from the Global Experience
Elisabetta Cervone
Abstract Th e author off ers a roadmap approach to regulating mobile payments (hereinafter “m-payments”) worldwide. Th is chapter draws the attention to the regulatory restrictions and/or regulatory uncertainty which govern m-payments and which are the most formidable barriers to expanding m-payments to the mass market. It focuses on the pioneer-ing—mostly unregulated—model M-Pesa in Kenya, on one side, and on the US legal and regulatory framework, on the other. Th e lesson from the global experience so far is that it is too early for regulators to assume that there is an established or “orthodox” method of regulating m-payments.
However, the author concludes that—as a roadmap approach to regu-lating m-payments worldwide—a functional rather than institutional approach is strongly recommended.
E. Cervone ()
World Bank, Finance and Markets Global Practice, Payment Systems Development Group
University of Milan , Department of international , juridical and historical-political studies, Italy
122 E. Cervone
Introduction
M-payments are playing an increasingly prominent role in widening the off ering of payment services and achievement of broader access to payment services. 1 Given the relatively high cost of a bank account—
minimum balance, service charges, full know your customer (hereinafter
“KYC”) requirements and travel time to a branch—and the easy, low cost and increasingly universal access to mobile services, the mobile operator model arguably is highly eff ective in bringing informal cash transactions into the formal fi nancial system, expanding access to fi nancial services.
Th e recent growth of m-payments has been contributing to enhance fi nancial inclusion. 2 It has been proved that innovation often occurs where the need for change is greatest. 3 In developing countries, where the traditional payment infrastructure is lacking, the fast take-up of new technology is enabling payment services to be provided to the unbanked.
By the later part of the 2000s, the main action in m-payments was occur-ring in developing and less-developed countries, from Kenya, to Brazil, the Philippines, South Africa, where m-payments are really attractive to unbanked and underbanked people because of the lack of bank branches.
Developed economies are so far behind developing countries. 4 While in less-developed countries loss aversion may be slow and they may be
1 M-payments can be defi ned as payments initiated and transmitted by access devices that are con-nected to mobile communication networks. Committee on Payment and Settlement Systems (CPSS) Innovations in Retail Payments (Bank for International Settlements, 2012), 19. On m- payments in general, see Th omas-Frank Dapp et al., Th e Future Of ( Mobile ) Payments : New ( Online ) Players Competing With Banks (Frankfurt am Main, Germany: Deutsche Bank Research, 2012); on m-payments in the European Union, European Commission, Green Paper : Towards An Integrated European Market For Card , Internet And M-Payments (Brussels: EC, 2012).
2 M-payments have allowed millions of people who are otherwise excluded from the formal fi nan-cial system to perform fi nannan-cial transactions relatively cheaply, securely and reliably. Finannan-cial inclusion has become a subject of growing interest for researchers, policymakers and other fi nancial sector stakeholders.
3 In addition, in microfi nance it is well known that the poor have limited liability since they do not have the possibility to lose anything. Th us, in poor countries loss aversion may be slow and they may be more open to experimenting with new models of m-payments, as in Africa, for example, where there are few banks, poor physical infrastructures and a rural population often dependent on remittances from the city.
4 In the USA, only recently, a system by Apple-Pay has been enacted, which allows iPhone users to pay at the checkout counter simply by holding their phone to a receiver for a few seconds. See http://time.com/money/3328891/apple-pay-iphone-global-mobile-payments/ .
more open to experimenting with new models of payments, in developed countries there is generally high consumer satisfaction with existing retail payment options, which are reliable, familiar and trusted.
Apart from diff erent economic, social and cultural backgrounds, an enabling national, legal and regulatory environment is essential to ensure widespread use of m-payments.
Regulatory authorities, in advanced as well as less-developed econo-mies, are faced with great challenges in regulating m-payments, especially because m-payment technology is in the early stages of its development.
Th e tension between, on one hand, the desire to innovate and to develop policy environments that will enable and support innovative models of payments and dedicated to pursuing a more open and competitive mar-ket and, on the other hand, the need to ensure the stability and safety of the national payments system and protect consumers, with particu-lar emphasis on those who are considered fi nancially vulnerable, has left many regulators cautious on the most prudent path to take. 5
Regulators diff er in their attitude towards governing m-payments. In some countries, innovation is preceding legislation: m-payments remain outside the scope of banking regulation and a “test-and-see” approach is adopted to permit experimentation in the fi eld. In other countries, instead of a “test-and-see” approach, m-payments remain governed by the same legal framework that applies to traditional banking services.
5 Th ere is considerable work done in this area in the recent past including the “Retail Payments Package” produced by the World Bank Payment System Developing Group, which off ers guidance and tools, including: (i) “Developing A Comprehensive National Retail Payments Strategy”, which aims to provide public authorities and market participants with detailed guidance on how to develop and implement a comprehensive, strategic retail payments reform; (ii) “A Practical Guide For Retail Payments Stocktaking”, which identifi es a methodology for undertaking a detailed stocktaking of a country’s retail payments landscape; (iii) “From Remittances To M-Payments:
Understanding ‘Alternative’ Means Of Payment Within Th e Common Framework Of Retail Payments System Regulation”, which explores the development of a normative framework to underpin an effi cient retail payments industry, including the so-called innovative payment mecha-nisms; (iv) “Innovations In Retail Payments Worldwide: A Snapshot: Outcomes Of Th e Global Survey On Innovations In Retail Payments Instruments And Methods 2010”, which presents the results of the fi rst World Bank survey among central banks that collected information on innovative retail payment products and programs. Available at: http://web.worldbank.org/WBSITE/
EXTERNAL/TOPICS/EXTFINANCIALSECTOR/0,,contentMDK:23252983~pagePK:21005 8~piPK:210062~theSitePK:282885,00.html .
124 E. Cervone
While the “test-and-see” approach, adopted in Kenya, is much more fl exible and encourages innovation, it potentially exposes m-payments customers to signifi cant risks. Th e second approach, adopted in the USA, applies the overly complex, legal and regulatory framework for tradi-tional banking services to m-payments, in this way discouraging inno-vation and thus limiting the ability of m-payments to reach previously fi nancially excluded groups.
Drawing a comparison between the US framework on one side and the M-Pesa in Kenya on the other, the lesson from the global experi-ence so far is that it is too early for regulators to assume that there is an established or “orthodox” method of regulating m-payments. Th ere is still a need to experiment with diff erent business approaches to learn how each performs in diff erent market circumstances. However, as a roadmap approach to regulating m-payments worldwide, a functional rather than institutional approach is strongly recommended across countries. Th at would be the best way to manage risk without stifl ing innovation. 6