaches is being tested. Most of the technology platforms in use are
considered stable, but the sustainability of each of the business models has yet to be proven since
none has yet achieved substantial scale or market traction. Unlike the Philippines, the African m-
payment market is therefore still in pioneer phase. The constraints faced by present African
providers will be discussed in Section 4.

V3.1 25
3.5 Categorization of m-banking models
The emerging m-payments and m-banking models discussed in the previous section differ
according to the roles played by the main providers in an m-banking solution: the bank, the telco
and/or a possible third party entity.

Mobey Forum has recently (2006) produced an elegant analysis32 of the different ‘mobile
financial services business ecosystems.’ This analysis distinguishes the two critical roles as (i) the
issuer of the security element (such as the SIM) used to authenticate and authorize; and (ii) the
platform manager. Different scenarios exist where banks and telcos fill these basic roles in
different configurations. Mobey Forum believes that the biggest potential for international growth
of m-banking exists when personalization bureaux (such as chip/SIM card issuers) take on the
role of platform manager, which owns the cryptographic keys that enable service providers to
download an application to the security element. This analysis adds a useful perspective of what
may be necessary for a high level of international operability, but the simpler categorization
provided here is operationally more functional for policy makers in developing countries.

Based on the answers to four key questions, four models may be identified:
(a) Who is legally responsible for the deposit? Usually, deposit taking is the regulated
preserve of banks only, but where this is not prohibited, telcos and other issuers of pre-
paid balances can also become issuers of e-money. The legal situation can seemed
blurred when telcos pool individual deposits into one aggregated account at a bank,
which has no sight of or role in administering the underlying individual accounts;
however, when the bank itself does not recognize the individual accounts, deposit
pooling is effectively the issuance of e-money.
(b) Whose brand is most exposed to the public? This consideration is related to the issue of
responsibility for the deposits, through the reputation risk involved. Note that in many
developed countries, where there may be small banks with limited penetration, the brands
of the few telcos with much larger clients bases may be far more valuable.
(c) Where can cash be accessed? The key question here is whether, in addition to
conventional banking outlets such as branches or ATMs, additional agent networks
brought into the offering for cash back or taking deposits, such as airtime merchants.
(d) Who carries the payment instruction? The key issue here is whether the m-banking
service is tied to one network operator or is network-independent.

Table 4 shows how the typical clusters of answers to these questions produce four main models,
for which examples are given at the bottom.

Moving from column one (the ‘pure’ bank-driven model), telcos or non-banks introduce key
elements to the m-banking offering such as new brands (model 2) and/or the new cash networks
(model 3). Hence, as one moves across the spectrum of models to the right, the bank becomes less
important to the model even though bank accounts are involved. Model 4 crosses a decisive
regulatory line since the telco effectively becomes a depository entity through the issuance of e-
money.

32

http://www.mobeyforum.org/public/pressreleases/Mobey%20Forum%20MFS%20Business%20Ecosystem%20Summary.pdf.

V3.1 26
Table 4: Classification of emerging m-banking models
Model Æ 1 2 3 4

Model name ‘Pure’ bank Joint venture Non-bank led Non-bank driven
driven

(a) Who holds the Bank Bank Bank Telco/ Non Bank
account/ deposit?

(b) Whose brand is Bank Joint—non-bank Usually non-bank Telco/Non Bank

dominant? or telco or telco dominant

(c) Where can cash be Bank Bank Bank + Telco network +

accessed ? alternative agent other
network
(d) Who carries the Any telco Usually specific May be one or Specific to offering
payment instruction? (sometimes to one telco any telco
with 3rd party
payment
gateway)
Current Examples Many additive MTN Mobile M-PESA, Wizzit Globe; Celpay
models e.g. Money, Smart
FNB

Table 4 shows that a range of approaches is being tried in Africa today, including models similar
to the Philippino models which are showing signs of success. Given that all models in Africa are
at a relatively early stage and that some may well fail to reach sufficient scale to be sustainable, it
is important that there is such a range.

V3.1 27
4. REGULATORY & POLICY ISSUES
4.1 Overlapping issues
As Figure 6 graphically depicts, m-banking sits at the intersection of a number of important
policy issues. Each issue is complex in its own right, and is often associated with a different
regulatory domain: as many as five regulators (bank supervisor, payment regulator, telco
regulator, competition regulator, anti-money laundering authority) may be involved in crafting
policy and regulations which affect this sector.

The complex overlap of issues creates the very real risk of coordination failure across regulators.
This failure may be one of the biggest impediments to the growth of m-banking, at least of the
transformational sort. However, even without the additional complexity introduced by m-
banking, many of these issues require coordinated attention anyway in order to expand access. It
is possible, however, that m-banking may be useful because the prospect of leapfrogging may
help to galvanize the energy required among policy makers for the necessary coordination to
happen.

Figure 6: Overlapping domains

E-
commerce Telco
regulation

AML-CFT
Comp-
Environment for etition
MOBILE PAYMENTS &
MOBILE BANKING

Deposit
taking
Payment
systems
Consumer
protection

V3.1 28
The issues will be grouped by their usual regulatory domain and discussed in turn.

4.1.1 Issues for ICT Policy makers: are e-signatures recognized legally?
M-payments require the accepted use of electronic signatures, such as a PIN number but
also including biometric identifiers, to authorize transactions. If the e-signature is not
legally valid, the transaction could be subject to challenge, exposing payment agents and
payees to the risk of repudiation. There is therefore a need at least to provide status to
electronic transactions equivalent to that achieved by physical signature.

PIN numbers are already in widespread use in developing countries—for example, as a

security feature on mobile phones—but not yet as e-signatures. Many developing
countries have yet to adopt legislation enabling e-commerce. It is unlikely that
individuals will accept the risk of accepting or making larger e-payments, or build new
business cases on the receipt of e-payments, if their validity may be challenged.
Establishing the legal validity of e-signatures is therefore a need for the m-payment/ m-
banking market to grow to scale.

4.1.2 Issues for Financial Regulators

• Are consumers adequately protected?
Consumer protection is a traditional concern of policy makers and of most financial
regulators. In developing countries, the enforcement of consumer protection measures is
often ineffective or lacking. However, in societies with low financial literacy or large
numbers of first time customers, the vulnerability to abuse is higher.

The issue for m-banking goes beyond traditional concerns about abuse of consumers.
however: in new markets especially, customer adoption depends on growing trust. The
experience of consumers at the hands of a few reckless providers may cause them to
distrust all similar offerings in the market. Providers may therefore enjoy positive
externalities from creating appropriate levels of consumer protection which help create
trust, leading to more rapid adoption.

However, there may also be negative externalities from inappropriate protection. By

imposing higher costs on providers, certain protective measures may result in small
balance accounts becoming unviable and therefore not offered. Those already holding
accounts may be better protected by these measures; but those who cannot qualify as a
result are without access to the product, and may be forced to use unregulated
alternatives.

A balance must be struck on this issue, therefore.

The starting point is to identify the risks to which consumers are exposed. In m-
payments, these typically include fraud (loss as the result of unauthorized transactions),
loss of privacy (through inadequate data protection) and even loss of service. The level of
risks involved vary with the nature of the product offering, and have been analysed in
33
detail by the Mobile Payment Forum. The security issues involved in customer

33
See for example, the publication on the best practice in managing security risks available via
http://www.mobilepaymentforum.org/pdfs/MPF_Security_Best_Practices.pdf

V3.1 29
 authentication and authorization through all the stages of wireless transmission have been
considered in some depth by the main industry fora. These are complex and fast
changing.

• How do m-payments affect the stability of the banking system and national payment
system?
The soundness of the banking system and of the national payments system are central to
the mandate of most financial regulators. Fears that stability could be undermined often
lead to conservative responses to product or service innovations, especially if they come
from outside the banking system. Such conservatism is to be expected, indeed welcomed,
when systemic stability is indeed at risk; but not when it leads to innovations being
suppressed without regard to real risks: the CPSS includes among the main objectives of
payment system regulation that regulators “address legal and regulatory impediments to
34
market development and innovation.” Proportionality is therefore a key principle of
good regulation, although it is often hard to apply in practice, especially in new and fast
evolving markets.

The conventional approach to the regulation of payment systems distinguishes between

systemically important and non-systemically important systems. Systemically important
is defined as “where, if the system were insufficiently protected against risk, disruption
within it could trigger or transmit further disruptions amongst participants or systemic
35
disruptions in the financial area more widely.” This determination is made based
mainly on the size or nature of individual payments or their aggregate value. At least one
of the following should be true for a payment system to be systemically important:
• It is the only national payment system
• It handles mainly payments of high value
36
• It is used for settlement of financial market transactions.

The more precise definition of systemically important is left to each country regulator.
According to the general definition, retail payment systems would usually not qualify,
although the CPSS also notes that it may be desirable for non-systemically important
systems to comply with some or all principles.

In the ‘pioneer’ phase of a new retail payment instrument or system, the case to apply
full, or even partial, regulation is likely to be weak. However, as the system grows in
coverage, it is likely to reach a system-wide usage threshold (in the sense that many
people rely on it), even if it is still not considered systemic. It would now warrant much
closer oversight by regulators, who may require assurances such as that there is adequate
backup procedures in place.

• Does the law distinguish adequately between payments and deposits?

Confusion in jurisdiction between payment regulators and bank regulators may be caused
by the lack of clarity over the difference between a payment and a deposit. The legal
boundaries between the two categories are often vague. Vagueness may result either in
legitimate payment developments being stifled through being incorrectly regarded as
deposit-taking; or unregulated deposit taking under the guise of being a payment service.
Neither is desirable.
34
CPSS 2003: 2
35
Available from http://www.bis.org/publ/cpss43.htm
36
CPSS 2003 Section 6.6

V3.1 30
 Evolving EU law provides an example of growing clarity over the distinction. The
proposed EU Payments directive defines a payment transaction broadly as “the act,
initiated by payer or payee of depositing, withdrawing or transferring funds from payer to
37
payee, irrespective of underlying obligations between payment system users”. A
deposit is also a form of payment (from depositor to bank or credit institution) but it
significantly different in that it is repayable to the depositor at a future time.

These transaction level definitions then inform the corresponding definitions of payment
providers (which enable payments to be made or received) and banks (which take
deposits in order to on-lend). Clearly, the prudential risks of each type differ, although
more in degree than form: payment providers are usually limited in the maximum time to
38
effect the payment , reducing the amounts at risk in event of failure, although ‘funds in
39
transit’ may still be substantial for large payment providers. Because of this risk,
payment legislation typically requires licensing and supervision of payment providers;
40
and imposes minimum capital requirements , though these are much lower than for
banks.

• Does the law provide for e-money issuance? By which entities?

Section 3.3 discussed the issues arising from the apparent issuance of e-money by telcos
when pre-paid deposits are used to buy services other than airtime. This question has
forced clearer definition of e-money in Europe at least. However, given the growing role
of telcos in most countries, there is a need everywhere at least to define e-money; and to
determine which institutions may issue it—banks only, or others as well?—since
prudential (and possibly systemic) risks arise if a large scale issuer fails.

• Is there provision for agencies for cash withdrawal and deposits?

For the foreseeable future, cash will remain the most widely used transaction medium in
developing countries. It is therefore necessary that there be sufficient points at which
bank money (i.e. in a bank account) or e-money (e.g. at a telco) can be deposited or
cashed out.

Traditionally, these transactions happened via a bank teller, but branches are expensive
to set up and run; extending branch networks into lower income or less dense areas is
unlikely to be a viable means of increasing access to cash. Deployment of ATMs can
help, since they may be cheaper than branches to set up and run. However, for developing
countries, ATMs are still relatively expensive, and typically require secure premises and
ongoing servicing.

Therefore, there is a need to use existing businesses which carry cash anyway, as bank
agents or correspondents. They may be linked electronically to the bank or e-money
issuer, so that customers can withdraw or deposit cash there. In effect, these arrangements
amount to outsourcing the front end of the deposit-taking business. In some regimes,
banks may not outsource any material function without regulator permission; in others,

37
Article 2
38
The proposed EU Directive provides for transfer by the end of the working day following receipt of funds (Article 60).
39
For example, Jacobs (2005:9)describes the consequences of the failure of US money transfer operator CashPoint
Network Services, with hundreds of retail locations in New York: “Ultimately, the company owed millions of dollars in
unpaid bills to utility companies…Some consumers were forced to repay bills they had already paid.”
40
In the US, bonding requirements for payment operators vary greatly by state but may be as high as $2m.

V3.1 31
 the front-end deposit taking function is viewed as being so core to banking business that
deposit taking outside secure bank premises is prohibited. Even in regimes where there
are no explicit prohibitions, regulators (and banks themselves) may be very cautious
about outsourcing the collection of deposits to agents because of the risk of fraud and loss
of reputation of the banking sector. However, new technology has greatly improved their
ability to manage the risk inherent in agency relationships.

• How do AML/CFT regulations affect account opening and cash transactions?

International Anti Money Laundering/ Combating the Financing of Terrorism (AML-
CFT) standards set by the Financial Action Task Force require that adequate customer
due diligence (CDD) be undertaken on all new accounts and on single payment cash
41
transactions. This process is part of Know Your Customer (KYC) procedures so that
suspicious transactions can be identified. National laws and regulations are required to
give effect to these standards, and they typically require:
• Verification of identity of the client, using a government issued identity document;
and
• Verification of physical address (for example, by production of a bank statement or
utility bill in name of the customer).42
If this procedure is not followed, the bank or payment agent may be penalized by the
relevant authority; or frozen out of international payment systems by other banks
concerned about the risk of being associated with illicit activities.

In many developing countries, clients have no formal address: the UPU reports that in
Africa, only 22% of households receive mail at home; and some 10% have no mail
43
service at all. Even if they did, there is often no means of verification, other than a bank
officer physically visiting the client’s home. Isern et al (2005) have warned of the
possible perverse consequences for access to financial services if an inappropriate rules-
based approach is followed in developing countries. Therefore, transformational models,
which target people less likely to have formal addresses, require flexibility in the
application of CDD requirements.

This issue applies across all types of bank accounts. In addition, transformational mobile
banking models often involve the opening of accounts by agents outside of bank
premises, known as remote account opening. This approach reduces the cost of
origination considerably. Although there may be higher risks involved, international
AML-CFT frameworks do not rule this out, proposing that a risk-based approach be
44
followed.

Clearly, a risk-based approach to CDD has the potential to be sufficiently flexible.

However, if national regulators give no guidance on what constitutes acceptable risk-
based approaches, banks may be left vulnerable to subsequent reprisal; and this may
encourage undue conservatism. In countries which strongly favour a risk-based approach

41
FATF Recommendation No.11, usually linked to CDD standards in the BIS publication CDD for Banks (2001), and
Special Recommendation VII for remittances.
42
Note that a proposed anti-crime law in South Africa would similarly require the identity and address of all mobile
users to be identified.
43
UPU 2005, available from
http://www.upu.int/statistics/en/development_of_postal_services_in_2004_en.ppt#276,2,Access to postal services
44
See for example, BIS (2001) 2.2.6

V3.1 32
 such as the UK, there are fora such as the Joint Money Laundering Steering Group
45
(JMLSG) which establishes guidance for its members on such issues.

4.1.3 Issues for Competition regulators:

• What are the acceptable boundaries of co-operation around payments
infrastructure?
• What are the risks of anti-competitive ‘lock in’ of a particular service?

Payments systems have long been recognized as complex ‘eco-systems’ where

competition among providers co-exists alongside co-operation which allows the benefits
of inter-operability. The right balance between competition and co-operation will vary as
a market develops; and will require careful oversight by relevant authorities. Nonetheless,
CPSS suggests that one of the objectives for payment regulators is to foster competitive
market conditions and behaviours. The CPSS General principles for payment system
development go further to encourage regulators to “give more choice to people; extend
the coverage and choice of non-cash instruments and services available to end users by
46
expanding and improving infrastructures.”

The main concerns are (i) that dominant systems may ‘lock out’ new players, limiting
innovation and allowing anti-competitive pricing; and (ii) that new products may
effectively ‘lock in’ a customer in an anti-competitive manner by reducing the ability to
switch at will. The Mobey Forum White Paper Customer Proposition is quite explicit that
customer lock in should be avoided: “The consumer should have the freedom to choose
banks, operator and Handset, and change them independently of each other”.

The boundaries between acceptable competitive behaviour and anti-competitive lock in

are often narrow. For example, the effort required to change a long standing mobile
phone number may cause a customer to be reluctant to switch providers; and providers
may exploit this stickiness through higher pricing. Nonetheless, telcom regulators do
typically not require number portability at the early stages of market development;
indeed, the concept only becomes relevant once a customer has come to be closely
associated with her number. As mobile network markets mature, number portability is
often a requirement: for example, it is required in SA in mid-2006.

Bank accounts are arguably subject to the same stickiness as mobile phone numbers, yet
bank number portability has not yet been required. M-banking models have different
propensity for lock in depending, for example, on the role of SIM as unique security
element. Models involving special downloads to the SIM card may limit the customer to
the SIM issuing network. Indeed, reducing the churn of customers in the face of increased
competition in maturing markets is one of the drivers for telcos who have entered m-
banking.

In early stage markets with an existing payments infrastructure, the bigger competitive
issue is more likely to be ‘lock out’ of other players. New entrants to m-payments may be
at a considerable disadvantage if they cannot access existing payment systems controlled
by incumbents anxious to protect their position.

45
See Website of the JMLSG at http://www.jmlsg.org.uk/bba/jsp/polopoly.jsp;jsessionid=aok_2PiclCH6?d=362&a=3424
46
Guideline 11

V3.1 33
 There is also a balance to be struck here; and regulators play a vital role in achieving this
balance. CPSS again provides general guidance on this point: “The system should have
objective and publicly disclosed criteria for participation which permit fair and open
47
access.” Enforcement may require special legal provision, however.

4.1.4 Issues for Telco regulators:

• How does the role of telcos in m-banking affect licensing requirements and their
solvency?

Telco license may preclude or limit telcos from becoming directly involved in m-banking
services or e-money issuance. Even if they do not, the risk profile of telco business may
change as they become increasingly involved in m-banking, depending on the roles that
they play. On the one hand, through generating more traffic on the network, m-banking
may make telcos more profitable; on the other, it may bring new risks which may not be
properly managed. For example, if pre-paid airtime balances become widely used as e-
money, then the carrying time on these balances, before they are used to make calls, will
lengthen. This lengthened float period will affect the accounting treatment of income, and
the risks and rewards of managing the float. Finally, as telcos enter m-payment or m-
banking space, telco regulators will inevitably have to coordinate and share information
with bank regulators. Together, they will have to delineate supervisory boundaries so that
unnecessary burdens are not placed on providers and the capacity of each regulator is not
strained through duplication.

4.2 Developed country financial regulator approaches

The policy and regulatory issues listed above are many and complex. In developed countries,
financial regulators have generally acknowledged that m-payments and m-banking are at an early
stage, and that the answers to all these are not yet fully known. However, they have generally
been reluctant to stifle innovation because the potential benefits, in greater efficiency at least,
exceed the new risks. Helen Allen of the Bank of England best expresses this stance in several
statements from a 2003 article in the Bank’s Journal: “Current limited take up of most of these
services highlights the importance of maintaining a sense of proportion in considering policy
responses, while acknowledging the possibility that the payments market could change
significantly…Were e-payments to grow significantly, any resulting changes in the distribution of
risks might make it appropriate to adjust the form and extent of payment system oversight in this
48
area.”

Particular recurring regulator concerns have included:

• The money laundering risks arising from having new channels for depositing and
transferring funds, especially in a post 9/11 world when banks are increasingly vulnerable
to civil lawsuits from the families of victims of terror if it can be established that any
funds connected to an incident or even organization flowed through a bank in violation of
the law.
• The possibility that central bank will lose control of the money supply as a result of
widespread e-money issuance. However, as long as e-money is issued in exchange for
47
CPSS Core principles for systemically important payment systems: IX
48
Allen 2003: 435/6

V3.1 34
 central bank money and until e-money is used at large scale so that the demand for
central bank money is displaced, this concern is usually exaggerated. After all, issuers
like telcos do not create e-money but rather exchange it for bank money; they still
ultimately need to settle with each other via accounts held at central bank, over which the
central bank retains control.
• The interaction of the new payment systems with existing bank payment systems, with a
view to avoiding the transmission of systemic risk. In addition, new payment systems
may cause changes in patterns of usage which may affect the viability of existing
payment platforms.

In general, financial regulators in developed countries have adopted the approach of monitoring
developments in the field closely to assess the risks over time. Many have gone beyond this to
facilitate and even coordinate around standards; and some have introduced new legislation as a
means of enabling. Each will be discussed in turn.

4.2.1 Monitoring
Monitoring involves the collection of relevant data on the size of the market, and on the product
types involved. The regular CPSS survey of internet and mobile payments across a large group of
countries is an example of the use of such data, collected from national regulators.

In addition, many financial regulators in developed countries have formed specialist internal
groups to monitor developments, such as the Payment Studies Resource Centre 49at the Chicago
Federal Reserve Bank or the Emerging Payments Research Group at the Boston Federal Reserve
Bank.50 These groups host regular conferences which gather industry players with regulators and
analysts to discuss latest trends. 51

Regulators have also played a role in disseminating information to the market. The e-Payments
Systems Observatory (www.e-pso.info), supported by the European Central Bank, offers an
electronic portal through which information on providers and models in European countries can
be easily. Because of its European focus, however, there is little information presently available
on developing countries.

4.2.2 Beyond monitoring: facilitation & co-ordination?

Allen has questioned whether financial regulators should widen their role beyond monitoring
only, asking: “Should policy makers promote inter-operability (to get to efficiency and critical
mass)? The gains from doing so could be offset by diminished product differentiation and stifled
52
innovation.”

Allen leaves this as an open question, wary that regulators could make the wrong choices, and
leave the market worse off for early intervention on these counts. Certainly, there have been a
variety of efforts by official bodies, such as the European Commission, as well as industry
groupings, such as Mobey Forum and Mobile Payments Forum, to coordinate and promote
common standards and interoperability. Financial regulators and policy makers in developed
countries have to date encouraged such co-operation on standards but done little more. In

49
http://www.chicagofed.org/emerging_payments_and_policy/emerging_payments_and_policy_index.cfm
50
http://www.bos.frb.org/economic/eprg/index.htm
51
The ECB has also hosted specialist events on this theme, such as “E-payments without Frontiers” conference in 2004;
see http://www.ecb.int/events/conferences/html/epayments2004.en.html
52
Allen 2003: 433

V3.1 35
developing countries, with fragmented banking sectors, regulators may need to play a much more
active role.

4.2.3 Beyond monitoring: new legislation?

Allen has also raised the question: ”Should public authorities be involved in the security of the
means of payment? There are commercial incentives for payment providers themselves to ensure
appropriate security…. (but) Inadequate security also has market-wide externalities since
53
problems in just one area could reduce public confidence across the wider payments market.”

Providing greater security would usually require the passage of new legislation, or the application
of existing legislation, to bring the new instruments explicitly under official protection and
supervision.

As discussed earlier, approaches here have differed: in the case of e-money, for example, the EU
has adopted the approach that introducing legislation early can and should enable markets to
develop, whereas the US has avoided passing federal legislation in favor of an incremental state-
based approach which has evolved over time. However, the uncertainty over possible future
regulation may have been an impediment to innovation.54

While the passage of e-money legislation in Europe did bring certainty, the recent review of the
directive found that it did not fully enable innovation, and has not led to take-off of issuance or
usage. In part, this was because legislation passed six years ago could not fully anticipate some of
the developments which have enabled new e-money forms today. The case of European e-money
issuance is not an argument against introducing or delaying legislation per se, however: rather, it
is an argument in favour of carefully assessing the need for certainty with the need for openness;
and judging carefully both the scope of any legislation and the timing of its introduction.

4.2.4 Philippines
Since m-banking has progressed furthest among developing countries in the Philippines, how has
the regulatory regime there evolved? Much is not yet known about the overall approach there, but
Lyman et al (2006) provide useful insights.

Clearly, there was sufficient openness to enable the two major mobile operators to start their m-
banking and m-payment models, in 2000 and 2004 respectively. Specifically, there was no e-
money regulation which prohibited Globe from issuing G-Cash. However, there has apparently
been close cooperation between the two major providers and the financial regulators to address
their key concerns, such as anti-money laundering. The bilateral agreement between each telco
and the Central Bank to limit the maximum size of wallet and transaction has clearly helped: not
only to limit the risk of money laundering to acceptable levels, but also to reduce possible
systemic risks. It is likely that the large size of the mobile operators, with the associated high
brand visibility and high solvency, also allayed fears that customers would not be adequately
protected or that account balances were at more risk in Globe than in a much smaller bank.

53
Allen 2003: 433
54
For example, see sentiments of ‘many participants’ from the summary of a Federal Reserve Bank of Philadelphia
Conference in July 2005 on “Payment Cards and the Unbanked”; p.20; available via: www.philadelphiafed.org/pcc

V3.1 36
However, because of the significance of the Philippino models, closer examination of how the
regulatory approach has evolved, and its options for future evolution would be well worthwhile to
guide other developing countries.

4.3 Enablement at work

In new market areas such as m-banking, regulators have a delicate task: neither over-reacting and
stifling market development, nor under-reacting to potential large scale risks until it is too late.
While delicate, the task is not impossible. Managing possible trade-off between innovation and
stability is at the heart of good policy and regulation. If policy makers develop a clear market
development strategy, this will not only brings greater certainty but also enable regulators to take
a sequenced, proportionate response to the risks involved.

In the domain of telco regulation, there are precedents for achieving transformational enablement.
For example, in the OECD paper on “Regulatory reform as a tool for bridging the digital divide”
shows how the timing of various enabling actions by the Indian telcom regulator has led to a
sharp fall in the effective mobile tariff since 1999, and a related large increase in Indian cellular
subscribers since 2001. This image is reproduced in Figure 7 below since it presents a picture of
what may be achieved through a suitable enabling environment.

Figure 7: The effect of India’s regulatory reforms on mobile usage and price

Source: OECD (2004:19)

V3.1 37
5. PILOT COUNTRY & PROVIDER ASSESSMENTS

This section moves to consider the specific issues arising in the legal and policy environment in
the two pilot countries—Kenya and South Africa; and the obstacles reported by providers there.

5.1 Legal & policy environment

In order to understand the environment for m-payment and m-banking, one aspect of this project
involved the collection of information on existing and intended legislation and regulations which
impinge on this area. Table 5 below summarizes key aspects from these templates for Kenya and
South Africa. Both countries are at an early, pioneering stage of market development, with
several models although none yet with critical mass.

Table 5: Summary of country templates

Kenya South Africa
1. Are E-signatures recognized Not yet—bill pending Yes
by law?
2. Are there consumer No—not explicit Yes for deposit taking (FAIS);
protection not e-banking. Banking
laws/regulations/codes industry Codes of Conduct and
with enforcement? Ombuds process cover e-
banking
3. Is there a competent Yes—however with limited Yes
competition authority? jurisdiction & powers
under old Act
Is there payments system Not yet—bill pending Yes
legislation giving authority
to a regulator?
4.Are AML/CFT CDD/KYC Apply to banks only; allow Yes—exemption from address
requirements prescriptive for risk basis but with no verification on small accounts;
or risk based? guidance and will likely be risk-based approach to ; but
Are they onerous for small onerous for small accounts still considered unclear by
accounts some providers

5. Can agents can provide Not prohibited; no specific Not prohibited; no specific
cash back/ take deposits? rules rules
6. Are there specific E-money No Yes—guidance only
regulations or guidance?

In general, South Africa has a well developed legislative and regulatory environment, which
creates relatively high certainty. Areas such as e-commerce, AML/CFT and even consumer
protection are fully covered. E-money issuance is covered by a recently updated guidance note.
While several of the new models considered here have started up in this environment, it is not
necessarily conducive for the rapid growth of transformational approaches, as provider’s
comments in the next section show.

In Kenya, by contrast, much important legislation in areas like e-commerce, AML/CFT and
payment systems is still at the draft or bill stage. The state of legislative and regulatory
uncertainty is therefore relatively higher than South Africa, although uncertainty is reduced
somewhat by the fact that there is at least draft legislation and accepted policies in areas such as

V3.1 38
the national payment system. Consequently, it has not precluded the launch of m-banking
products such as M-Pesa discussed here. The lack of specific legislation in various areas has left
the Kenyan environment relatively more open. Kenya now has the opportunity to coordinate and
integrate its approach to the m-banking sector within and across all the planned new laws before
they are passed, thereby avoiding the confusion of any conflict or ambiguity.

In both countries, high level strategy and policy documents have been developed and released for
the development of the National Payment Systems. In 2006, the SA Reserve Bank released
Vision 2010, an updated framework and strategy for the national payment system there.55
One of the seven main strategic objectives identified is “Facilitate wider usage by the public and
broaden the provision of payment services in the NPS”, which is further clarified in a footnote to
include ‘addressing the payment needs of the unbanked community’. The document envisages an
active role for the Payment System Division of the Central Bank in monitoring developments
nationally, regionally and internationally, as well as facilitating the establishment of an authority
which would certify payment system standards. In Kenya, the NPS Framework and Strategy
document was issued in 2004. The elements of the vision for the NPS include access-related
elements: “Easily accessible to both urban and rural consumers…”; and “Basic NPS features
understood by all including the rural populace.”56 These objectives provide openings for
regulators to consider transformational offerings more favourably than they might otherwise.

In terms of the openness-certainty diagram introduced in Figure 3, SA therefore sits closer to Box
3 (lower right hand side) and Kenya to the upper left hand side (Box 2).

While these relative positions are perhaps to be expected of a middle income and a lower income
country, neither Kenya nor South Africa is especially representative of Africa in general: the
retail banking systems in each are well developed, and the Central Banks well capacitated,
relative to many neighbouring countries. They were chosen for this project because of the new m-
banking models emerging in each. However, the checklist represented in Table 5 could also be
applied to other developing countries. It could also be developed further into a rating system
which could enable better comparison across more countries and across time of the environment
for m-banking.

5.2 Provider obstacles reported

The four direct providers who participated in this project completed a questionnaire which asked
them to identify barriers to the development of their business models. Three IT providers who
provide m-banking systems to providers in Africa were also polled.

The biggest barriers reported by these providers today are not primarily regulatory or legislative.
Rather they were customer adoption issues typical for a new product or service, such as:
• How to educate customers in the use of the mobile phone for transactions;
• How to build trust in and awareness of a new financial brand.

These are little different from the general obstacles to m-commerce becoming pervasive (‘u-
57
commerce’ or ubiquitous commerce) identified by Schapp and Cornelius :

55
Available from:
http://www.reservebank.co.za/internet/Publication.nsf/LADV/DAA203A3059201E4422571570025D8F3/$File/Vision201
0.pdf
56
CBK (2004) p.14
57
See Schapp and Cornelius, “U-Commerce: A White Paper”, available from
http://www.foreshore.net/_support/uploadedFiles/Ucommerce%20whitepaper.pdf

V3.1 39
 • Security (which generates user trust, essential in financial mechanisms)
• Simplicity (or user friendliness).
They also include the need for common standards, which allow interoperability, and therefore
greater utility to clients and greater scale.

These barriers are also similar to those reported by respondents (mainly in developed countries)
to the 2006 Mobile Payments study undertaken by consultancy Edgar Dunn: merchant adoption,
customer adoption, agreement on common mobile platforms and security and fraud issues tied as
the most commonly reported barriers.

However, while the environment in the relevant countries was by definition open enough to
enable them to start up, the providers in SA in particular also reported significant specific
regulatory obstacles to the growth of transformational approaches. These included in particular:
• a lack of clarity and consistency over the application of CDD standards to remote account
opening procedures, even though the CDD required on low value accounts is already reduced
by exemption; for example, it is unclear whether or not a copy of an identity document must
be secured from the client in all cases, and if so, in what time period; or whether a biometric
58
identifier (such as a voice imprint) is adequate.
• customer protection laws, designed primarily to cover the inappropriate offering of
investment-type products, also extended to the opening of basic transactional bank accounts;
as a consequence, a higher level of training, and therefore cost, was required in front line
staff.
• access to the national payments system: non-bank providers remarked on the difficulty and
cost of obtaining access to the South African payments system infrastructure, for example for
ATMs or POS acquiring. Access is in theory open to all banks, but in practice, the major
banks which own most of the infrastructure dominate and are wary of models which will
‘piggy back’ on their existing infrastructure. A 2004 National Treasury task group report on
competition in SA banking identified that this may constitute a barrier to competitive pricing
59
and innovation; and competition in the payment system is now being further researched.

In addressing these and other regulatory issues, providers generally reported that they had had at
least some engagement with financial policy makers and regulators. Engagement was usually
related to particular issues rather than market development in general.

In South Africa, there have been some attempts at coordination among providers: a working
platform group comprising banks, mobile networks and vendors had convened in the past to
consider the most feasible m-commerce model for the country. This group had concluded that the
market required a central, trusted infrastructure that housed consumer data away from the actual
mobile device and facilitated the authentication, instruction, financial transaction processing and
60
fulfillment of transaction to merchant or retailer.

Discussions in both countries supported the conclusion that a high level roadmap of market
development would be useful in promoting certainty and allowing graduated openness. The next
section sets out initial principles arising from this project which could be the starting point for
discussions about a roadmap.

58
This issue was highlighted as a major obstacle in a recent press article on why takeup has been slow at MTN Banking:
see http://www.moneyweb.co.za/shares/financial_services/208080.htm
59
National Treasury Task Force report (2004), recently released but not on Treasury website www.treasury.gov.za as at
May 06.
60
Krugel (2005).

V3.1 40
6. ENABLING PRINCIPLES FOR M-BANKING

6.1 General enabling environment

This report has focused on the policy and regulatory environment for m-banking. Before
developing the requirements in this area further, it is worth acknowledging that there are other
aspects of the broader environment which may have a significant impact on whether m-banking
can or will take off in a particular country.

First, m-banking requires that clients have access to mobile phones; countries where network
coverage and usage is growing strongly are more likely to develop widespread m-banking
applications. The relationship is not linear however: in countries with low levels but rapid rates of
growth, as in much of Africa, network capacity may be overstretched; network operators are often
pre-occupied with voice rollout, and therefore less interested in the addition of complex and
unproven products. The potential for rapid growth may be highest in countries where levels of
usage have already reached critical mass, and where increasing inter-network competition (and
lack of effective retail banking competition in e-payments) creates both the push and the pull to
consider additional product offerings.

Second, m-banking clearly benefits from having a wider pool of informed, literate potential
customers. Greater literacy may speed adoption, and may reduce the risks of abuse. However,
greater literacy is also correlated with other factors which may inhibit take-up: there are more
financially literate, informed customers in developed countries, but these customers also have
more existing options, and less reason to change, than customers in poorer countries with few or
no alternatives.

Third, because of the ongoing need for access to cash, m-banking benefits from the existence of
an accessible existing e-payment infrastructure which allows cash withdrawal. Until e-money
transfers are widely accepted at first, cash out functionality enhances the initial value of an m-
banking offering. If new cash-back networks must be built from scratch, this may take too long.
However, in many countries, even where there are very limited ATM or POS networks, airtime
vendors are widespread: with an existing business relationship to the mobile operator, they may
quickly become agents for encashment if this is allowed. Again, the relationship is non-linear: the
more pervasive the existing infrastructure, the higher its functionality to users, hence the harder it
may be to persuade them to switch to a new payment instrument. Equally, the greater the existing
investment in other acquiring infrastructure, the harder it may be for entrants with new modes of
payment to gain access to this infrastructure, unless it is required by law.

These three factors all suggest that the potential for take-off of m-banking may be highest in
middle or low income markets which have limited safe, accessible e-payment alternatives.
However, predicting take-off in a particular market is inherently uncertain, since it will depend on
particular conditions there. More important for now, is to ask whether the policy and regulatory
soil is fertile enough to enable the startup and development of m-banking models with
transformational potential.

V3.1 41
6.2 Proposed enabling principles

This section lays out six core principles which together may help to create an enabling policy and
regulatory environment for m-banking. These principles define further the basic components
which provide sufficient openness and certainty for the long term development of m-banking. As
such, while they are likely to be necessary, they are not sufficient conditions for take-off. In
addition, the impact of some extends well beyond m-banking alone, to banking more generally.

Several major industry fora, set up by their members to promote mobile payments, have produced
their own blueprints for the development of the sector in the form of White Papers for the Mobile
Payments sector:
• the Mobey Forum, based in Europe and consisting largely of major European banking
61
groups and hardware providers like Nokia ; and
• the Mobile Payment Forum, based in the US and consisting of card associations, First
62
Data (owner of MTO Western Union) and major telcos like Vodafone.
Similarly, in line with the eEurope 2005 policy agenda, the European Commission produced for
discussion a Blue Print on Mobile Payments, which required progress towards interoperability by
63
end 2003. Some of the principles set out in this section—for example, around consumer
protection and competition—are drawn in part from these sources. However, the focus of the
White Papers is more on developing the technical standards necessary for interoperability among
providers. By contrast, the principles enunciated here pertain particularly to developing
economies; are more focused on regulatory issues; and seek to achieve maximum enablement of
transformational m-banking.

There are two tiers to the principles:

• First, those principles necessary for there to be m-banking at all;
• Second, those necessary if m-banking is to be transformational, rather than merely
additive.

The Table below summarizes the principles; and indicates whether each is intended primarily to
address certainty or openness (denoted by a shaded square for primary intent, unshaded as
secondary effect). In the following section, the options and recommended approach to the
implementation of each are explained.

6.2.1 First tier: basic principles

Principle This means: Open- Certain
ness ty
1. There should be sufficient
certainty around
electronic contracting
Electronic signatures must have at least
the same standing as physical signatures
▪
2. Customers should be In general, this requires:

61
Mobey Forum White Paper:
http://www.mobeyforum.org/public/material/Mobey%20Forum%20White%20Paper%20on%20Mobile%20Financial%20Serv
ices%20v1_14.pdf
62
Mobile Payment Forum White Paper: http://www.mobilepaymentforum.org/pdfs/mpf_whitepaper.pdf
63
http://mellonrd.com/blueprint/Docs/A-Blueprint%20Mobile%20Payments%20(Version%201.1).pdf

V3.1 42
 adequately protected -- clear disclosure at account opening
against fraud and abuse and at time of transaction
--placing liability on providers for
▪
unauthorized transactions on certain
conditions
-- providers to have a clear, simple and
fast complaint/ dispute resolution
process
3. Interoperability should M-payment platform established by a
be encouraged, through mobile provider should be open to other
ensuring that providers account holders within agreed time; fair
have access payment
platforms and that
basis is established for new entrants to
use existing payments infrastructure
▪
consumers are able to
switch financial Cell number portability should be
providers required in a reasonable timeframe

6.2.2 Second tier: Transformational principles

4. Account opening CDD CDD/KYC procedures should make
procedures should be provision either for:
risk-based, and not (i) Exemptions on small volume/
unduly prejudice remote
account openings by (ii)
value accounts
Adequate guidance provided
▪ ▫
small customers on risk based approaches
5. Customers should be
able at least to make Not prohibiting agent deposit taking or
deposits and withdraw withdrawals; and usually, enabling
cash through agents and
remote points outside of
through appropriate regulations ▪ ▫
bank branches

6. Adequate provision
should be made for the Introduce appropriate E-money
issuance of e-money by regulations which provide clear
appropriately
capitalized and
definition and allow and supervise non-
bank issuance according to risk level
▪
supervised entities
which are not
necessarily banks

6.3 Approaches to implementing the principles

This section sets out options for implementing each principle and, where appropriate and possible
at this level of generality, makes recommendations.

V3.1 43
6.3.1 Principle 1. There should be sufficient legal certainty around the status
of electronic contracting
This principle can be fully effected only through the passage of suitable legislation which
provides the necessary clarity.

Fortunately, there are clear examples of laws which adequately address this principle. The United
Nations General Assembly Resolution 56/80 adopted the United Nations Commission on Internal
Trade Law (UNCITRAL) Model Law on Electronic Signatures in 2002. However, only three
countries have adopted the Model Law: Thailand, Mexico, and China. Electronic signature
legislation has also been drafted or adopted in several Latin American countries, including
Argentina, Colombia, Chile, Ecuador, and Peru. In Africa, Egypt is the only country other than
South Africa to have drafted electronic signature legislation.64

6.3.2 Principle 2. Customers should be adequately protected against fraud and

abuse
Figure 8 below represents the typical spectrum of approaches to consumer protection. As one
moves from left to right, the extent of regulatory involvement increases. Hence, on the left, a
minimalist position would require adequate disclosure of terms and fees, and leave the buyer to
beware. On the opposite extreme, regulators may closely regulate the way in which a product is
marketed, sold and supported. This may include prescribing (or limiting) the words of
advertisement; and requiring that provider staff have minimum training or experience.

Neither extreme approach seems suitable in most developing countries: disclosure alone is not
adequate to protect large numbers of first time Consumers of a product who do not understand it;
and the prescriptive regulations will likely discourage innovation in product offerings, while
probably proving unenforceable.

Figure 8: Consumer protection spectrum

B. Cover downside
A. Minimalist: (i) Liability limits
Disclosure + (ii) Resolution C. Prescriptive
caveat emptor procedure Prescribe process
or outcome

Certain regimes arguably take a middle ground approach: in the US, the Electronic Funds
65
Transfer Act and accompanying Regulation E ; and in the EU, the proposed Payments

64
See website of law firm McBride, Baker & Coles http://www.mbc.com/ecommerce/ecommerce.asp
65
Regulation E, http://www.federalreserve.gov/regulations/default.htm#e

V3.1 44
 66
Directive. In addition to requiring appropriate disclosure, there are two key features in these
approaches which provide a basis for better consumer protection:
• A legal limit is set for the maximum liability of the customer in the case of unauthorized
transactions: in the US, this is $50 or $500, depending on when the consumer notifies the
bank of the unauthorized transaction; and €150 in the proposed EU law. This approach
caps the loss to a consumer, and places greater responsibility on the provider to have in
place adequate safeguards to manage its own liability. Since most are large entities like
banks, this is a reasonable balance of responsibility.
• A procedure is created for the rapid resolution of complaints or disputes between client
and provider, so that recourse to a court system is avoided. Timelines are established in
terms of which the provider must respond: for example, within ten working days of
receipt of a complaint in the US.

As with other principles, the full protective framework is not necessary in the early stages of a
market, but it is helpful for providers to have a sense of which type of regime policy makers are
likely to adopt as market scale increases.

Even though legislated and regulated consumer protection may be unnecessary and even
unhelpful early on, providers may agree appropriate principles of consumer practice. Regulators
could encourage such moves; and endorse an appropriate list. In most cases, at least the two
issues highlighted above should be addressed, namely the limited liability of the customer; and a
timely, fair dispute resolution mechanism.

Early self-regulation may help to promote customer trust in m-banking. The principles may over
time be amended to allow for market evolution and eventually, become codified. While voluntary
codes of practice may be sufficient in the early stages of market development, they will not be
sufficient to discipline or stop reckless operators who do not subscribe. Less reputable providers
may enter an industry which has benefited from establishing an early trusted reputation and
67
undermine it. Therefore, at some stage, probably during or after the breakout phase when new
providers are attracted to the market, legislation or regulations will be necessary which compels
adherence to a common standard.

6.3.3 Principle 3. Regulators should encourage inter-operability, through

ensuring (i) providers have access to payment systems and (ii) consumers
are able to switch financial providers
There is limited precedent to date of competition authorities applying general principles like these
to the mobile payment environment, although there are increasing cases of regulatory attention to
potential anti-competitive practices in the payment sector, especially the card payment
associations.

One notable case is that of Movilpago, now Mobipay. Mobipay was originally a joint venture
between Spain’s largest telco, Telefonica, and large bank BBVA, to create a mobile payments
platform. Required to approve the inception of the proposed joint venture, the Spanish
Competition Authority (SDC) considered “that m-payments affected not only the market for e-
payments, into which there was relatively free entry, but also the market for mobile telephony,

66
Available via http://europa.eu.int/comm/internal_market/payments/framework/index_en.htm
67
For a general discussion of a balanced approach to consumer protection, including industry codes, see for example
Porteous & Helms, “Protecting Microfinance Borrowers”, CGAP Focus Note No.27

V3.1 45
where there are important barriers to entry. The barriers to entry can come from a combination of:
large subscriber bases, large capital bases, large established distribution networks, no open
standards and patents on technology. The SDC considered that a unified and widely used m-
68
payment system is in the interests of the consumer.”

Because of concerns that the JV could raise barriers to entry, the SDC approved the joint venture
on the basis that:
• other mobile operators must be allowed to participate;
• it must be technically possible to use the system with any mobile operator and any financial
institution;
• contracts with the m-payments provider may not limit customers in their freedom to choose
other operators or financial service providers; and
• interchange fees must be approved by the SDC.

This finding resulted in delay in the launch of Movilpago (now Mobipay) until 2002 as the
decisions were implemented. In August 2004, Mobipay was still lamenting that “it has not caught
on as a popular means of payment” although it was then live in 3000 stores and 2500 taxis in
Spain. Mobipay International, wholly owned by BBVA, is being taken to Mexico & North Africa
in 2005.

Movilpago is therefore an example where competition authorities enforced the implementation of

inter-operability early on. This may be unnecessary or even undesirable in countries with fewer
existing systems or providers with which to inter-operate. However, it may be important to
enshrine the principle of inter-operability upfront; and for regulators to have the power, in terms
of payments legislation, to require it when necesary.

The EU proposed Payments Directive, not yet in force, moves in this direction by stating:
“Payments systems may not impose…
• a ban on participation in other payments systems;
• a rule which discriminates between authorized service providers,
69
• any restriction based on institutional status.”

Where other retail payment systems exist, payment regulators and/or competition regulators need
to consider carefully the basis under which they allow access to new players; and the extent to
which this basis promotes or restricts the desired market development trajectory.

Where such systems do not yet exist, the role of regulators is more to monitor the emergence of
models or product which may in future unfairly lock out other entrants or lock in customers.

6.3.4 Principle 4. Account opening CDD procedures should be risk-based, and

not unduly prejudice account remote account openings by small
customers
A risk-based approach to customer due diligence is clearly preferable to one with inflexible and
inappropriate rules. However, as argued earlier in Section 4, in the absence of clear guidance, a

68
Krueger 2001; the full SDC ruling is available in Spanish via http://www.tdcompetencia.es/frames.asp?menu=9
69
Article 23

V3.1 46
risk-based approach may leave too much uncertainty for providers, who will adopt a conservative
approach to CDD in response. In order for this issue not to block transformational models,
regulators must either create a clear exemption from the usual CDD requirements for a defined
category of low risk accounts, or provide (or encourage) suitable guidance to be developed.

6.3.4.1 CDD exemptions for small value accounts

Several countries have exempted small value accounts of individuals from all or some of the
usual CDD requirements. Small value is defined relative to a maximum transaction volume and
account balance, as shown in the table below.

Enforcing these limits requires that the systems of the financial institutions monitor the limits and
freeze accounts of individuals which exceed the limits, until they come into complete the standard
CDD procedure. FATF has criticized some exemptions as creating vulnerability, since small size
alone may not reduce to the risk that terrorism is being financed.
.
Table 6: AML/CFT Small account exemptions
Country What is exempt Maximum Maximum Source
turnover balance
India Annual credits to $1250 Letter to banks
account: $2500 25 Jan 2006
Philippines G-cash: $720 G-Cash: $180 By special
Smart: $950 agreement with
Central Bank
South Africa Address $900 daily $4167 FICA, exemption
verification $4167 monthly 17a revised
EU Usual CDD $2500 per $150 EC
waived on e- annum Directive2005/60;
money and Article 11(d);
products or 40(d)
transactions
deemed low risk

6.3.4.2 Guidance for Risk based CDD

While industry bodies may develop their own guidance, as in the UK, it may be necessary for
regulators in developing countries to initiate this process; or even issue guidance themselves. For
example, the former approach has been adopted in South Africa, allowing banks to develop their
own risk-basis for the re-identification of existing clients. In the guidance note setting this out, an
example was given of a simple risk matrix, in which account of natural persons were given low
risk weighting.70

6.3.5 Principle 5: Customers should at least be able to make deposits and

withdraw cash through agents and remote points outside of bank
branches
Where banks are prohibited from appointing agent for deposit taking, this prohibition should be
revoked in favor of an enabling framework which regulates the bank-agent relationship
appropriately. Where there is no prohibition, banks could proceed to experiment with such

70
Available via www.fic.gov.za under Documents, Guidance Note Concerning Identification of clients

V3.1 47
relationships on a commercial basis. However, they may be reluctant to do so without a clarity
from the regulators. In addition, if agency relationships become as pervasive as in Brazil,
regulators may require powers of greater oversight of agents than existing law gives to them.

Therefore, in either case, it is recommended that specific regulations or guidance be promulgated

to address the creation of bank agency relationships for withdrawals and deposit at least. BIS
71
Outsourcing Principles (2005) provide general guidance on material outsourcing arrangements,
but do not address specifically the issue of agency for cash back or deposits. However, the
principles do require that regulators take into account outsourcing activities as an integral part of
their ongoing assessment of the regulated entity, and ensure that any outsourcing arrangements do
not hamper the ability of the regulated entity to meet its regulatory requirements.

Therefore, in line with these principles, enabling regulations would enable the appointment of
agents to handle specific banking functions on specific conditions. These conditions would
include:
• Requiring a written contract between bank and agent which addresses explicitly
identified areas or risk, for example, giving bank supervisors direct access to agent
records where necessary;
• Placing strict responsibility on the bank to ensure that the agent performs all the functions
required by law, such as AML/CFT adherence.

As Kumar et al show, Brazil provides a leading example of the possible effect of suitable
72
enabling regulations. India has recently followed suit with the publication in January 2006 of
guidance which permits the creation of agency relationships for small deposits, as part of an
73
explicit move to increase access to financial services. Note, however, that the passage of
regulations may be necessary but not sufficient for growth in this area: Kumar et al point out that
other regulations, for example, setting high standards of branch security and even labor laws,
helped to make expansion through non-branch agencies more attractive than otherwise to
Brazilian banks.

6.3.6 Principle 6: Adequate provision must be made for the issuance of e-

money by appropriately capitalized and supervised entities which are not
necessarily banks
The ability to issue and transfer e-money is at the heart of emerging m-banking models. Given the
weakness of the retail banking sector in many developing countries, it is important that non-bank
players, in particular telcos with their strong retail brands and established networks, may also be
able to issue e-money. Even if they choose not to, the threat of entry in this form may galvanize a
response from banks.

Earlier sections of this report have shown the different approaches to the regulation of e-money
issuance, for example between the US and Europe. ‘Appropriate provision’ does not necessarily
mean legislation at the outset, therefore; but neither does it mean ignoring the prudential risks of
widespread e-money issuance by non-banks. As already pointed out, these risks may be higher for
entities other than telcos.

71
http://www.bis.org/publ/joint12.htm
72
Available via http://www.bcb.gov.br/?english (Resolution 3.110)
73
http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=2718&Mode=0

V3.1 48
A more appropriate response may be to allow certain non-bank players to issue e-money, perhaps
on prescribed terms which limit the volume and the risk per customer (as the Philippino Central
Bank has agreed with operators there, although apparently more for AML-CFT reasons); and then
monitor the transaction volumes and outstanding balances. This may be possible by a guidance
note, which sets out the conditions on which this will be allowed, including reporting the
necessary data. At a defined trigger levels, there may be a need to move to appropriate prudential
legislation or regulations under an existing framework like the Banks Act.

There are few suitable templates for e-money legislation presently available: the EU Directive,
while best known, was designed in a developed country context; and even there, it has not
succeeded in enabling innovation and growth fully, as the recent review pointed out. There may
therefore be value in encouraging discussions among bank regulators as to the elements of
suitable e-money legislation in developing countries, so that when it is needed, it is available.

V3.1 49
7. CONCLUSION

This report set out to answer two main questions:

• What is happening in m-banking in general and in particular, in the African countries
studied, and is it likely to lead to greater access?
• Will it happen spontaneously or is enablement required for this to happen? If so, what
forms of enablement?

In answer to the first question, the scan of developed and developing countries in Section 3
showed that m-banking has been slower to develop than expected. However, the volume of users
is now reaching critical mass in parts of Asia, like Japan and Korea. The Philippines offers the
most striking demonstration of the potential take up in a developing country. In Africa, m-
banking is now being added on to the services offered to existing customers by a number of retail
banks and this is likely to continue. In addition, there are several innovative models with the
potential to expand access to financial services to customers who are not presently banked; or in
the words used in this report, to be transformational.

However, genuinely transformational models of m-banking are few today; and they face
numerous obstacles. These include the standard uncertainties about the pace and scale of
customer adoption, exacerbated by the fact that low end models require higher volumes of
transactions to be viable. Importantly, the regulatory and policy environment for m-banking is
complex and often ill-defined since it cuts across various regulatory domains. In some countries,
the policy regime may not be sufficiently open to allow a range of models to startup and develop;
and in others, sufficiently certain to encourage the investment necessary. Of the two countries
considered in this report, in which m-banking is still in the early or pioneer stage, South Africa
falls more into the former group (more certain but less open); and Kenya the latter (more open but
less certain).

If m-banking is to realize the potential of massively extending access to safe, convenient and
affordable financial services to those who today lack it, then enablement is likely to be required.
In its absence, m-banking may simply amount to adding another convenient channel for already
banked customers. The consequence will be a market trajectory with much lower ultimate levels
of usage and access, as Figure 9 on the next page shows.

Enablement in the sense proposed here is not only about clearing regulatory space for the entry of
new m-banking models. To be sure, low income countries with limited financial legislation and
regulatory capacity may not need much space to be cleared—entry may be easy there and a
successful model, likely telco driven, may well emerge; but uncertainty will affect the
development of the market, not least by limiting competition over time. This will affect the
pattern of future development. Rather, enablement is about managing the delicate balance
between sufficient openness and sufficient certainty, not least in the mind of customers who must
entrust money to the entity involved, whether bank, telco or other. Applied at the early stages of
market development, enablement means creating conditions favourable to the emergence of
sufficient appropriate models to be tried and to the successful ones being scaled up. Applied at
later stages, enablement means continuing to ensure openness, while increasing certainty for
stable growth.

V3.1 50
Figure 9: Enabled and un-enabled market trajectories for m-banking

Enabled
% of possible consumers

Not enabled

1. 2. 3. 4.

This approach to enablement may seem to demand more of regulators than they can offer,
stretched as they are by many other issues. As the report has shown, developed countries continue
to grapple with defining their appropriate role in this area too. This is why the report has
recommended the set of high level principles as a starting point. They are designed as an
indicative road map through some of the complexity in order even to start the process of enabling
transformational m-banking. Translated into a national setting, and issued or endorsed by policy
makers in consultation with regulators and providers, principles like these could help to pinpoint
the key aspects of openness while creating greater certainty over the possible trajectories of
market development.

The call in this report for the enablement of m-banking markets does create an initial case for
donor support—for example, capacitating regulators to adopt an enabling approach. However,
any such case needs careful exploration and exposition. This will be undertaken in a separate
subsequent document as part of considering strategies to promote transformational m-banking.

V3.1 51
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V3.1 52
Frameworks proposed for m-banking
EU (2003) EU Blueprint on Mobile Payments, V1.1 http://mellonrd.com/blueprint/Docs/A-
Blueprint%20Mobile%20Payments%20(Version%201.1).pdf
Mobey Forum Mobile Financial Services (2003) Mobey Forum White Paper on Mobile Financial
Services (v. 1.1) , available via www.Mobeyforum.org
Mobile Payment Forum (2002) White Paper, available via
http://www.mobilepaymentforum.org/relatedinformation.htm

Principle 1: E-signature
Electronic Signatures in Global and National Commerce Act of 2000 (ESIGN, 15 USC §§7001-
31)
Uniform Electronic Transactions Act of 1999 (UETA)
EU Community Framework for Electronic Signatures Directive 1999/
http://europa.eu.int/scadplus/leg/en/lvb/l24118.htm
RSA Electronic Communications and Transactions Act No. 25, (2002) available via
http://www.acts.co.za/ect_act/electron.htm
UN CITRAL Model Law on electronic signatures:
http://www.uncitral.org/pdf/english/texts/electcom/ml-elecsig-e.pdf

Principle 2: Customer protection

EU (2005) “A New Legal Framework for Payments in the Internal Market” V5.0 Proposed
directive available via
http://europa.eu.int/comm/internal_market/payments/framework/index_en.htm
Federal Reserve Board Regulation E : Electronic Fund Transfers; 15 U.S.C. 1693b;
http://www.federalreserve.gov/regulations/default.htm#e
FFIEC (2005) Authentication in an Internet Banking Environment ,
http://www.ffiec.gov/pdf/authentication_guidance.pdf
Jacob, K (2005) “Retailers as Financial Services Providers: The Potential and Pitfalls of this
Burgeoning Distribution Channel”, CFSI May, available via www.cfsinnovation.com

Security:
Mobey Forum Mobile Financial Services (2001) The preferred Payment Architecture V1.0, via
http://www.mobeyforum.org/
Mobey Forum Mobile Financial Services (2005) Mobile Device Security Element Key Findings
from Technical Analysis V1.0; http://www.mobeyforum.org/
Mobile Payment Forum (2003) Risks and threats Analysis and Security Best Practices: Mobile 2
way messaging systems, Version 1.0, available http://www.mobilepaymentforum.org/

Principle 3: Competition & payment system development

Tribunal de Defensa de la Competencia (Spain) (2000) C59/00 Movilpago, available (in Spanish)
via : http://www.tdcompetencia.es/frames.asp?menu=9
EU Proposed Payments Directive (2005): see via
http://europa.eu.int/comm/internal_market/payments/framework/index_en.htm

Payments systems
CPSS (2001) Core principles for Systemically Important Payment Systems, Publication 43,
January 2001, available from http://www.bis.org/publ/cpss43.htm

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CPSS (2003) Policy issues for central banks in retail payments, Publication No. 52, March 2003,
available from http://www.bis.org/publ/cpss52.htm
CPSS (2006) General guidance for national payment system development; from
http://www.bis.org/publ/cpss70.htm

Principle 4: AML/CFT CDD KYC

BIS (2001) CDD Requirements for Banks: http://www.bis.org/publ/bcbs85.htm
BIS (2003) General guide to account opening and customer identificaton;
http://www.bis.org/publ/bcbs85annex.htm
FATF Forty Recommendations on Money Laundering; available via http://www.fatf-
gafi.org/pages/0,2966,en_32250379_32236920_1_1_1_1_1,00.html
FICA (South Africa) FIC Exemption 17 and guidance notes; available via www.fic.gov.za
FSA (2003) Reducing money laundering risk, DP22, August ,available via
http://www.fsa.gov.uk/Pages/Library/Policy/DP/2003/discussion_22.shtml
Isern, J, D. Porteous, R. Hernandez-Coss & C. Egwuagu (2005) “AML/CFT Regulation:
Implications for Financial Service Providers that Serve Low Income People”, CGAP Focus
Note No.29.; available from http://www.cgap.org/docs/FocusNote_29.html
JMLSG (2005) Prevention of money laundering/ combating the financing of terrorism—
Guidance for the UK Financial Sector”
http://www.jmlsg.org.uk/bba/jsp/polopoly.jsp?d=362&a=3424

Principle 5: Agency deposit taking

Banco Central do Brasil (2003) Resolution 3110 dated 2003; available via
http://www.bcb.gov.br/?english
Basle Committee on Bank Supervision (2005) Outsourcing in financial services, Feb 2005,
available via http://www.bis.org/publ/joint12.htm
Kumar, A, A. Parsons & E. Urdapilleta (2006) “Expanding Bank Outreach through Retail
Partnerships“, World Bank Working Paper 85
Reserve Bank of India (2006) Notification to Commercial Banks dated 25 January 2006;
available via http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=2718&Mode=0

Principle 6: E-money issuance and payment service provision

E-money
CPSS (2004) Survey of e-money and internet and mobile payments, BIS, available via
www.bis.org
Dorn, J (Ed) (1997) Future of Money in the Information Age, Cato Institute: Washington DC
Evaluation Partnership, The (2006) “Evaluation of the E-Money Directive: Final Report”,
Submitted to DG Internal Market, EC, available from
http://europa.eu.int/comm/internal_market/bank/docs/e-money/evaluation_en.pdf
FSA (2003) Electronic Money: Perimeter Guidance, CP 172, downloadable at
http://www.fsa.gov.uk/pubs/cp/cp172.pdf
Krueger, M (2002) “Innovation and Regulation: The Case of E-money regulation in the EU”,
Background Paper no.5, EPSO, available via http://epso.intrasoft.lu/papers/backgrnd-
5.html

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Lauridsen, R (2003) “E-Money in less developed countries: The Case of Tanzania”, Dissertation
submitted to U. Manchester IDPM available via www.financialdeepening.org
SA Reserve Bank (1999) E-money Position Paper NPS 11/99, available via via
http://www.reservebank.co.za/internet/publication.nsf/WCEV/80a58b3dec609e5042256d7
0032fc1f?OpenDocument&AutoFramed
SA Reserve Bank (2006) The National Payment System Framework and Strategy: Vision 2010,
available via
http://www.reservebank.co.za/internet/Publication.nsf/LADV/DAA203A3059201E442257
1570025D8F3/$File/Vision2010.pdf
EU EMI Directive (2000) available via http://europa.eu.int/eur-
lex/lex/LexUriServ/LexUriServ.do?uri=CELEX:32000L0046:EN:HTML

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ANNEX A: PROVIDERS

A1. M-payment/ banking providers participating:

In Africa:
Celpay: www.celpay.com
Vodafone: www.vodafone.com
Safaricom: www.safaricom.co.ke
M-Pesa: see summary report via http://www.financialdeepening.org/default.asp?id=40&ver=1
MTN Mobile Banking: http://www.mtnbanking.co.za/
Wizzit: http://www.wizzit.co.za/

Technology enablers
Paym8: http://www.paym8.co.za/
Fundamo: http://www.fundamo.com/index.asp?pgid=1
Cointel: http://www.cointel.co.za/

A2. Other providers mentioned

In Africa :
Nigeria: Glo Mobile Banking: http://www.gloworld.com/NR/exeres/8C612910-7AA2-4B18-
B031-5701C503B675,frameless.htm?nrmode=Unpublished&wbcmode=AuthoringReedit
Zimbabwe: reference to Kingdom Bank service via Econet:
http://www.econet.co.zw/view_newsflash.aspx?nfid=22

Elsewhere:
Globe G-Cash: http://www.myglobe.com.ph/gcash/
Smart Money: http://www.smart.com.ph/SMART/Value+Added+Services/Smart+Money/
Mobipay: http://www.mobipay.com/en/home.htm

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ANNEX B: GLOSSARY

ACRONYMN WORD
AML/CFT AntiMoney Laundering/ Combating Financing of Terrorism
authentication: process of verifying the identity of a person or entity
ATM Automated teller Machine
BIS Bank for International Settlements
CDD Customer Due Diligence
CPSS Committee on Payment and Settlement Systems (at BIS)
EU European Union
GSM Global System for Mobile comms, most popular 2-G standard
KYC Know your customer
MS ISDN Mobile station ISDN
NPS National Payment System
pre-paid Mobile phone contract paid by purchase of airtime in advance
post-paid Mobile phone contract paid on presentation of invoice
PDA Personal Digital assistant
POS Point of sale
PRS Premium Rate Services
RFID Radio Frequency Identification
SA South Africa
SMS Short Message service (sometimes referred to as texting)
STK SIM Toolkit
UPU Universal Postal Union, Geneva
USSD Unstructured supplementary services data
VAS Value added service (similar to PRS)
WAP Wireless Applications Protocol
WIG Wireless Internet Gateway

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