Incidentally, since Robert was on the panel, I couldn’t help but mention John Reed’s famous statement that “one day, banking will be a line of code in a big network” when I asked a long and boring question about what is meant by “banking” and what the goal of banking about banks might be (if not something concrete like reducing the total social cost of payments). I was trying to ask whether the narrow banking meme might grow to divide the banking business even further: a kind of narrower banking that doesn’t include payments, which would then be regulated separately.
One phrase that caught my ear, in a very positive way, was “risk-based approach to know-your-customer”. In other words, I think, it’s time to begin to resolve the implicit tension between financial exclusion and financial inclusion agenda in a common sense way. It’s one thing to recognise the legitimate law enforcement and regulatory requirements for identification and authenticaton and another to insist that these requirements are met in the tightest possible way in all circumstances. The truth is that bringing people inside the tent, given the data exhaust from electronic payments, delivers far greater overall benefits to society than trying to keep people out of the tent. In other words, stringent rules about terrorist financing and so forth mean that the poorest people stay excluded because it becomes complicated and expensive to deliver services to them. I think that we should start looking at a global exclusion for pre-paid accounts below a certain level (say 500 euros) in return for increased monitoring to patterns, transfer and behaviour.
By the way, the guy from the government, the Right Honourable Douglas Alexander MP, said that if all remittances were sent by mobile payments instead of through banking and money transfer networks that would save $13 billion for some of the poorest people in the world. He also announced a programme called Facilitating Access to Financial Services through Technology (FAST) that will, amongst other things, help to persuade government in developing countries to stop killing efficient and effective mobile payment services through excessive regulation: he mentioned a couple of examples such as Kenya, discussed below, and India, where the RBI has drawn up mobile payment regulations that will excude non-bank competitors from a potentially vast market.
Meanwhile, our favourite mobile money transfer (MMT) enabler has been living through some interesting times and continues to develop into a fabulous case study of how mobile payment systems can evolve and develop, and an insight into the relationship between payments and banking in general.
For the last couple of years, CHYP has been working on a mobile payments and microfinance project for Vodafone. It’s called M-PESA, and it highlights the way in which digital money can really make a difference.[From Digital Money Forum: Mobile Payments and Microfinance]
The scheme has been a runaway success since launch and continues to grow.
In September, M-PESA person-to-person money transfer transactions reached approximately EUR 96 million[From The Paypers. Insights in payments.]
Here you have a scheme that has gone from nothing to five million users and a hundred million euros per month in interpersonal transfer in 18 months. What a fantastic success. Now, faced with this clever use of new technology to deliver a much-needed financial service in an economic and compelling manner, the local banks went to market with more innovative solutions. I’m joking, of course. What they actually did was what too many banks do when faced with a small and nimble competitor, which is to go whining to the regulator to get the competitor banned.
In the marketplace, bankers accuse M-PESA of encroaching into their turf, arguing that its exemption from Central Bank of Kenya’s (CBK) stringent and costly regulations has enabled the mobile phone operator to offer “banking” services on the cheap.[From Business Daily Africa – the international window into East African business opportunities – M-Pesa success stirs banks’ fury as five million subscribers enrol]
They are partly right. Non-bank payment operators start with a lower cost base since they do not have to comply with costly banking regulation. This is why the European Commission is hoping that the new regulated categories of Electronic Money Institution (ELMI) and Payment Institution (PI) will allow even banks to set up highly competitive low-cost payment services.
The problem for the banks seems to be the extraordinary popularity of M-PESA. Launched in March 2007, it now has over 5,000,000 registered users and almost 5,000 registered outlets. It has transferred almost Sh60 billion since it started. In September M-PESA transferred Sh9.61 billion and in October reportedly over Sh10 billion (that’s more than a HUNDRED MILLION DOLLARS).
Safaricom’s stated revenue for SMS, Data and M-PESA in its half year accounts released last month was Sh 3.75 billion. Reportedly around Sh925 million of that was generated by the M-PESA business.
By comparison the banks only have 750 banking outlets and 3,000,000 bank accounts between them countrywide.[From allAfrica.com: Kenya: Big Banks in Plot to Kill M-Pesa (Page 1 of 1)]
The maximum balance that a consumer can hold in an M-PESA account is KSH 50,000 (about $700), so M-PESA is hardly to going to take large deposits away from the banks, and customers do not earn interest on their M-PESA balances anyway. Nevertheless, the banks were able to get the Kenyan government to start an investigation.
The unexpected M-PESA probe ordered last week by acting Finance minister John Michuki may have been influenced by an informal cartel of local banks unhappy with the threat posed by Safaricom’s mobile money transfer service poses to their business.
According to well-placed sources, four big local banks have formed an “ad hoc committee” to try and get M-PESA stopped.
The bankers pitched their case to Michuki at dinner on Monday, 8th December. They argued that M-PESA was similar to a ‘pyramid scheme’ and that people could lose their money if it collapsed.[From allAfrica.com: Kenya: Big Banks in Plot to Kill M-Pesa (Page 1 of 1)]
The plot failed, and the Kenyan government has not only approved M-PESA but has also formulated a National Payment System Bill to regulate payment services (as in the EU case) in a distinct manner, separating complicated and costly banking regulation from simple and inexpensive payment regulation.
An audit by Central Bank of Kenya says while the system transacted Sh17 billion in August last year, the net deposit value was Sh203 per customer. “This demonstrates that M-PESA has not been regarded as an alternative bank account with sums staying in the system,” said Treasury PS Joseph Kinyua in a signed statement… Treasury has formulated the National Payment System Bill to enable it regulate and supervise various payment systems, including money transfer… But the service provider has expressed fears that the onset of CBK rules is likely to increase transaction costs in M-PESA. Presently, customers are charged Sh30 for transferring between Sh100 and Sh35,000.[From The Standard | Online Edition :: Regulator gives M-Pesa a clean bill of health]
The last figure gets to the heart of the matter. Apart from providing a payment service where none existed before, M-PESA has forced a realignment in the market pricing of money transfer services.
Following an aggressive expansion of M-PESA, commercial banks have been forced to eliminate charges on their customers when sending cash.[From The Standard | Online Edition :: Regulator gives M-Pesa a clean bill of health]
No wonder banks are not as enthusiastic about the service as mobile operators and consumers.
These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]