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121010_Mobile Banking & Payments for Emerging Asia Summit 2012_A Risk-Based Approach to Mobile Financial Services Regulation
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121010_Mobile Banking & Payments for Emerging Asia Summit 2012_A Risk-Based Approach to Mobile Financial Services Regulation

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121010_Mobile Banking & Payments for Emerging Asia Summit 2012_A Risk-Based Approach to Mobile Financial Services Regulation 121010_Mobile Banking & Payments for Emerging Asia Summit 2012_A Risk-Based Approach to Mobile Financial Services Regulation Presentation Transcript

  • A Risk-Based Approach to Mobile Financial Services RegulationMobile Banking and Payments for Emerging Asia Summit, Bali, October 2012 Michael Joyce, Mobile Money Policy Advisor, TNP2K mike@joyce.net www.linked.in.com/mikejoycenet @mjoyce_au
  • The First Question a Regulator asks.• Who is providing the service? A bank or a telco?• If it’s a telco, how can I regulate it? Is it banking? TIM NASIONAL PERCEPATAN PENANGGULANGAN KEMISKINAN 2
  • Regulatory Approaches to Mobile Money• In reality, all mobile financial services need both a bank and a telco at some level.• Financial regulators are the appropriate body for all cases where safeguarding of money is an issue, whether it is the form of banking laws, payments laws or some combination of these. TIM NASIONAL PERCEPATAN PENANGGULANGAN KEMISKINAN 3
  • Models of Mobile / Branchless Communications Banking Customer Transaction Account Settlement Channel Interface Processing ManagementWireless or remote Often delivered on Movement of money Maintenance of Movement of fundslink provided to mobile phones, but between accounts. account balances. between mobileconnect customer could also involve Must be done in real- May be performed money and otherwith systems. EDCs, POS, tablets time, online within a Core financial system or computers. environment. Banking System or a participants. Includes May be accessed by “wallet” system. input and output of customers or agents. funds at a macro “Telco-Led”, i.e. M-Pesa Kenya; Smart and Globe Philippines level. Telco Telco Telco Telco Bank“Bank-Led”, i.e. DBBL Bangladesh, UBL Omni Pakistan, Indian “Business Correspondent” mod Telco Bank Bank Bank BankOther models – Hybrid or third party models (WING Cambodia, Indian Business Correspondent Telco Third Party Third Party Third Party Bank Telco Third Party Third Party Bank Bank Telco Subsidiary Subsidiary Subsidiary Bank Telco Third Party Bank Bank BankModel Source: Protecting Mobile Money Against Financial Crimes, Chatain et Al, World Bank 2011 TIM NASIONAL PERCEPATAN PENANGGULANGAN KEMISKINAN 4
  • Deposit taking vs E-Money Deposit taking – accepting funds from the public with a view to deploying them as lending or investment. E-money – a surrogate for coins or notes intended to be stored on an electronic device and used for immediate payments at any time1. • Deposit taking is higher risk than e-money as the funds are leveraged. This requires a higher degree of prudential supervision. • Regulators need to monitor risks associated with e-money- ensure it is kept segregated from other business accounts. • KYC requirements may be lesser for e-money, but this is dependent on what can be done with the e-money (cashing out, transferral to bank accounts, system limits).1: GSMA “Understanding Financial Regulation and How it Works” 2008http://www.gsma.com/developmentfund/wp-content/uploads/2012/06/gsmaunderstanding_financial_regulation_0908.pdf TIM NASIONAL PERCEPATAN PENANGGULANGAN KEMISKINAN 5
  • Examples of regulations for banking andpayments • Banking and Prudential • Data privacy Supervision Regulation • Electronic security / E- • Anti-Money-Laundering and commerce Counter-Terrorist-Financing • Foreign exchange (AML / CTF) • Consumer protection • Payment Regulation • Taxation • E-Money • Rural Banks / Microfinance • Remittance • Islamic Banking • Outsourcing • Payment system rules • Agents / Branchless Banking (RTGS, retail switches, SWIFT, Card Schemes) • Accounting Standards TIM NASIONAL PERCEPATAN PENANGGULANGAN KEMISKINAN 6
  • Why take a risk-based approach?• Benefits of a risk-based approach – Balances risks against the benefits of new services. – Regulators often have a commitment to financial inclusion – Allows businesses to make their own decisions, within guidelines – Best use of limited resources• Principles for risk-based approaches – Compare risks with the risk of cash or existing practices – Continuous communication, monitoring and flexibility – Clarity is important to prevent “over-compliance” TIM NASIONAL PERCEPATAN PENANGGULANGAN KEMISKINAN 7
  • What are the risks of mobile banking and payments?Fraud Most frauds are variants of existing vulnerabilities. Mobile payments generally have better fraud protection than magnetic card-based payments.Technical failures Mobile money technology is maturing. MNOs are used to dealing with large scale transaction bases.Process failure Internal processes can be a weakness for new operations. Many bank-standard processes are new to telco operators.Business Continuity Redundancy and availability are critical to real-time systems with no paper trail.Money Laundering / System limits are typically low, and transactions areTerrorist Financing inherently easier to trace than cash or existing inter-bank transfers.Customer Protection Use of agents creates new risks. Simple processes and good education are important. TIM NASIONAL PERCEPATAN PENANGGULANGAN KEMISKINAN 8
  • What are the risks of mobile banking and payments?Credit Risks No new credit risks in most mobile banking operations. Can lead to improved credit assessments if mobile usage patterns are considered.Liquidity Risk: Agents Operators must have good processes in place for agent liquidity- often the number one problem for customers.Liquidity Risk: Operator could go bankrupt or be unable to service allOperator cash-out requests (“bank run”). Placement and monitoring of security / pool / trust account is vital for e- money systems.Systemic Risks Closed-loop systems may lead to anti-competitive behaviour or unfair pricing.Inflationary Risks Uncertain if this is an issue - value is small compared to other institutional payments systems.Reputational Risks Mobile services need a high level of trust in order to succeed. TIM NASIONAL PERCEPATAN PENANGGULANGAN KEMISKINAN 9
  • Which risks should most concern• Approvals to launch regulators?• Risk Management Framework of the Operator / Bank• Compliance with AML / CTF• Deposit of funds for e-money providers• Use of agents• Consumer protection• Minimum technical standards• Reporting TIM NASIONAL PERCEPATAN PENANGGULANGAN KEMISKINAN 10
  • Common controls in mobile financial• services Transaction and value limits• PINs and PIN reset processes• Customer Due Diligence• Agent Due Diligence• Agent compliance monitoring• Customer and agent training• Transaction reporting• Transaction alert systems• Segregation of Duties• Complaint handling TIM NASIONAL PERCEPATAN PENANGGULANGAN KEMISKINAN 11
  • Examples of risk-based approach: KYC and limits• CBNV (Mexico) implemented a tiered approach to KYC, matching deposit limits to socio-economic income levels. ID type Monthly deposit limit (USD)Level Anonymous 285 Can be opened through retailers, web or agents,1 but cannot be used on mobile.Level Self-reported name 570 Can be opened remotely, paper records are not2 and details necessary. 24 months to migrate to full KYC.Level Self-reported, with 1140 Can be opened remotely, paper records are not3 identification validated necessary. 24 months to migrate to full KYC. against public database.Level Face-to-face 3800 Can be opened at branches, agents and4 verification of ID enterprises. No paper records necessary.Level Full bank account N/A Only at branches.5http://technology.cgap.org/2011/05/19/a-bold-move-toward-simplifying-amlcft-lessons-from-mexico/ TIM NASIONAL PERCEPATAN PENANGGULANGAN KEMISKINAN 12
  • Pakistan – willingness to allow changes• SBP Initially released Branchless Banking Regulations in 2008• Significant expansion in number of agents, but was not leading to financial inclusion – low activity rates, many customers were over-the-counter rather than account based.• Issued new guidelines in 2011. – Introduced “Level 0” accounts with no paper required. – Simplified account opening requirements (previously required biometrics) – Increased account limits• Guidelines are very detailed and written in “Plain English”• Publishes very detailed quarterly reportshttp://technology.cgap.org/2011/07/25/state-bank-of-pakistan-removes-barriers-to-branchless-banking/ TIM NASIONAL PERCEPATAN PENANGGULANGAN KEMISKINAN 13
  • Dangers of over-compliance• Colombia has a widespread Conditional Cash Transfer program in place “Familias en Accíon”. It reaches about 2.5 million families. About 2.4 million use a no-frills bank account to receive their payment.• Simplified account opening is allowable for customers of these payment schemes and for low-value electronic accounts opened at agents.• In 2008, a tender was awarded to Union Temporal, an alliance of Banco Agrario and Assenda, a company that provides logistics, cards and merchant services.• The responsible bank decided to use a more complex process than required by regulations, including fingerprint scanning and taking of photographs. The fingerprints are not used for any transactional purposes.• The process cost an average of 9,900 pesos ($5.50) per account Assenda estimates that a simplified processed would have beenhttp://www.cgap.org/gm/document-1.9.57010/Colombia_Public_G2P_Country_Report_Final.pdfhttp://www.cgap.org/gm/document-1.9.42397/Updated_Notes_On_Regulating_Branchless_Banking_Colombia.pdf 30-40% less costly. The project is being re-tendered. TIM NASIONAL PERCEPATAN PENANGGULANGAN KEMISKINAN 14
  • Ongoing regulatory capacityFour key requirements to capture in regulatory reporting1• Risk management frameworks and resulting data for risks pertaining to operations, liquidity, money laundering, and terrorist financing;• consumer protection;• public disclosure of information; and• outreach and financial inclusion.Other Regulatory activities• Receive lists of agents• Monitor transaction values, volumes and activity• Receive audit reports• Conducts audits of relevant bodies• Review and approval of major changes to products and services• Report information to the public and relevant audiences1: AFI Guideline Note on Mobile Financial Services: Regulatory Reporting September 2012 TIM NASIONAL PERCEPATAN PENANGGULANGAN KEMISKINAN 15
  • Future issues and groundwork for successful mobile financial services• Interoperability• Fees and interchange costs• Exclusivity• Financial inclusion – does Mobile Money lead to this?• Moving to cash-less (or less-cash) societies (G2P, value chain) TIM NASIONAL PERCEPATAN PENANGGULANGAN KEMISKINAN 16
  • Summary• Financial regulators will need to understand the complexities of different business models of mobile financial services.• A risk-based approach will enable the right balance between service growth, financial inclusion and protection of the financial system and consumers.• Good communication is essential for a risk-based approach to succeed. TIM NASIONAL PERCEPATAN PENANGGULANGAN KEMISKINAN