Compared to the bearer business model, mobile operators who want to cooperate with financial institutions whilst being present at the customer interface (cash in/out) are more dependent on the regulatory environment of their respective country.
If the agency rules prevent them to handle cash and undertake the customer due diligence procedures for AML/CFT prevention, then they may not be able to choose the business models.
The first level of financial regulation is AML/CFT compliance, which generally becomes applicable when the mobile operator becomes involved in cash handling at the consumer interface.
The next level of regulation applying to mobile operators is prudential regulation. Prudential regulation becomes applicable when risks increase for the involvement of the mobile operator in the financial transaction, for consumers and for the wider financial system.
AML/CFT standards generally require that institutions implement a wide range of 'Know Your Customer' (KYC) procedures, including specific customer due diligence (CDD) procedures when opening a new bank account or when initiating or receiving a single payment for a client.
Systems and training to prevent money laundering (train employees, establish procedures of internal control and communication which are appropriate to prevent money laundering).
Identification procedures (provide satisfactory evidence of identity of customers, take into account the greater risk of money laundering when customers are not physically present when identified).
Record keeping procedures (keep copy of identification data for at least 5 years on record); money service operator has to register with relevant authority (this in turn gives the authority the power to enter and inspect the premises, order access to recorded information and impose penalties).
E-money (medium risk – medium heavy prudential rules)
Deposit taking, i.e. banking (high risk – heavy prudential rules)
However much such a risk-based approach would be desired, it is not the rule, and in many countries banking regulation applies to the majority of financial services offered independently of the risks involved.
One of the examples of risk based payment regulation is the EU Payment Services Directive (PSD), which will be adopted by November 2009 across the EU.
It was introduced to remedy the lack of competition with regard to payment services in the EU.
The EU Commission argued that the current regulatory situation seems to create a lack of competition in many payment services with banks often enjoying a privileged competitive position in payment markets.
The objectives of this Directive are to generate more competition, increase market transparency for providers and users, and standardize rights and obligations of providers and users of payment services.
A payment service provider has to fulfill qualitative and quantitative requirements, which ensure both financial stability and sound and prudent management of the payment institution.
The authorization for operating as a payment service provider requires capital requirements on ongoing and initial capital.
These capital charges are based on the lower risk of payment services and are in comparison lower than the capital requirements of banks.
The Directive sets out the requirements on payment service providers to provide information to consumers in order to ensure transparency.
E-money (Medium Risk – Medium Heavy Prudential Rules) Background and purpose
There are several examples of regulatory regimes allowing non-banks to accept money from a customer and to store it on an electronic device.
We call it e-money in this toolkit. The risks with e-money services compared to payment services increase, because the e-money provider holds customers’ monies over some time.
And if the e-money provider were to go bankrupt, the risk is that the customers’ monies would be lost.
This regulatory framework imposes prudential supervision of e-money institutions to the extent necessary for ensuring their sound and prudent operation and their financial integrity.
E-money (Medium Risk – Medium Heavy Prudential Rules) Obligations
Summary of most important obligations
Structural separation: a mobile operator offering e-money services has to set up a separate company, because electronic money institutions issuing electronic money are restricted to offer only services closely related to the issuance of e-money.
The Directive requires initial capital and ongoing own fund requirements.
Limitations on investment: Electronic money institutions have to have investments of an amount of no less than their financial liabilities related to outstanding electronic money in zero credit risk and sufficiently liquid funds.
Sound and prudent operation for management, administrative and accounting procedures and adequate internal control mechanisms.
E-money has to be redeemable in cash.
The E-Money Directive requires compliance with money laundering regulation.
Deposit Taking, i.e. banking (High Risk – Heavy Prudential Rules)
Banks hold deposits which they use for a variety of risk-taking activities, including providing credit, and can pose a systemic risk to the wider financial system.
Banks are regulated under Basel II with rules ensuring financial stability and that depositors can be repaid on demand.
General principles of bank regulation are reserve requirements, capital requirements, restrictions on activity and affiliation and payment system requirements.
Regulation on the use of agents determines if entities other than banks are allowed to handle cash at both ends of the remittance transaction, whether on behalf of banks or non-banks (i.e. remittance providers).
In cases where regulation permits the outsourcing of the cash handling function, entities which already handle cash, such as retailers, may act as agents for financial institutions.
It varies from country to country whether non-bank agents such as mobile operators are allowed to accept or disburse cash on behalf of a bank or a money remittance provider.
In those cases where the mobile operator operates the MMT service the agency rules also become relevant with regard to the scope the mobile operator can use other retailers to become agents of the MMT service.
Mobile operators are likely to be affected by the same rules governing the use of agents in situations where they want to handle cash at both ends of the remittance transaction.
It is often easier for a mobile operator to become an agent for a remittance provider than for a bank.
Morning Session: Assessing Regulatory Aspects of Mobile Commerce:
Anti-Money Laundering (AML) and Combating of Financing of Terrorism (CFT)
Mobile Operators Role
Prudential Regulation: Deposits, Payments and E-money
Outsourcing and Use of Agents
Introduction to the Remittance Market
The Opportunity for Mobile in Money Transfer
Mobile Money Transfer as a Mobile Financial Services Market Catalyst
Mobile Banking Vendor Analysis
Pre Conference Workshop – 23th March 2010
Introduction to the Remittance Market: Background (1/2)
Millions of people in developing countries are dependent on the support of primary wage earners working in cities far from home or abroad, where work opportunities are concentrated.
In Asia this phenomenon is well established with countries like the Philippines having a high proportion of GDP dependent upon international workers.
More recently, the extension of the European Union has lead to an increase in workers from Eastern Europe working in countries such as Germany , France and the UK , as well as the Nordic bloc . Similarly, significant numbers of people from West Africa are resident and working in Europe and the US .
Top recipients of migrant remittances among developing countries in 2008 (US$ billion, 2008e)
The flow of funds from migrant workers back to family in their home countries is an important source of income for many developing economies. The recipients often depend on remittances to cover day-to-day living expenses, to provide a cushion against emergencies or, in some cases, to make small investments.
For recipient nations, these funds form an important source of national income, in many cases exceeding the country’s income from Foreign Direct Investment and International Aid donations. Remittances now account for about a third of total global external finance (source: World Bank).
Most migrant workers send home between US$2,000 and US$5,000 a year – or 20 to 30% of their earnings (source: ID21 Insights). The total value of remittances has been increasing steadily over the past decade and it is conservatively estimated that in 2004 the total value worldwide was over US$230 billion. The latest World Bank figures estimate that in 2007, US$318 billion was sent cross border.
This value is based on ‘formal’ remittance channels that are tracked and recorded. In light of the fact that informal channels also exist, this figure is estimated to be approximately half the total amount remitted, giving a possible total market of over $500 billion.
Some 175 million migrants currently use remittance services, sending money to a dependent recipient base of around 800 million people. The World Bank estimates that the average transaction value is US$200.
Global remittances exceeded $338 billion in 2008, fell to $317 billion in 2009
For individuals in developing countries, access to remittance funds has the potential to bring profound change to their lives, and to the social and economic growth of their communities.
For receiving countries, such funds have huge economic and social benefits on a national scale.
The ability to move money using the mobile phone will have dramatic and positive benefits on the dynamics of economies, with traders being able to communicate and do business more easily across whole regions.
Looking ahead, favorable trends in global migration will ensure that the amount of remittances will continue to grow dramatically.
According to Western Union, the global migrant population is expected to grow from 191 million in 2005 to more than 280 million in 2050, with China, India, Mexico and the Philippines experiencing strong levels of emigration.
It is estimated that the total value of global remittances in the next five years will be US$700 billion.
Such developments have already led the World Bank to state in a report that ‘ improvements to payment system infrastructure that have the potential to increase the efficiency of remittance services should be encouraged .’
The remittance market is a huge and expanding industry sector, and mechanisms for moving cash across borders are well established.
The market is dominated by a few specialized players, such as;
Cross-Border Payments by Type * The most recent year for which comprehensive data was available Source : Boston Consulting Group (BCG), Preparing for the Endgame. Figures for 2011 are projections. BCG defines payments as non-cash transactions, i.e., payments not involving a face-to-face exchange of cash. 2003 2009
Estimated Market Share of International Person-to-Person Transfer Providers, 2003 (by number of transactions processed) Sources: Ratha, “Workers’ Remittances,” First Data, SEC Form 10-K; MoneyGram, SEC Form 10; Bezard, Global Money Transfers ; Great Hill Partners, “Great Hill Partners Form GMT Group;” private estimates of Gera Voorrips and Hans Boon, ING Postbank; authors’ estimates.
A number of mechanisms for cross-border remittances already exist, ranging from international bank transfers, specialist remittance companies and indeed a large ‘informal’ sector where methods for transferring cash are varied and difficult to quantify.
These mechanisms are prohibitively expensive for small denomination transfers, which limit the ability of individual workers to distribute funds to a larger number of people and penalise the poor who can only afford to send small amounts.
The informal sector also presents challenges to governments and their agencies.
Due to high overheads (retail premises and staff costs), a high fixed commission cost per remittance means that charges for smaller transactions are high, with industry revenues estimated at an average 15% per transaction, increasing to over 25% for remittances below $100 (including foreign exchange costs, ‘FX’).
Transfer Cost to Some Leading Recipient Countries (per cent of amount sent; countries ordered by total remittance inflows) Sources: Western Union, Women’s World Banking, and IMF staff calculations
The most and least costly "country corridors": (Country Corridors & Average cost in US$)
Top 5 (least costly):
Spain to Brazil 7.45
United States to El Salvador 9.17
United States to Ecuador 9.39
United States to Honduras 9.41
Saudi Arabia to Philippines 9.56
Bottom 5 (most costly):
Germany to China 49.30
Germany to Romania 48.79
South Africa to Zambia 47.02
Netherlands to Indonesia 45.09
Germany to Croatia 42.45
Top 5 (least costly):
Spain to Brazil 7.68
United States to El Salvador 11.35
United States to Honduras 12.48
Saudi Arabia to Philippines 13.50
United States to Lebanon 13.65
Bottom 5 (most costly):
Netherlands to Indonesia 86.41
Germany to Croatia 85.66
South Africa to Zambia 81.08
Germany to China 76.74
Netherlands to Dominican Republic 70.58
Cost includes the transaction fee and exchange rate margin. Only those corridors where all the necessary information was provided are featured. Corridor averages are unweighted and do not reflect the market shares of the different firms that compose the average.
Charges to send $200 to selected countries Sources: Worker Remittances – An International Comparison, Menuel Orozcp, Inter-American Dialogue, 2003
Remitting from Singapore to Indonesia 12.00 Total Average 10.00 Post office Average 10.88 MTO Average 17.50 Bank Average Apr 08, 2008 Next day. However, money can only be sent to branches of Mandiri Bank 25.00 Bank Bank Mandiri Apr 08, 2008 1-2 working days 15.00 MTO GPL Remittance Apr 08, 2008 15 minutes 12.00 MTO Western Union Apr 08, 2008 1-5 days 10.00 MTO Brunphil Express Apr 08, 2008 Same day to branches of BNI in Indonesia; 5 days to all other banks 10.00 Bank BNI (Bank Negara Indonesia) Apr 08, 2008 1-3 working days 10.00 MTO One Stop Remittance Apr 08, 2008 Next day 10.00 Post office Singapore Post (Cashome) Apr 08, 2008 Next day 10.00 MTO BTI Money Transfer Apr 08, 2008 10 minutes 10.00 MTO Ameer Tech (MG) - cash Apr 08, 2008 10 minutes 10.00 MTO Ameer Tech (MG) - account Apr 08, 2008 Next day 10.00 MTO MoneyWorld Date Transfer speed Fee (SGD) Firm type Firm name
With its ubiquity and high penetration in nations around the world, mobile communications now has the potential to vastly improve and transform access to remittance funds for people in developing markets.
Mobile technology can lower the cost of remittances as it removes the need for physical points of presence and ensures a timely and secure method of transaction.
This concept of ‘e-cash’ is extremely attractive to low income users in particular.
For many communities around the world, access to such funds forms a critical part of their livelihood.
Malaysia: Maxis launch of Fast Tap Service April 9, 2009
Extending the Remittance Model to Include Mobile
Left without intervention, mobile money transfers of various forms will continue to proliferate, and product innovation will continue, albeit at different rates and in different directions around the world.
Global interoperability, however, would offer significant value to customers and ensure the GSM ecosystem delivers value and scale into this service.
Interoperability and Market Momentum: Individual MNO Subscriber Penetration The remittance model must therefore be extended to enable international remittances over mobile in a scalable and sustainable manner and to allow cost effective low denomination remittances – an entirely new market not served today.
There are two sources of value to the operator; direct and indirect.
Direct value is generated from transaction fees and increased telecoms usage to support the service.
Indirect value comes from increased usage not directly linked to the service but catalyzed by it, for example calls to notify customers that funds are being sent, or from reduced churn. In particular, one mobile operator has already experienced up to 80% reduction in churn from those consumers using a mobile wallet.
Mobile Money Transfer as a Mobile Financial Services Market Catalyst: Mobile Money Transfer, Mobile Payments and Mobile Banking
By placing mobile operators at the heart of remittances, Mobile Money Transfer has the potential to catalyze the whole mobile financial services market, incorporating mobile payments, mobile banking and mobile transfers.
Mobile remittances may serve as a valuable catalyst of m-commerce and m-banking on a global scale, bringing social and economic development and driving CSR agendas.
The enabling infrastructure for 'remote' transactions of mobile payments, banking and transfers has significant synergies.
Structure of the Mobile Financial Service Market
The previous example of Pakistan demonstrates a country where Mobile Money Transfer has the potential to significantly increase the use of ‘e-cash’, with only 1 million people with bank accounts, more than 70 million mobile subscribers, and 7% of the population working abroad.
If the 7% migrant worker population from Pakistan sent money back to an average of 4-6 people each, it would take only a short period of time before almost half the population was receiving and using mobile e-cash.
This critical mass would drive the ecosystem to support the domestic use of these funds for the community receiving them.
Mobile remittances are an important but not sufficient element of the successful uptake of e-cash and mWallets.
To be a compelling consumer proposition there must be a critical mass of uses of e-cash.
The key competitive differentiator for local mWallets will be the combination of cash-in and cash-out channels and the network of merchants that accept payment with e-cash or with a payment card associated with the mWallet.
Combining m-wallet uses successfully to match consumer behavior
Mobile operators are uniquely positioned to meet the needs of this latent market, with both developed and developing economies offering a potential total direct market revenue opportunity of more than US$100 billion by end 2010, coupled with a significant opportunity for operators to reduce churn.
The GSMA MMT Operator Working group consists of around 30 Mobile Operators that have shown an interest in MMT and have allocated resources to actively participate in the development of standards and interoperability on a global scale.