Last update: 2010

1. Bringing Smart Policies to Life The basics: Mobile phone financial services Last update: 2010

2. 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

3. Finland Mexico South Africa The Philippines Colombia Kenya % Banked people % Mobile Penetration Potential Market Closing the gap between unbanked people with access to mobile phones is one opportunity to scale up access to finance 100% 97% 50% % mobile phone penetration 10% % of banked people 3 Sources: Banked Honohan 2007; Penetración Celular: ITU; WireIess Intelligence 4:2002, 4:2006 Datos México: Notes on Branchless Banking Policy and Regulation in Mexico; CGAP

4. 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 Benefits

5. Service offering • 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

6. 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

7. Policy Question: interoperability? • Interoperability enables customers to gain access to a different operator’sm-bankingplatform • 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

8. 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

9. 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.

10. Kenya “MNO-Based” Model: M-PESA MNO Agent Cash In/Out Client Safaricom Bank • 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. 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. 10

11. 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)

12. Philippines “Bank-Based” Model: SMART Money SMART Money SMART Agent Cash in/out of Smart money wallet Client Banco D’Oro • With a loaded E-money wallet clients can … • Purchase • Deposit • Withdraw • Pay Bills • Transfer Money • ATM Withdraw a • Using 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 In the SMART Money “Bank-Based Model,” Banco D’oro issues E-Money using the SMART E-wallet platform that allows clients to transact. 12

13. Mexico Mobile Banking Model 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. TelCo (Banking Agent) TelCo Retailer Face to Face with Client Bank Client • Basic Banking Services: • Deposits • Withdraws • Bill payments • Remittances Deposits are withheld and managed by the bank 13

14. Mexico Mobile Banking Model Banking institution is responsible for the implementation of the AML/CFT regulation but some specific activities are required of the TelCo. • Monitoring client transactions • Report suspicious and significant transactions (over US$10,000) Bank • 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. TelCo 14

15. Thank you! © Alliance for Financial Inclusion 2010 info@afi-global.org www.afi-global.org