I participated in an interesting workshop on mobile money last week that brought together academics, policy makers and practitioners and was organized by the International Growth Centre
at LSE. It has been 10 years now that M-Pesa took off in Kenya and it is hard to keep up with all the developments in Kenya and other countries. The number of mobile money accounts (be they stand-alone or linked to bank accounts) has exploded
over the past years, though their use is not as high as the pure account number suggests. They are still mostly used for transaction purposes, in spite of product offerings in the savings and credit space. Importantly, the use of mobile money is
part of a wider trend of using mobile technology for government and other transfers, reducing transaction costs and “leakages” related to corruption and theft. And while mobile money has not been the silver bullet in terms of expanding financial
inclusion to the last household in the developing world, it has helped expand the frontier of bankable population substantially. I do not think that the promise of mobile technology has been quite exhausted yet. But it has also become clear that there
are other constraints holding back the full use of mobile money technology, including on the demand side (including behavioural constraints, as so prominently featured by the latest Nobel Prize winner Richard Thaler).
My own contribution
was giving a quick overview of a task force report from 2016, co-led by Stijn Claessens and Liliana Rojas-Suarez and in which I participated. As mobile
money expands, the question on how to regulate its providers and users rapidly arises. Where mobile money provision is restricted to banks this question is easily answered by expanding bank regulation to this new payment and account form. It is
where mobile money is offered by non-bank providers that this question becomes relevant. Among other factors, the regulatory approach in Kenya has contributed to the success of M-Pesa by using a wait-and-see approach, which has been adapted into a regulatory sandbox approach in other countries (allowing new players into the market on limited scale without stifling regulation, but monitoring them carefully).
The task force
report on Financial Regulations for Improving Financial Inclusion starts with three broad principles: similar regulations for similar functions (no matter what
the name of the provider), regulation based on risk (to avoid reverting gains in financial inclusion made thanks to mobile money) and a balance between ex-ante and ex-post regulations (regulatory restrictions and penalties). These principles are then
translated into 26 recommendations across three areas – competition policies, levelling the playing field, and know-your-customer (KYC) regulations. The goal is to allow and encourage entry of new, qualified providers of financial services, without
deterring useful cooperation where needed to achieve the necessary scale. This gets to a broader challenge in mobile money (but also other segments of the financial systems) – strong network externalities easily result in a winner takes all situation,
where innovation only comes about if the winner is assured the biggest share of pie; on the other hand, such a market-dominating position can easily stifle future entry and innovation. In the area of inter-operability (between mobile networks, in agent networks
etc.) this trade-off become quite prominent, but it is clear that one single approach does not fit all circumstances. It is also important that non-bank mobile money providers are regulated according to the risk they pose for the financial system, which depends
on the type of services they offer, which range from simple transaction services, over value store service to intermediation services. Only the last would require full prudential regulation. Finally, KYC regulations should internalize the trade-off between
inclusion and integrity objectives – many countries have now adopted risk-based KYC regulations, which exempts basic accounts with a limited number of transaction s and a small volume from standard KYC rules.