Last update: 2010

Bringing Smart Policies to LifeThe basics: Mobile phone financial services

Overview

Mobile phone penetration is soaring, with subscriptions more than quadrupling since 2002, to more than 4 billion globally.

• Well over half of these live in developing countries

• Huge potential for expanding financial access at a lower cost than through brick-and-mortar branches

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Closing the gap between unbanked people with access to mobile phones is one opportunity to scale up access to finance

Potential Market

Sources: Banked Honohan 2007; Penetración Celular: ITU; WireIess Intelligence 4:2002, 4:2006Datos México: Notes on Branchless Banking Policy and Regulation in Mexico; CGAP

97%

50%

100%

10%

% Banked people % Mobile Penetration

Finland

KenyaThe

Philippines

South Africa

Colombia

Mexico

% m

obile

pho

ne p

enet

ratio

n

% of banked people

Benefits

• Expand financial access to the unbanked by: - Offering convenient and real-time transactions - Dramatically reducing transaction costs

Microfinance Loans and Domestic Remittances

- Expanding points of access – reaching remote areas

- Lessening the need to carry cash - security

• Mobile phones can be used to deliver a range of banking services, including:– money transfers– retail purchases– bill payments– welfare payments and other social services– savings– withdrawals – remittances

• Transaction data can be used to develop customers’ credit histories:• Can lead to a wider range and depth of inclusion

Service offering

Policy Question :AML/CFT

• Traditional AML/CFT rules may need to be updated for virtual or outsourced relationships & transactions– Pose unique risks but also opportunities, as mobile phone

transfers leave trails

• FATF advocates a risk-based approach that allows regulation to be tailored to perceived risk

– In practice, many countries face challenges in achieving compliance this way

• Standard KYC procedures may hurt outreach to low-income customers– Some policymakers have simplified procedures to allow the

development of products with a low-risk profile

•

Policy Question: interoperability?• Interoperability enables customers to gain access to

a different operator’s m-banking platform• Question of market structure and competition policy

– Mandating interoperability may promote competition and benefit consumers

– Early movers may resist, as they can lose competitive edge

• Customers still need to convert e-money to cash, using bank branches, ATMs or agents– Adds another level to interoperability - sharing cash in/cash

out infrastructure can support outreach at lower cost

Policy Question: Protecting Consumers

• Mobile phone financial services present new consumer protection challenges– Large distance between providers and customers– Agents may lack clear incentives or liability for transparency– Cash in/out function by agents may open the door to fraud– Requires technology-tailored solutions to data security and

privacy, redress mechanisms and pricing transparency

• Including technology issues in financial education can help reduce information asymmetry

• Bringing operators under central bank supervision may also help unfamiliar customers feel more at ease

Example: Kenya

• M-PESA launched in 2007 when only 23% of Kenyans had a bank account but 80% access to a mobile phone.

• The service has grown into one of the most successful in the world, with more than 8.5 million customers and over 12,000 agents by the end of 2009.

Kenya “MNO-Based” Model: M-PESA

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In the M-Pesa “MNO-Based model,” clients cash-in/out at thousands of M-Pesa agents. M-Pesa wallets are held by Safaricom & are not classified as deposits. E-Money is backed 1:1 by pooled funds deposited in trust at a commercial bank.

SafaricomBank

Client MNO AgentCash In/Out

With a loaded M-Pesa Account Clients can…• Transfer & receive funds•Pay Bills•Withdraw•Donate

M-Pesa account funds are pooled

and deposited by Safaricom

into an account held in trust at a

commercial bank.

Example: The Philippines

• Two mobile banking operations (Smart Communications and Globe Telecom/G-Cash) have an estimated 71.2 million customers (90.5 Population)

• Mobile phone transactions are estimated to cost just 1/5 of those executed through bank branches (US$0.50 versus US$ 2.50)

Philippines “Bank-Based” Model: SMART Money

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In the SMART Money “Bank-Based Model,” Banco D’oro issues E-Money using the SMART E-wallet platform that allows clients to transact.

SMARTMoney Banco D’OroClient SMART Agent

Cash in/out of Smart money wallet

With a loaded E-money wallet clients can …•Purchase •Deposit• Withdraw• Pay Bills• Transfer Money•ATM Withdraw aUsing just their mobile phone

The E-money issuer in this model is Banco D’Oro. Individual Smart E-wallet accounts

are held on the books of the bank

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Under the Mexican model, TelCo is a banking agent because the Mexican Banking law only allows a banking institutions to accept deposits from general population.

Mexico Mobile Banking Model

TelCo(Banking Agent)

BankClient TelCo Retailer

Face to Face with Client

Basic Banking Services:• Deposits• Withdraws• Bill payments• Remittances

Deposits are withheld and

managed by the bank

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Banking institution is responsible for the implementation of the AML/CFT regulation but some specific activities are required of the TelCo.

Bank

TelCo

• Open mobile banking accounts and apply simplified KYC and CDD

• Back office for handling database of banking transactions and push a copy to the bank.

• Monitoring client transactions

• Report suspicious and significant transactions (over US$10,000)

Mexico Mobile Banking Model

Thank you!

© Alliance for Financial Inclusion 2010

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