Evolution of Mobile Banking Regulations

Arvind Ashta1

Burgundy School of Business (Groupe ESC Dijon-Bourgogne), CEREN, CERMi

29 rue Sambin, 21000 Dijon

France

Abstract

Legislation takes place slowly and incrementally, much like evolution. Ideas in one field get

transferred to others. New innovations create new mutations and new fusions take place with

apparently dissimilar partners creating a need for other adaptations. Such a fusion is now

occurring between the banking industry and the telecommunication industry, creating a

concept called mobile banking, which would enable transaction cost reduction and increase in

outreach to enable poor unbanked people to access micro financial services. This fusion is

necessitating a change in the regulatory institutional environment to accommodate and adapt

to this fusion. This paper studies the evolution of the mobile banking regulations in five zones

(Kenya, South Africa, Philippines, India and European Union) in different stages of economic

development and offers possible reasons for such differing evolutions. The reasons are

couched in terms of loss aversion of regulators of developed economies and the spread of

regulations internationally, by imitation, to nurture an enabling environment to permit

innovation to succeed. Future research directions are also indicated.

Keywords: microfinance, telecommunications, evolutionary economics, regulation,

institutions, loss aversion,

JEL : E4, E5, G21, G29, K00, K2, D72

1 My thanks to Banque Populaire for financing the Microfinace Chair of the Burgundy School of Business. This

paper was presented at the Journe de recherch CEREN-CERMi on 18th March 2010 and I would like to thank Claude Gnos, Jean-Michel Servet, Marek Hudon and Christine Sinapi for helping us further deal with these comments. I would like to specially thank Martina Rani Kopala of Vignana Jyothi Institute of Management, Hyderabad, India for her encouragement and company in the initial stages of this research and understand her decision to withdraw from this owing to many other commitments.

Evolution of Mobile Banking Regulations

INTRODUCTION: Microfinance boosted by Mobile Banking

Evolution takes place slowly and incrementally. Ideas in one field get transferred to others.

Unmet needs lead to new inventions and innovations and these create new economic

relationships. New mutations and new fusions take place with apparently dissimilar partners

creating a need for other institutional adaptations. Such a fusion is now occurring between the

banking industry and the telecommunication industry, creating a concept called mobile

banking. This sector is being constrained by the slower development of regulatory framework

owing to conservatism and loss aversion.

One such unmet need was the inability of banking services to poor people, which led, first to

the development of microfinance (Yunus 2003; Armendariz and Morduch 2005).

Microfinance is the provision of financial services (savings, credit, payment mechanisms) to

poor people. This microfinance sector has been growing at 30% per annum over the last few

decades and has become a possible source of hope to drive out poverty, combined with many

other governmental and NGO actions. However, the sector has touched less than 200 million

people, (at best 1 billion people considering a family size of five). There are probably 4

billion unbanked2 people in the world and the others are still waiting for microfinance to

arrive to their doors. A second area of concern is that the small transaction size entails high

proportional costs to the poor (Shankar 2007; Ashta 2009). For example, worldwide

microcredit rates were as high as 28% in 2006 (Rosenberg et al. 2009). It is hoped that

technology will help to increase outreach as well as reduce operating costs (Ashta In Press).

One such technology is mobile banking (Bhavnani et al. 2008).

There are an estimated 4 billion people with mobile telephones. Of these, 2 billion are

unbanked. It is expected that mobile banking could drive down the cost of delivering financial

services to these people. For the poor, savings have a huge impact because they provide

2 The unbanked are people without formal bank accounts who operate in a cash economy; they are

limited in their ability to take out loans, maintain savings, or make remote payments, and these

constraints can inhibit their economic opportunities Mas I (2008) Realizing the Potential of Branchless

Banking: Challenges Ahead. In: Focus Note 50. Consultancy Group to Assist the Poor (CGAP),

Washington, D.C..

interest income, consumption smoothening and also constitute a less risky alternative than

borrowing to financing asset-building activities (Dowla and Alamgir 2003).

Governments may also be interested in developing mobile payments as a stakeholder in

Government to consumer payments of minimum social security which a lot of developing

countries have introduced in the last decade (Pickens et al. 2009). Mobile payment facilities

would considerably reduce the costs compared to dispensing cash for such transfers, including

time spent by poor people in travelling to the payment point, queuing, cash dispensing,

identity checks at the time of each payment, record keeping and fraud. In addition, there

would be no need for overhead expenses in creating payment points and staffing them.

Mobile banking has already started in a number of countries(Lyman et al. 2008). The

forerunners have been Kenya, Philippines, South Africa and India. Two different models

seem to be emerging. One is the bank led model and the other is a telecom led model.

Essentially, in the former, the bank is the mobile banker and the platform. In this model, the

telecom is just an agent of the bank. However, in the telecom-led model, the value is stored

directly with the telecom operator. Although the telecom may be required to store aggregate

value with a bank to respect prudential norms, the last mile connection belongs to the

operator. Thus, both banks and telecoms are lobbying in different countries to be the leaders

in mobile banking, in order to capture the client base.

As indicated in the table below, South Africa and India have opted for a bank led model,

whereas, Kenya has a telecom led model. In Philippines, we see the coexistence of bank led

and telecom led models. Bank led models have emerged in Kenya also. Since Telecoms

cannot accept deposits and pay interest, they can informally offer only prepaid stored value

features which permit making transfers and payments (Mas and Rotman 2008). As indicted

earlier, savings channels are very important to poor people, even if they do not provide

interest, because they permit consumption smoothening, future investment and increased

security (than the mattress). Thus, secure stored value accounts of telecom operators are

snatched up .

Operator Country Model (led

by)

Service

MPesa Kenya Telecom Stored Value

GCASH Philippines Telecom Stored Value

SMART Philippines Bank Deposit Account at

Bank

Wizzit South

Africa

Bank Deposit Account at

Bank

SBI/ ICICI

(different

banks)

India Bank Deposit Account at

Bank

As technology changes and a new economic activity evolves, in different models depending

on country environments, different legislative accommodation and adaption responses take

place. The study of economics as an evolutionary science probably started with Veblen

(Veblen 1898) and today there are many different streams of evolutionary economics such as

Universal Darwinism, Schumpetarian, neo-Schumpetarians and Naturalistic approaches (Witt

2008). "Evolutionary theories of institutional change try to capture the idea that there is a

diversity of potential and actual institutions, which allows for their selection. Moreover, new

institutions arise, often unplanned, through innovation, regrouping of individuals, or

integration of different levels or scales of human organization (local to international). Often

this happens in response to changes in other areas of the economy or even the environment"

(Van Den Bergh and Stagl 2003). Evolutionary economists propose a two way interaction

between technologies and institutions (Pelikan 2003). In this paper, we look at one technology

and one aspect of institutions (regulation).

We contend that the slow pace of technological diffusion is constrained by enabling

legislation and that this is related to loss aversion (Kahneman and Tversky 1979). Loss aversion is

a dislike for downside risk, especially pronounced if it means losing money. In prospect theory,

people become risk seeking in loss making situations (Kahneman and Tversky 1979). Since then, a

number of studies have incorporated the concept of loss aversion in decision making (Rivers and

Arvai 2007), in marketing (Hardie et al. 1993; Genesove and Mayer 2001), in portfolio management

(Haigh and List 2005), in forecasting (Kermer et al. 2006), in risk (Quattlebaum 1988; Thaler et al.

1997; Rivers and Arvai 2007), in employment (Dickinson and Oaxaca 2009) and other areas. Closer to

our domain, the loss aversion concept of prospect theory has been used to explain government

behavior: why do superpowers prefer to have continued risky military interventions in the periphery

(Taliaferro 2004). In this paper, we extend these loss aversion explanation of government behavior

to legislation.

The competition of the two mobile banking models raises the questions of what regulation

permits and enables each model and how legislation has evolved in these countries. These are

the central questions treated in this paper. In this paper, we first provide a background to the

different risks inherent in mobile banking and conventional ways to treat them through

regulation. We then examine the recent changes in banking regulations in these four countries

to study the similarities and differences and to see if we can link the evolution in regulation to

the mobile banking model opted by the country. We provide a few directions for future

research directions before concluding.

BACKGROUND: Risks in Mobile Banking

The purpose of regulation is to reduce risk. This could be by reducing conflicts between the

different parties involved and reducing the risk of failure of the parties. The risks which are

inherent in mobile banking are those inherited from both banking and from telephoning, as

well as new risks unique to mobile banking. We will first overview the risks inherent in

banking and telecommunication and the normal banking regulations and telecom regulations

which are introduced to overcome these, before examining new risks introduced by mobile

banking.

Risks related to banking

Banking has developed over many centuries and therefore a good deal is known about the

risks involved, even though recurrent financial crisis may suggest that either regulations or

observance is inappropriate. We could separate the risks inherent in banking as risks for the

bank, the risks for its clients and the risk for the economy. The risks for the parties are often a

function of who is giving the cash. In lending money, the bank is taking the risk; in depositing

money, the client is taking the risk.

There is a vast literature on banking risks: the banker's risks include credit risks, liquidity

risks, solvability risk, operational risks, interest rate risks, foreign exchange risks and

reputation risks (Godlewski 2005; Irina and Irina-Stefana 2008). The credit risk is related to

loans and is the possibility or probability of non-repayment by the client/ counterparty and

concerns adverse selection as well as moral hazard. The liquidity risk is introduced by the fact

that banks have used depositor's money to lend money. If the depositors all come back on the

same day to withdraw the money, the bank would not have the means to honor its

commitments and would go bankrupt. The operational risk is the risk of losses from

operations owing to drastic increases in costs or falls in revenues as a result of inadequate or

failed internal processes, people and systems or from external events (Sathye 2005)

The interest rate risk is related to loans and interest bearing deposit accounts. An example of

such a risk is that the bank lends to a customer at a certain rate and thereafter the rates of

interest for the economy increase. The bank would therefore have made, at least, an

opportunity loss. In international transactions, interest rate risk is compounded by fluctuations

in foreign exchange rates since the loan is taken in one currency and repayments may have to

be translated back to that currency and because governments may not allow transfers

(Wetmore and Brick 1994; Staikouras 2005). There are also broader risks for the bank related

to its governance and its reputation.

The banking risks that the client may face include perceived moral hazard as well as fraud.

Moral hazard, in this case, would be the risk that the bank goes bankrupt or does not have

enough liquidity. Thus, if a depositor wants to withdraw cash, it is the risk that the bank or the

particular branch does not have adequate cash. This may be either because the bank's reserve

is inadequate or because the bank does not want to keep cash in many different outlets

because of risk of theft or because of the costs of idle cash lying around. In any case, the

result for the depositor is the same. A second risk is an identity risk: what if someone else

withdraws the money in his name and the bank gives that money to the person?

The risks to the economy in general are resulting from the money creation function as well as

the money distribution function. The former risk is because by giving credit, the bank is

creating money and this adds to the money supply and can create inflation. The distribution

risk is that the bank may be a conduit for laundering money from illicit activities or that it

may be used to finance terrorist activities. The Financial Action Task Force (FATF) sets

international AML/CFT standards and oversees compliance monitoring. It calls for national-level

regulatory regimes to require that adequate customer due diligence (CDD) be undertaken on all new

accounts. CDD is also known as You're your Customer (KYC) norms (Isern and Koker 2009).

To overcome banking risks to bankers as well as the economy, governments put in force

regulations such as Minimum capital requirements, governance requirements, capital

adequacy norms, Reserve and liquidity norms, licenses, benchmarks for asset quality, anti-

money laundering laws, laws combating terrorism and limitations on risk exposure and insider

lending. The bank's internal governance procedure also requires identity checks. These are

reinforced with reporting requirements, sanctions and corrective actions, deposit insurance

schemes and institutional overview and off-site surveillance.

Risks Related to Telecommunications

The risks related to telecommunications could also, similarly, be divided into three categories:

risk for the telecom operator, risks for telephone users and risks for the system.

The telecom industry is notable for the high fixed costs of entry. The biggest fixed cost is

laying down telephone wires. The development of mobile phones has helped get over this

huge cost. Nevertheless, there are still costs of relaying towers or satellite connections, as well

as all the software required, which can be major investments. Second, as in any high

technology field, the risks of obsolescence can be very high. At the same time, to succeed, a

large outreach is required. The returns to networks are a power function and each new

customer adds considerably to the value of the network.

For customers, the risks associated with telephoning can be labeled as interoperability issues,

lock-in clauses, identification or billing costs and privacy costs. Interoperability, the basis for

sharing is a key consideration of any networked business. Once the customers have an account, they

will want to use it for many types of payments. The value to customers of joining the network depends

on how many of their friends, business counter parties, agents are connected to the network. Hence

interoperability of mobile banking service provider should be a equalizer. Interoperability is

required for Terminal equipment, Transaction switching, Interbank clearing and Interbank settlement

(Lyman et al. 2008). Interoperability issues arise if the user's telecom only allows users to

contact users in the same network or limited networks who have an agreement with the

telecom on a bilateral basis. Lock-in clauses mean that it is costly for unsatisfied customers to

exit for some predetermined period of time. Identification costs are based on the need for

billing to ensure that one does not get billed for calls that one does not make and that the call

duration is reported correctly and that all discounts offered have been incorporated in the bill.

Privacy issues mean that it should not be possible for others to listen in to the conversation

and that nobody should have access to statistics on who is calling whom. This kind of data is

very useful to marketers who would like to target specific persons to call.

Systematic risks are those which can impact the whole economy. This could be the high cost

of allowing multiple operators to enter, in which case all of them have high entry costs, no

one reaches break-even and most are forced to exit. The economy pays a high price. A second

systematic risk is if the telecom network is being used by people to organize terrorism.

Thanks to telecommunications, terrorists do not need to physically meet. This means that it is

more difficult to identify them and catch them. Police officials usually demand access to data

on who suspected terrorists are calling on their phones. Therefore, there is some conflict

between privacy and public interest needs.

Telecommunication regulations usually provide strict guidelines on interoperability, universal

operators who provide common services, identification and privacy issues. A certain amount

of encrypting may be required to ensure confidentiality of SMS messages.

New risks introduced by Mobile Banking

Mobile banking has all the above risks, both of banking and telecommunications. However,

putting the two together upscales some of the risks and adds new dimensions of fears. Mobile

banking is not the first technological innovation in banking. Internet transaction banking, a

recent application, had led to fears that it would increase operational risk, but this was not

justified (Sathye 2005). However, the mobile telephone aspect may create different problems,

especially if it is not bank controlled. It is appropriate therefore to examine these risks and

fears.

First, banks are regulated by the Central Bank who is in charge of monetary policy including

money creation. In classical economic terms (MV=PT), mobile banking speeds up the

velocity of money (V increases) and this would lead to inflation (P increases), if the supply of

money (M) and the effective demand (T) remains the same. However, many more transactions

can take place since people have funds faster. Therefore, both the velocity of money (V) and

the number of real transactions (T) work faster and both the total money supply (MV) and

total demand increase simultaneously (PT). While this can usher in growth in Transactions

(T) as assumed above, but it may also lead to inflation (P) if there is full employment and full

capacity (conditions which seldom exist in poor countries) or if there are structural rigidities

preventing the effective demand meeting real supply (conditions which often exist), and

which therefore still needs to be monitored by the central bank. However, if the central bank

controls only the banks and not the telecom, a whole new sector is now financially included,

but is out of control of the monetary policy maker. This is especially true of telecom led

systems where cards or phones may be used to store value, effectively working as deposits. 3

However, economics has evolved and today it is believed that money creation is through the

money multiplier based on the credit function used by commercial banks rather than the

printing of notes by the central bank or deposits with it (Holbecq and Derudder 2008)4.

Therefore, until such time that mobile operators provide credit, there is no fear on the money

supply function. It may be noted that the Central Bank may require the Telecom to deposit the

float amount with a bank. Of course the bank could then use this deposit to multiply the

credit, but banks are within the ambit of existing monetary regulations.

Nevertheless, in view of the fact that there continues to be debate between economists on the

causes of inflation and its link to money supply, there is some uncertainty and risk and the

professional Central Bank Manager, would like to ensure that he has some control on Money

supply and would like only those within its purview to make money.

Second, prudential regulation using Basle 2 or earlier guidelines, protects banks and,

ultimately, their clients from the risk of banks going bankrupt. These regulations apply to

neither microfinance institutions nor telecoms. Since there is immense competition in the

telecom space, what would happen if one telecom operator decides to exit? The small savers

lose their deposits. Some of these problems exist with prepaid telecom cards. This is why

telephone cards in Europe, for example, are now required to indicate expiry dates. Thus,

people who could buy cards only for rainy days are now discouraged from investing in them.

Thus, if telephone cards have to play a part in the savings for precautionary motive, the

depositor must be protected from telecoms who could shut down.

3 For improving this paragraph and helping improve our understanding, our thanks to Claude Gnos and Jean-

Michel Servet who pointed out that there was a problem with the previous version and our understaning. 4 Thanks to Marek Hudon who sent us the book and to Christine Sinapi who more or less summarized this view

in a paragraph.

In a microfinance-poor-consumer setting, although the amounts saved will not be large in

absolute terms, they may represent a substantial proportion of wealth. So the issue of

consumer protection arises. What would happen in the event that Safaricom became

insolvent? Is the M-PESA e-money float held with Central Bank of Africa (CBA) safeguarded

for "depositors" or is it at the mercy of the creditors of Safaricom?

The billing risk in telecommunications becomes a banking transaction risk in mobile banking.

Thus, identification risk multiplies in importance because a wrong number dialed means

money has been sent and needs to be brought back before the wrong recipient spends it. One

possibility is that the sender should know not only his bank account number but also the

account number of the recipient, in addition to his telephone number. Also, a new system of

codes is required to ensure that the person who is using the phone is also the person whose

bank / telecom account is being used to make a payment. This verification of identity is

especially important if the telephone is being shared by people for different bank accounts.

The risk of fraud is based on elusiveness and rapidity. Elusiveness is because one can use

hundreds of small mobile transactions to cover up huge movements of funds for illegal or

terrorism purposes. Their origins and destinations cannot be traced without some invasion of

privacy. Rapidity adds to this scenario because the transactions are real time and may be

completed and the account closed before the bank or the telecom operator can conform to any

anti-money laundering or anti-terrorist guidelines. Thus, the float time which can be used by

banks to address these issues ex-ante is lost to mobile bankers who can do this check only ex-

post. One way to do this is to have an authentication check of an id with photo (and keeping a

copy on record) at the time each new mobile telephone is put into use and each time a new

stored value or deposit account is opened.

The risk of privacy of information also increases. Now, the mobile operator, is not only privy

to the conversations of a person, but all his financial information transacted online as well. All

these risks increase if monopoly power of the leading mobile banker, often the universal

operator, increases. Another type of risk faced is delay in the receipt of SMSs during peak

texting hours (Morawczynski and Miscione 2008).

Interoperability, so useful to network power-functions, dynamically increases mobile banking

risks. Just as the strength of a chain is based on its weakest link, it is sufficient for one

telecom operator to be weak (operationally or financially) for the whole network to be

impacted. Each operator would be content to supervise it's own users. This is why both

GCASH and SMART in the Philippines prefer to limit their services to people in their own

network. However, when the system is based on interoperations of payments between

operators, as is the case with Wizzit in South Africa, new opportunities arise but risks also

multiply, necessitating supervising authorities. The largest player usually does not want

interoperability because the others have more to gain from its system than it has to gain by

using the smaller systems. Interoperability has technological problems of telephoning but also

problems of banking such as clearing and settlement challenges and consumer protection

(including mechanisms to cater for disputes, warranties and claims), besides the special

encrypting and decrypting which may be necessary for SMS based mobile banking transfers.

Interoperability is required for terminal equipment, transaction switching, interbank clearing

and interbank settlement. The risk here is non-co-operation among the providers to build a

broad basis of an interoperable network (Mas 2008).

A large part of these risks depends on the ability of the government to impose financial

service regulations and supervision on Mobile Bankers.

MAIN TOPIC: Mobile banking Regulation as a response to these risks

It is generally agreed that mobile banking, despite all the risks, needs to be encouraged to

permit the unbanked to avail of financial services, which could reduce the cost of living for

them as well as allow banks and telecom realize their fortune at the bottom of the pyramid.

Therefore, any regulation to this sector should be enabling, ie. open to the startup and growth

of new and varied models and inducing certainty, both for providers investing capital taking

risk, as well as consumers entrusting funds to new m-banking providers, whether banks,

telcos or other entities. This openness may require a new look at what constitutes e-money

and how it might impact money supply, inflation and other economic indicators. It should also

insist on interoperability so that money can be transferred between operators, even if doing so

increases the risks and costs of supervision.

At the same time, if the regulation does not significantly reduce the risks, initial losses caused

to poor people may spread the word and the intended benefits would neither be reaped for the

poor nor for industry. Therefore, any intended regulation needs to be conservative because we

are dealing with money, which is the essential core of an economy. This tradeoff between the

need for conservatism and the need for enabling is often referred to as proportional regulation.

The key feature of proportional regulations would be that restrictions imposed on an industry

should be related to the benefits expected from those restrictions.

In the financial industry sense, Lyman et al (2008) provided an example of the conflict

between enabling and conservative concerns. The development of microfinance through

mobile banking requires building agent networks to go where banks do not. These agents need

to be regulated. At the same time,KYC norms applied to banks would not allow them to use

agents. Perhaps, this could be balanced by proportionality in as much as regulations on the

stored value accounts of GCash in the Philippines and MPESA in Kenya may need to be

lighter than the prudential norms applied to a full banking transaction account (Lyman et al.

2008).

Hannes interprets proportional in this sense and looks at identity risk in terms of Know Your

Customer requirements related to anti-money-laundering and combating financial terrorism

legislations. He suggests that the lowest layer or tier should provide for very little KYC (or

client identification), but should be very strict regarding limits and functionality. With higher

levels of compliance, more rigor could be added to the registration and client management

process, but at the same time, more functions and higher limits are associated with the

account.

We will now look at the legislation relating to mobile banking passed in the European Union

and in four developing countries that have been early innovators in this field, note their

similarities and propose a possible theoretical conceptualizing to cover regulation for mobile

banking.

A. Case Studies in Mobile Banking Regulations

The mobile banking regulations need to be researched piece-meal and put together since they

come from many different laws, decrees and circulars which essentially modify the existing

banking and telecom laws to permit the additional activity of mobile banking. In different

countries, the evolution of the law may permit only some banking activities and not others.

The areas we looked at our whether agents are allowed to open accounts, who can issue

emoney, KYC legislation, transaction sizes limits and balance limits. To the extent that KYC

regulation is often required for all telephone numbers, no additional mobile banking impact is

required. However, in countries where you can buy Sims cards and prepaid telephone cards

from street hawkers, KYC legislation may be a bit lax.

Our investigation concerned the four countries (Kenya, Philippines, South Africa and India)

where mobile microfinance is emerging as well as a rich group of countries (the European

Union) to benchmark and act as a control to generalizations.

Europe

The new Directive 2009/110/EC 5 on the taking up, pursuit and prudential supervision of the

business of electronic money institutions replaces the existing Directive 2000/46/EC. The

revised directive seeks to remove the high regulatory barriers preventing the development of

an electronic money market in the EU and seeks to set reasonable conditions for the business

operations of electronic money institutions.

European regulators try to distinguish between spending products (electronic money) and

savings products (deposit taking). For this reason, interest on electronic money balances is

banned in Europe.

An important change to the EU regulation came from the legalization of hybrid electronic

money institutions, i.e. institutions that perform other activities in addition to the issuance of

electronic money. The funds of emoney custormers have to be separated from that of the rest

of the business, according to the 2009 directive.

In this 2009 directive, agents are allowed to distribute emoney but not to issue new emoney.

Electronic money institutions are subjected to effective anti-money laundering and anti-

terrorist financing rules

Another fundamental change in the 2009 directive is the reduction in the regulatory burden

placed on electronic money institutions and the convergence of their status with the conditions

for payment institutions under the Payment Services Directive. In terms of capital

5 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:267:0007:0017:EN:PDF, (official Journal of

European Union dated 10/10/2009)

requirements, initial capital is reduced from the current EUR 1 million to EUR 350,000, i.e. to

approximately one-third.

There is no protection for consumers against the failure of an electronic money issuer in

Europe because the authorities assume that the products will be used for spending and not for

saving and that therefore substantial balances will not be carried. However, this distinction,

however valid it may be in Europe, is not helpful when discussing the needs of poor

consumers in developing countries who may use the same electronic purse for spending,

budgeting and saving, whether legally permitted or not.

Philippines

In the Philippines, too, emoney is not considered as deposits. E-money can be issued by

banks, NBFIs as well as other institutions (money transfer agents). It has to be issued and

redeemed at par and cannot earn interest nor have insurance attached to it. Redemption fees

need to be indicated in advance.

The Money transfer institutions have to be large enough to be considered safe. As a result,

they need to have a minimum capital of 100 million pesos (about 45 pesos to a dollar). Their

activities are limited to e-money issuance and related activities such as money transfer/

remittances, but not credit.

E money issuers have to maintain the equivalent of the money issued either in bank deposits

or in government securities. They also have to obtain a quasi-banking license from the central

bank.

The issuer has to ensure that their distributors/ agents comply with the requirements of AML

laws.

In 2006, the Central Bank of Philippines passed a circular6 for consumer protection from

electronic banking, relating to the requirements to safeguard customer information; prevention

of money laundering and terrorist financing; reduction of fraud and theft of sensitive customer

information; and promotion of legal enforceability of banks electronic agreements and

transactions.

A key aspect of this policy is to remind top management of banks that the oversight for

mobile banking was their responsibility. A special emphasis was given on managing risks

linked to increased complexity associated with outsourcing and third-party dependencies to

perform critical e-banking functions.

6 http://www.disini.ph/downloads/BSP_Circular_No._542.pdf

Risk management and internal controls had to be established to ensure information security

including authentication, account origination and customer verification, and monitoring and

reporting of E-banking transactions. In the internet and wireless banking measures of this

circular, the bank requires network controls, operating system controls, encryption,

authentication and appropriate anti-virus programs as well as intrusion detection programs to

be installed to ensure security of data and money. It also requires audit trails to record

movement of money as well as dropped transactions.

Layered encryption: Where risk assessments indicate that the use of single-factor

authentication is inadequate, banks should implement multifactor authentication (e.g., ATM

card and PIN), layered security, or other controls reasonably calculated to mitigate those risks.

End to end encryption was recommended for highly sensitive data such as customer's

passwords.

Moreover, the banks have to implement a consumer awareness program. Examples of such

awareness are "Do not disclose your Mobile Banking Pin (MPIN) to anyone; regularly change

the PIN; if the phone is stolen, report the incident to the bank; and keep a copy of the

transaction number."

Finally, the 2006 circular covered disclosure polices as well as record keeping. The disclosure

policies include who is liable for unauthorized or fraudulent transactions.

The Philippines central bank has placed restriction on the amount that can be maintained in

SMART Cash and G-Cash accounts. In 2009, the BSP (Bangko Sentral ng Pilipinas), fixed

emoney per customer as 100,000 pesos. In case a bank issues more than one kind of emoney,

it has to ensure that the total of money issued to one customer is less than this limit.

In the Philippines, receipt of cross border remittance is also permitted.

Kenya

In Kenya, for non face-to-face contacts, two cross verification identification checks are

required. These could be one for the address and one for the identity. For non-residents, an

introduction from a banker in the home country can be sought.

Receipts of cross border remittances are allowed

A law on mobile banking is expected.

South Africa

It is interesting to note the differences between the earlier positions on electronic money with

that used by South Africa in an updated position paper (2009) on electronic money. "For

purposes of this position paper, e-money is defined as monetary value represented by a claim

on the issuer. This money is stored electronically and issued on receipt of funds, is generally

accepted as a means of payment by persons other than the issuer and is redeemable for

physical cash or a deposit into a bank account on demand." Thus, consistent with a bank led

model, South Africa accepts that the money can be placed in a bank account.

What complicates the South African position is that payment of bills are considered payment

services, but transfer payments between people (remittences) are considered deposits. As a

result only banks can issue e-money!

The South African regulation on Mobile banking7, called Cell-phone banking by the Reserve

Bank of South Africa, is quite interesting in respect to the procedure for respecting reduced

AML requirements.

For AML, mobile banking can be exempt for the face-to-face account opening and is thus

subject to lower requirements. But because of these lower requirements, it is limited to very

certain conditions. For example, only South African citizens and residents are allowed to be

offered a mobile bank account since they have a South African identity number. Verification

of the identity is cross-verified using other data bases such as those of the department of

Home Affairs. Moreover, if there is no face-to-face verification of the initial account opening,

transactions are limited to Rial 1000 per day. To exceed this limit, a face to face verification is

required. A person can open only one account using non face-to-face account opening

procedures.

Otherwise, even with face to face verification, there is no need to check the physical address

if the accounts have overall daily limits for transactions of 5000 Rials per day within a limit

of 25000 rials per month for payments and 20000 per month for receipts, and a maximum

balance of 25000 rials per month. This is done because many people don't have a formal

address as they are living in unauthorized housing.

7 See also Porteous, David Porteous D (2006) Enabling Environment for Mobile Banking in Africa. In. DFID

available at http://www.bankablefrontier.com/assets/ee.mobil.banking.report.v3.1.pdf

India

The objective of opening low cost bank accounts for the unbanked started in 2005 when the

RBI introduced its policy to encourage no frills accounts. Although, Indian public and

private banks have opened 15.8 million accounts (Ramji 2009), more than 85 percent are

dormant, primarily due to distance from bank branches, low financial literacy, and poor

marketing by banks in terms of communicating the purpose of the account (Venkatesan and

Thyagarajan).

In 2006, following the example of Brazil, the RBI allowed banks to appoint certain types of

agents. Notably, FINO (a financial services technology provider) emerged and in little more

than three years, FINO has reached 10 million8 poor clients with various financial services on

behalf of banks.

Mobile banking guidelines came out in 20089 and were modified in 2009

10. Only banks who

have received one time approval from Reserve Bank are permitted to provide this facility to

customers. Banks can extend this facility only to their customers and their holders of

debit/credit cards. Banks can extend this facility through their business correspondents also in

order to promote financial inclusion.

Minimum Technology and Security Standards have been prescribed in the guidelines. Such

securities are to be viewed within the context of overall limits. Banks are now permitted (after

the 2009 modification) to offer this service to their customers subject to a daily cap of

Rs.50,000/- per customer for both funds transfer and transactions involving purchase of

goods/ services. Transactions up to Rs.1000/- can be facilitated by banks without end-to-end

encryption. Fund transfer service shall be provided by banks but the maximum value of such

transfers shall be Rs.5000/- per transaction and Rs.25,000/- per month, per customer.

8 http://www.fino-cofi.blogspot.com/ Blog dated Jan 21, 2010, consulted on Feb 18, 2010.

9 The original operative guidelines (RBI/2008-09/208 DPSS.CO.No.619/02.23.02/2008-09, October.8, 2008) can be found at http://rbidocs.rbi.org.in/rdocs/notification/PDFs/87664.pdf) 10

December 2009 Guidelines (RBI/2009-10/273 DPSS.CO.No.1357/02.23.02/2009 dated 24 Decemeer) were issued to amend some of the limits imposed by Mobile banking Transactions in India Operative Guidelines for Banks/Press Release 2008-09 dated 19, 2008, of which one limit was transaction limits of Rs.5000 for fund transfers and Rs.10,000 for purchase of goods and services.

The guidelines mandate interoperability among service providers to ensure prevention of

monopoly by one or a few mobile operators.

B. Findings: Comparison of legislations

In the different legislations, we find some common features between a few countries, but

rarely is the legislation the same in all the countries.

Most countries have placed some regulation on security norms. However, the regulation is

broad and does not indicate which technology is to be used for identification or

authentication. Instead, it imposes the burden of security on the supplier of the mobile

banking service.

In case of fraud, and the breaching of the security regulation, the courts will undoubtedly need

to fill in the law and decide on a case to case basis, on who is responsible. Obviously, if the

consumer is lax and divulges his code, he is responsible. Yet, it is important, in a setting of

illiterate poor consumers, that the mobile banker participates actively in educating the

consumer on his responsibility in keeping codes confidential. Since business correspondents

play a huge role in disseminating mobile banking, it is important that these agents apply

standardized protocols in educating clients. A key role is therefore being played on

identification of appropriate agents.

However, for hacking, the mobile banker may be responsible. The mobile banker may itself

need to turn to the telephone operator to share a part of this responsibility. This sharing is not

clear from existing laws on mobile banking, but contract law would undoubtedly be applied.

Most countries which have legislated on the subject, using the banking correspondent model,

have indicated limits for transactions so that lower level of security is applicable to lower

levels of transactions. They have waived face to face authentication for low value accounts.

The exact numbers vary from country to country. Thus KYC norms pertaining to AML rules

are applied on a proportional basis. If there are transaction fees applied on each SMS/ phone

call, it is unlikely that money-launderers and terrorists will use a series of phone calls to

transfer small balances, because the system would have taxed them.

C. Conceptual evolution of regulatory design

To the extent that the evolution of regulation has been different in each of the countries

studied, we can say that there is some amount of path-dependency in the sense that history re-

inforces existing institutions. Since the money market is an established institution, and the

banking system is an institution on which a lot of trust and faith is reposed, it is normal that

many countries have been loss averse and preferred to reinforce the bank-led model.

As opposed to this conservative loss aversion, on the flip side, people like option value and

positive side volatility. This volatility would favour new innovations, especially if downside

systemic risk can be limited. This would explain that the EU has favored the operator led

model and has permitted stored value in non-bank operating cards and devices. To limit the

risk, it has ring-fenced its directive and excluded the possibility of e-money issuers taking

deposits which could have created interactions with the existing known money supply and

monetary policy options.

In Microfinance, it is well known that the poor have limited liability since they don't have the

possibility to lose anything. Thus in poor countries, loss aversion may be low and they may be

more open to experimenting with new notions of mobile banking. The laws created are to

provide certainly, required for private investors to invest. However, as the case of the absence

of legislation in Kenya illustrates, entrepreneurs may not wait for such laws, if they think they

can gain enough. Thus, innovation is preceding legislation, which is emerging in a protective

role.

FUTURE REGULATORY DIRECTIONS

The Background section has already enumerated the risks to be covered by mobile banking.

Many of these risks are either covered by extant legislation, or need to be covered by new

legislations. Here are some regulatory issues which will probably need to be addressed.

The fist series of question pertains to proof. This may depend on the definition of an

electronic signature. Is the PIN a signature or less than a digital signature? When you pay be

credit card and you type your code, is it a signature? Are computer records admissible in court

(Kilonzo 2007)? Till recently, photocopies were not admitted in many countries.

The second is a series of questions relating to moral hazard. Can banks or telephone operators

or agents run away with the money? What if the ATM does not give money and you are

debited? In mobile banking, what about wrong numbers and the money transferred as a result?

Who has the burden of proof? (Kilonzo 2007). What happens if telecoms don't survive in the

face of competition? What happens if there is a failure of the system? In cheques and paper,

there is a receipt. In electronic transfers, there is no tangible receipt. Suddenly; the customer

has to beware and report any errors in the bank statement, within a specified period (60 days?)

(Kilonzo 2007).

A third series of issues stem from the fact that intangibles are the source of most of the value

of a firm. These intangibles include goodwill or the customer base. In a joint operation

between a bank and a telephone operator (no matter who is the leader), the question which is

emerging is who owns the customers (the last mile)? The answer may determine who has

access to the mailing lists, who can advertise to them and who can influence them.

A final series of questions pertains to the distribution of benefits between the private equity

investors of mobile banking and the customers, especially the poor customers. These are

broad question of economic policy and economic regulation of the system and pose large

question whether the fortune at the bottom of the pyramid if for rich people with the latest

technology to exploit.

CONCLUSION

New technology of mobile telecommunication has enabled new economic relationships with

unbanked as well as the banked, called mobile banking. These new economic relationships are

being constrained by the existing institutional framework of banks and central bank

supervision which may be constraining development. At the same time, government

regulators seem to be learning from experiences in other parts of the world to create enabling

environments to permit this innovation.

This paper has looked at the risks involved in mobile banking, this new sector coming from a

fusion between mobile and banking. It has then surveyed some of the key aspects of

regulatory response to these risks in a few countries. This regulatory evolution is based on

conservative evolution, mimetic influence of legislative developments in other countries and

the desire to create huge gains from latest technological evolution. We find that mobile

banking regulation has covered some of the new risks created by this new technology.

However, the risks covered and the regulations used vary from country to country, even

though common recourse to limits of transaction sizes is made.

The two models, bank led model and telecommunication led model require different kinds of

legislations. Relatively advanced countries like India and South Africa have a lot to lose and

would like to ensure that banking is safely entrusted to bankers. Countries in which the

proportion of banked people are much less, can afford to experiment with other operators

coming in. Very advanced countries, such as the EU, can ring fence their banking operations

and can thus play on the upside potential of telecommunications led payment systems.

Many problems remain to be resolved. Regulations, like other institutions, evolve

incrementally. Moreover, since the concord of a number of actors has to be achieved through,

perhaps, horse-trading, only those aspects get covered by legislation as are subject to broad

agreement.

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