Basic Principles and Key Issues in Creating

an Enabling Environment for DFS

0Mohammad Moniruzzaman, 2009 CGAP Photo Contest

Proportionality Proportionate regulation maximizes the net-benefit of regulation

Benefits Costs

1

This is best to be

achieved following a risk-

based approach that

allows for rationalizing the

use of scarce supervisory

resources by focusing on

issues posing the highest

risk to the achievement of

the regulatory objectives

of inclusion, stability,

protection, and integrity

(I-SIP)

“Basic regulatory enablers” in digital financial services

Broad consensus about short list of most critical topics

1. E-money issuance

2. Agents

3. AML/CFT

4. Competition

5. Consumer protection

2

Nonbank players permitted?

Bank and nonbank agents?

Tiered, risk-based KYC structures?

Different types of institutions?

Tailored to specific risks?

Main issues

Regulating Nonbank E-Money

Issuers3Md Farhad Rahman, 2013 CGAP Photo Contest

Basic enabler #1: Regulations permitting and governing e-money

4

India - yes

No nonbank e-money

issuance, but:

• Prepaid Payments

Instrument Issuers

(Restrictions on cash-

out/requirements to

partner with banks)

• Soon: Payments banks

Pakistan - no

The PSEFT Act provides for e-

money institutions to be

authorized by SBP, but if it’s

not used in practice (similar in

Bangladesh). Different types

of banks can issue stored

value accounts and MNOs

have been permitted to own

banks

Bangladesh - no

Not really, but –

• bKash very much operates

like a nonbank e-money

issuer

Rwanda - yes

E-money issuer defined in

PSP regulations, but same

rules apply as for PSPs

except for trust account rules

Uganda - yes

Mobile money service providers

(MNOs and other nonbanks) can

offer e-money services, but in

partnership with banks as the

entity receiving the regulator’s no

objection

What do we want to see and how do we get there?

Nonbanks or limited purpose banks can issue e-money / stored value accounts / small savings accounts

Sufficient fundsafeguarding and fund isolation rules

Not subject to full range of prudential regulations applied to financial intermediaries

Appropriate e-money regulation

National Payment System Law or clear authority in another law to regulate payment system

Implementing regulations governing the issuance of e-money by nonbanks (and banks?)

Alternatively: Limited purpose banks (“differentiated banks”, niche banks)

Typical steps

required to get there

5

6GMB Akash, 2011 CGAP Photo Contest

Regulating bank and

nonbank agents

Two important issues to address in agent regulations

How to ensure level playing field

between bank and nonbank agents?

Who can be an agent?

• No material difference between

bank and nonbank agents’

regulatory treatment (but bank

agents might be permitted to do

more)

• Best achieved by single regulation

covering both types of agents or by

identical regulations applying to

both types

• Otherwise risk of regulatory

arbitrage and contradictory

treatment of shared agents

• Liability of the provider core

element of both agent types

• Set minimum standards without

unnecessarily circumscribing

growth potential

• Business registration?

• Length of operations?

• Credit history?

• Criminal record?

• Avoid geographic restrictions or

barring certain legal entities from

operating as agents

• Allow for tiered agent structure and

use of agent network managers

7

8

India - yes

Have had agent rules for a

long time (since 2006), but

restrictions were only lifted

over time

Kenya, Tanzania, Bangladesh - yes

Different rules for bank and nonbank

agents potentially leading to level

playing field issues

Uganda - no

Only for nonbanks (MFSPs),

but not permitted for banks

Additional issues to

consider

Agent exclusivity and tiered

agent structure

Myanmar - yes

Mobile Banking Directive

permits agents, but lacks

clarity (e.g. on exclusivity,

tiered agent structure)

Basic enabler #2: Regulations permitting and governing the use

of agents by banks and nonbanks

What do we want to see and how do we get there?

Use of agents permitted by range of relevant providers

Provider liability clearly stated

Preferably other relevant elements clearly prescribed

Appropriateagent

regulations First step is to permit agents (Uganda example for what happens if not) and to establish general principal agent principles

Second step is to define clear rules

Other relevant issues: (i) exclusivity; (ii) level playing field for different types of agents; (iii) tiered agent structure; (iv) use of prefunded accounts; etc.

Typical steps

required to get there

9

KYC Regulation

10Bir Azam, 2013 CGAP Photo Contest

Basic enabler #3: Tiered, risk-based KYC structures

11

Pakistan - yes

Separate KYC rules for

branchless banking, while in

most other countries existing

rules for banks apply mutatis

mutandis

Bangladesh - yes

Central bank-issued rules vs.

general rules under AML Law: One

can be better at defining

proportionality than the other, but

AML Law generally prevails

India and Pakistan - yes

e-KYC allows customers to

open accounts at agents (and

in Pakistan even on the phone

with biometrically verified

SIMs)

Kenya - yes

Coverage of ID and

accessibility of database: if

good, even low risk accounts

can make use of official ID

and the need for alternative

forms of identification for low

risk accounts is less important

Rwanda - no

Not clear whether PSPs (and

thus EMIs) fall under definition

of “reporting entity” in the AML

Law

General risk factors Cash Digital financial services

Before Controls After

Anonymity *** **Customer profile building, includes

registration info (name, unique phone

number etc.)*

Elusiveness *** **Limits on amount, balance, frequency and

number of transactions

Real time monitoring*

Rapidity * ***

Real time monitoring

Frequency restrictions on transactions

Restrictions on transactions amount and total

account turnover in a given period

*

Lack of oversight *** * *

Indication of risk:

*** Highly prevalent

** Somewhat prevalent

* Low

KYC requirements limit risks associated with anonymity and lack of

oversights and puts restrictions on elusiveness and rapidity

12

What do we want to see and how do we get there?

Simplified CDD for low risk accounts

The extent to which KYC/CDD is a problem strongly depends on the quality of the ID system

Biometric verification of SIMs can be a game changer

Risk-based KYC rules

Ideally the AML law provides room for simplified CDD

The question of how simplificationwill look like strongly depends on quality of ID system

Pakistan as example that pricingcan also play important role

Typical steps

required to get there

13

Consumer protection

regulation in DFS14Sumon Yusuf, 2013 CGAP Photo Contest

The same three core objectives in consumer protection apply to DFS

Three core objectives

TRANSPARENCY

Disclosure requirements:

• Product pricing, terms

and conditions

• Plain language, simple

(and possibly

standardized) formats

• Whether customer can

seek recourse and how

• Required display at

agent premises

FAIR TREATMENT• Provider liable for agent

conduct in transaction

• Allowable charges by

agents

• Data privacy and security

• Fraud prevention/

detection, incl. receipts

• Protection of customer

funds

EFFECTIVE RECOURSE• Require providers to offer

internal dispute resolution

– regulation sets standards

• Workable for low-income

and inexperienced

consumers (e.g.,

accessibility, cost, literacy

factors)

• Complaints/resolution data

valuable to regulators for

market monitoring

15

What do we want to see and how do we get there?

Consumer protection rules specific to the provision of digital financial services

This could be part of a broad FCP regime or something specific for agents / e-money / digital credit etc.

Appropriate consumer protection regulation Broad authority in

law (increasingly under stand-alone FCP law)

Rules tailored to the specific consumerprotection risks in DFS

Typical steps

required to get there

16

Some broad lessons from CGAP work on creating enabling

environment for DFS

• Takes time (often two steps forward, one step back)

• Important to build

trust with regulators

and industry

• Requires good under-

standing of local

market

• Draw on deep

expertise and global

knowledge of basic

enablers

17

Emerging regulation issues

• Competition and market conduct

• New services like digital credit

• Telecom related issues: USSD access and

pricing, open API

• Payment systems integration and

interoperability

• Supervision of digital financial services

18

شكرا ً

Thank You

19

It is important to draw clear lines between payment,

e-money, and deposit

Payment Electronic money Deposit

Definition

Who can issue?

Prudential

requirements

Deposit insurance

Transfer between two parties; Time

restricted (e.g. within T+3)

Special type of repayable funds with transaction

focus

“Repayable funds”, intermediation

Payment Service Providers

E-Money Institutions; regulated financial

institutions

Regulated financial

institutions

Low Medium High

NA In most cases not Typically yes

Fund safeguarding and fund isolation

are two key regulatory provisions

Fund safeguarding

Maintain liquid assets equivalent to e-float

Restrictions on use of funds

Diversification of e-float fund holdings

Fund isolation

Ownership of funds

Trust account/escrow account

Issuer failure: hierarchy of claims

Transaction limits constitute additional

risk mitigation measures

Maximum transaction values

Maximum value of individual transaction

Maximum monthly/periodic load

Maximum holdings

Use tiered accounts with varying levels of KYC

“Emerging regulatory enablers” in DFS

Paying interest to e-money holders

Typically not permitted in order to differentiate from

banking

Could be “pass through” of interest on pooled

account

Bringing e-money accounts under deposit insurance

Coverage limits too low or e-money excluded from

coverage

Pooled accounts in insured institutions can

provide coverage for each customer

Source: Banxico Circular 2019/95 as modified by Circular 14/2011

Level 1 Level 2(1,114 USD)

Level 3(3,715 USD)

Level 4Traditional bankaccount (no limit)

Max amount in monthlytransactions

US$ 280 + max balance of US$ 370

US$1,110 US$3,700 No limit

Customer information required to open account

NoneBasic Information(Name, Address,

Gender)Full customer information required

Documentation N.A. No paper copy requiredPaper copy

required

Customer present at opening

No

No (but bank has theoption to request

it)

Yes Yes

Access pointOnly debit card.

No mobileMobile, card, bank

transferMobile, card, bank

transfersThe same plus

cheques

Tiered account structureThe example of Mexico

24

Using biometrically verified SIMs for account openingThe case of Pakistan

439 665 929 1,060

1,447 1,761

2,112 2,399

2,643 2,966

3,475 3,832

4,238 4,713

5,415

7,538

10,881

13,192

15,322

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Branchless Banking Accounts

(in thousands)