There are good reasons, as we have discussed before, why we actively want regulators in the m-payment space. That’s because while no regulation at all might minimise compliance costs for the provider, it does not minimise costs for society as a whole: consumers carry on using more inefficient forms of payment (cash, in the countries being discussed) because they have regulatory certainty. So there are great benefits to having regulation. Blums summarised these as benefits to consumers, providers and the common good. I thought he was dead right to include the common good as a separate and distinct beneficiary, serving to remind . Surprisingly, to some people, he said that one of the benefits of regulation was to encourage innovation.
The idea of regulators balancing prescriptive vs. principles-based
He gave a useful case study of the Philippine regulatory response to the development of G-Cash and Smart Money, showing how the regulators allowed the market to develop new solutions by working with the new entrants to find ways to make the regulations work. As an aside, later in the day a chap from Ernst & Young (who began by saying that, with admirable candour, that the “big four” have come “a little late” to m-payments) was drawing some lessons from the launch of Smart Money (in 2000), GCash (in 2004) and Citi (In 2008) in the Philippines. Smart Money has seven million registered users and 700K retailers, GCash two million registered users and over 600K retailers (and GCash customers have access to 6,000 ATMs) but these systems could be bigger still with bigger networks of agent, consumers and merchants. The barriers to entry are too high.
GCash need to make it easier for new members (consumers or merchants) to join system. But they also need to do something with the agent network. There is an onerous process for new agents to join the GCash network and since agents only get 1% commission for cash loads compared to 10% commission for airtime top-up, there’s not much of an incentive for them. These factors have limited the growth of the agent network which has, in turn, limited the growth of the scheme. As an aside, here’s a useful data point: Blums reckons that the shift to m-payments has eliminated nearly 80% of microfinance provider costs in the Philippines. Now, the environment there is most conducive to m-payment — 95% of Philippine towns have mobile coverage, only 60% have a bank branch. There are 10,000 ATMs but a million airtime resellers — but so the cost savings may be at high end of possibility, but the opportunity to significant cost reduction in many markets is clear.
Looking forward, he reiterated the growing need to regulate the agent networks in the m-payments space (Globe has something like 1,800 accredited partners for the GCash service), something that we have been thinking about with some of our customers and something that we will be sure to return to on the Digital Money Blog. Finally, he noted that a key element of the future platform is some form of mobile identity infrastructure. GCash has over-the-air registration, but if you use it at POS you have to present an ID card, which makes it less convenient than it might be. I couldn’t agree more, which is why I was so keen to have a mobile eID panel session at the recent Identity and Privacy Forum and I’ll be talking on this subject in Session C European eIdentity Management, the 22nd eema conference, on 25th June in London.
Talking about regulation, there’s a suspicion that incumbents, while complaining about consumer protection legislation, are actually quite happy for it to grow and expand because it serves as a barrier to entry for competitors. If you are, for example, an Indian bank then why would you open up a profitable business to nimble, lean competitors than could do the same job for a fraction of the cost? You would not. You would try and buy as much time as possible while you tried to develop competitive products.
To some extent, it is natural for regulators to be “captured” by incumbents. The new entrants in many cases do not exist so therefore cannot lobby the regulators. What’s more, as is generally the case with value chain disruption, the “losers” are few, large and vocal whereas the benefits to the winners (consumers, new businesses, society) are diffuse. We learned about this problem a couple of hundred years ago in Britain with the repeal of the Corn Laws (yes, I’ve been reading Splendid Exchange again!): the economically efficient solution is to compensate the losers and bring forward the reform, because the benefits to society outweigh the costs of the compensation. So, if we think about the Indian example again, it would make more sense for the economy as a whole to allow non-bank competition in payment services in return for giving the banks some other advantage. Some would say that the ability to create credit is a big enough advantage as it is (this is, pretty much, the European approach) but I can see that in developing markets a more direct form of compensation might be appropriate.
These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]