Regulatory Imperatives in Mobile Microfinance, Hugo Daley

Regulatory Imperatives in Mobile MicrofinancePrepared for the Mobile Financial Services Conference, Kingston Jamaica, December 10th, 2010.

Hugo Daley, Transcel, Ltd

BACKGROUNDMicrofinance is widely viewed as a potent instrument for reducing

poverty, enabling the poor to accumulate assets, and reduce their

vulnerability to economic stress. One of the major challenges the

industry faces in Jamaica is the cost of disbursing loans and collecting

loan payments. More significantly it is the single greatest obstacle to

MFI’s lowering the comparatively high interest rates they charge on

microloans. Another hurdle to the widespread adoption of microfinance

is the difficulty in accessing rural populations. For both of these

challenges - and many others which tend to hobble the expansion of

micro-financial services -- a potential solution is Mobile Money – defined

as monetary transactions carried out using mobile phones including

mobile banking, money transfers and mobile commerce. We coin the

term “mobile microfinance” to refer to the use of Mobile Money for low-

value transactions and financial services for microenterprises and micro-

savings of the unbanked.

It is now widely accepted that the low transaction costs associated with

mobile networks and the ubiquity of mobile phones, mean that Mobile

Money can play an important role in the accessibility of microloans for

Copyright @ Transcel Limited, 2010. All rights reserved.

small business and financial inclusion for the poor.1 Furthermore,

important innovations in microfinance such as repeated lending, which

breaks down loans and repayments into small installments and

progressive lending, which increase loan disbursements gradually over

time, could be best implemented using low-cost Mobile Money. The

challenge is now to determine what regulatory or public policy position

best supports the emergence of an effective mobile microfinance

infrastructure.

REGULATORY AND POLICY PRIORITIESFor the past year, Transcel has been working with the Development Bank

of Jamaica (DBJ) in developing policy priorities in the areas of Mobile

Money service and regulatory policy. The present remarks are based on

this activity. Much of this work has been focused on the concerns of the

MFI community. Input from the MFI community to date focused on the

concern that the potential benefits of Mobile transactions, in the areas of

costs and ubiquity, should not be degraded by poor implementation or

regulatory barriers. Results from a June 2010 questionnaire and

subsequent workshop deliberations showed the following priorities:

Low start-up costs and service fees for MFIs and their customers;

Open access to services across networks on a wide range of

mobile devices;

Integration with MFI operations without onerous additional KYC

burdens.

Recommendations ranged from regulating service fees across Mobile

Money service offerings to a risk-based approach to regulation that

would reduce KYC requirements for low-value transactions.1 Ignacio Mas and Dan Radcliffe, Scaling Mobile Money, Bill & Melinda Gates Foundation, September 2010


REGULATORY CHALLENGEMobile microfinance in Jamaica faces a dual regulatory challenge: on the

one hand, much of the microfinance sector remains unregulated and is

free to innovate in partnership with technology providers without the risk

of regulatory burden; on the other hand, mobile financial service

implementation almost invariably involves commercial partners who are

subject to either banking or telecommunications regulations.

Table 1. Matrix of Regulatory Options

Industry

Financial Service Telecommunications

Reg

ula

tion

Con

stra

ints

Limits (or “holiday”) on interest charges on mobile micro-credit

Open network rules for access to independent data service providers

Limits of MM transaction fees Network interconnection requirement

Anti-trust rules to limit price collusion and barriers to competition

Inter-carrier “additional cost” price limits

Rig

hts

MM account issuance authorization Telco controlled hardware (e.g. SIM cards) approved to store financial value “Wallets”

The microfinance community is thus in the position where it must begin

to lobby regulators with its own independent priorities for regulatory

reform which support its self-interest in Mobile Money deployments.

Table 1 provides an illustrative matrix of options for regulatory

intervention.

It is however quite unclear what broad regulatory posture is in the best

interest of microfinance. Would it be in the best interest of the

microfinance sector to support:


A. Polices that “constrain” licensees from using their privileged

position to gain dominance over the new services arena or

erecting barriers to new entrants – new players that could foster

greater innovation and microfinance-targeted solutions; OR

B. Policies that expand the “rights” of regulated sectors so as to

facilitate and promote their entrance into new mobile financial

services areas – which could benefit the microfinance sector by

speeding the development of service offerings by banking and

telecom incumbents.

At this point, it might be best that the concerns of the microfinance

industry remain highly targeted. With respect to costs, the industry must

lobby both banking and telecom regulators to control charges for

transactions traversing these networks. With respect to accessibility,

telecom regulators must be encouraged to act to assure fair access rules

for data services on mobile networks. With respect to integration of

mobile platforms into its own business processes, the MFI community

must lobby financial services regulators to permit the use of its existing

customer data and identity process in a Mobile Money KYC regime.

The regulatory imperative in mobile microfinance goes beyond the

concerns of the MFI community. Given that the informal sector in the

Jamaican economy represents over 40% of the national GDP, the

potential for mobile microfinance to become a vehicle for economic

transformations is enormous.2 The regulatory imperative in mobile

microfinance becomes a broad public policy concern.

2 Pascaline Dupas and Jonathan Robinson (2009) “Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya.” NBER working paper No. 14693. Study found that that after six months, access to a mobile money savings account led to a 39% increase in productive investment of funds.


THE PUBLIC POLICY IMPERATIVEA focus on mobile microfinance has significant implications for public

policy options for Mobile Money. MFIs in Jamaica serve less than 50,000

customers out of a potential customer-base estimated at 500,000.

Industry growth is slow, costs are high. There is clearly a need for a new

microfinance infrastructure to accelerate industry growth. Yet, it has

become very clear from the introductions of Mobile Money services to

date that many models for Mobile Money service do not serve the needs

of microfinance.

The major commercial players in Jamaica are clearly incentivized by the

competitive environment NOT to meet the needs of the microfinance

sector:

Banks are focused on providing more convenient access to

accounts for their existing customers. All announced m-banking

offerings have had that focus. The core business model in the

banking community is to serve those who have the most money

not those who have the least.

Mobile operators are in a 3-way death-match, with barriers raised

to network interconnection and independent services on their

networks. In these circumstances, a mobile network operator’s

focus is logically on growing the ARPS – Average Revenue Per

Subscription – without the costly changes to network operations

that could be required by the additional transaction security and

KYC requirements of financial service delivery.

Transcel’s assessment suggests that public policy for Mobile Money

would be best guided by an analysis of the deployment factors that best

serve economic development and broad financial inclusion objectives.


The Preliminary conclusion is that the primary public policy goal should

be support for a mobile microfinance infrastructure that preserves the

radical cost-advantage of mobile transactions over traditional financial

service delivery. Recommended is regulatory support for a future mobile

financial service infrastructure that includes the following:

New interoperation and interconnection services to support

secure, transparent, integration of the data networks, as well as

the offerings and services of financial institutions, mobile network

operators and independent service providers.

An information sharing infrastructure that allows authorized

access to and analysis of user transaction data to facilitate value-

added service to the unbanked - including intelligent credit

worthiness assessment, interest rates, and service pricing.

Open network regulations that allow rational-cost, any-to-any,

service delivery across mobile networks.

Identity authentication and authorization standards and services

that serve the needs of populations currently outside of the

formal financial service sector.

Financial network fees tagged to transaction value and

transaction costs.

Regulatory burden on Mobile Money accounts and transactions

scaled to financial risk.

THE WAY FORWARDThe public welfare opportunity of mobile microfinance beckons. The

response is certainly not to stand still. Not much will be further gained

without trial and error; pilot projects that fail and pilots projects that

succeed. The clear policy imperative, at this point in time, is creating the

appropriate regulatory space for experimentation and innovation without


compromising the basic security, financial integrity and consumer

protection interest of the state.


Documents

Regulatory Imperatives in Mobile Microfinance, Hugo Daley