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The Enabling Environment for Digital Financial Services
This document discusses key considerations for regulating agents in digital financial services. It recommends authorizing agent use through a risk-based approach focusing on operational risks, consumer risks, and anti-money laundering risks rather than approving individual agents. Ongoing supervision of agents should include targeted inspections of providers and agents according to materiality and risks. Reporting requirements should be proportionate. Ensuring a level playing field between bank and non-bank agents is important. Regulations should set minimum standards without restricting growth potential and allow for tiered agent structures.
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The Enabling Environment for Digital Financial Services
- 1. The Enabling Environmentfor Digital Financial Services Stefan Staschen 10 March 2016
- 2. Main determinants ofsuccess Regulation Agents Issuers Transaction limits Registration Customers Sign up Active Use Product design Pricing Platforms Agents Sign up Training Management (i.e. liquidity, branding, equipment, etc.) Business Models Provider Product design Pricing Platform
- 3. Basic Principles andKey Issues in Creating an Enabling Environment for DFS Mohammad Moniruzzaman, 2009 CGAP Photo Contest 3
- 4. Proportionality Proportionate regulation maximizesthe net-benefit of regulation Benefits Costs This is best to be achieved following a risk- based approach that allows for rationalizing the use of scarce supervisory resources by focusing on issues posing the highest risk to the achievement of the regulatory objectives of inclusion, stability, protection, and integrity (I-SIP) 4
- 5. Level Playing Field Samerisks should be treated in the same way, different risks differently No material differences between regulatory treatment of agents hired by banks and nonbanks, as long as they offer the same products Regulation based on function, not on institutional type, e.g. • E-money accounts can be issued by banks and nonbanks • Agents can be used by various types of financial service providers • Financial consumer protection rules apply to entire range of financial service providers Provide scope for banks and different types of nonbanks (MNOs and others) to compete on equal footing
- 6. DFS regulation impactsevery participant in the DFS value chain FSP ClientAgent DFS participant Regulatory environment Prudential regulation of banks and e-money issuers 1 Agent regulation2 KYC regulation3 Consumer protection regulation 4 6 Competition regulation
- 7. “Basic regulatory enablers”in digital financial services Broad consensus about short list of most critical topics 1. E-money issuance 2. Agents 3. AML/CFT 4. Competition 5. Consumer protection Nonbank players permitted? Bank and nonbank agents? Tiered, risk-based KYC structures? Different types of institutions? Tailored to specific risks? Main issues 7
- 8. Bangladesh Ghana India Kenya Myanmar Pakistan Rwanda Tanzania Uganda E-Money No YesYes Yes No No Yes Yes Yes 67% Agent networks Yes Yes Yes Yes Yes Yes Yes Yes No 89% Tiered KYC Yes Yes Yes Yes No Yes No Yes Yes 78% Multiple institutions No Yes Yes Yes No No Yes Yes No 56% Consumer protection Yes No No Yes No Yes No No Yes 44% Overall score 60% 80% 80% 100% 20% 60% 60% 80% 60% 67% A snapshot of basic enablers in nine countries CGAP has been working on Positive regulatory changes in recent years Areas in which change is relatively likely to happen soon 8
- 9. Regulating Nonbank E-Money Issuers MdFarhad Rahman, 2013 CGAP Photo Contest 9
- 10. The banking partof DFS regulation FSP ClientAgent DFS participant Regulatory environment Prudential regulation of banks and e-money issuers 1 Agent regulation2 KYC regulation3 Consumer protection regulation 4 10 Competition regulation
- 11. Bank Agent Client Nonbank(e.g., MNO) What difference does it make for regulatory treatment? Bank Contractual relationship
- 12. It is importantto draw clear lines between payment, e-money, and deposit Payment Electronic money Deposit Definition Who can issue? Prudential requirements Deposit insurance Transfer between two parties; Time restricted (e.g. within T+3) Special type of repayable funds with transaction focus “Repayable funds”, intermediation Payment Service Providers E-Money Institutions; regulated financial institutions Regulated financial institutions Low Medium High NA In most cases not Typically yes
- 13. Fund safeguarding andfund isolation are two key regulatory provisions Fund safeguarding Maintain liquid assets equivalent to e-float Restrictions on use of funds Diversification of e- float fund holdings Fund isolation Ownership of funds Trust account/escrow account Issuer failure: hierarchy of claims
- 14. Transaction limits constituteadditional risk mitigation measures Maximum transaction values Maximum value of individual transaction Maximum monthly/periodic load Maximum holdings
- 15. “Emerging regulatory enablers”in DFS Paying interest to e-money holders Typically not permitted in order to differentiate from banking Could be “pass through” of interest on pooled account Bringing e-money accounts under deposit insurance Coverage limits too low or e-money excluded from coverage Pooled accounts in insured institutions can provide coverage for each customer
- 16. How about thethree models we introduced yesterday? The pure bank model: Equity Bank • Using telco as channel • MVNO license provides access to SIM The standalone payments model: bKash • MFS Guidelines: bank-led model • Behaves very similar to e-money model The non-bank model: Airtel Money • In most countries directly licensed by the regulator • In a few it’s more complicated: e.g. Uganda, India
- 17. Basic enabler #1:Regulations permitting and governing e-money India - yes No nonbank e-money issuance, but: • Prepaid Payments Instrument Issuers (Restrictions on cash- out/requirements to partner with banks) • New: Payments banks Pakistan - no Different types of banks can issue stored value accounts and MNOs have been permitted to own majority stake in banks Bangladesh - no Not really, but – • bKash very much operates like a nonbank e-money issuer Rwanda - yes E-money issuer defined in PSP regulations, but same rules apply as for PSPs except for trust account rules Uganda - yes Mobile money service providers (MNOs and other nonbanks) can offer e-money services, but in partnership with banks as the entity receiving the regulator’s no objection 20
- 18. What do wewant to see and how do we get there? Nonbanks or limited purpose banks can issue e-money / stored value accounts / small savings accounts Sufficient fund safeguarding and fund isolation rules Not subject to full range of prudential regulations applied to financial intermediaries Appropriate e-money regulation National Payment System Law or clear authority in another law to regulate payment system Implementing regulations governing the issuance of e- money by nonbanks (and banks?) Alternatively: Limited purpose banks (“differentiated banks”, niche banks) Typical steps required to get there 21
- 19. REGULATORY REFORM TO ADVANCEFINANCIAL INCLUSION: A CASE STUDY OF GHANA ELLY OHENE-ADU, BANK OF GHANA MARCH 2016
- 20. Background • During earlyto mid 2000s, Ghana recognised the need to expand the boundaries of financial services • MM technology was introduced in the same period providing a window of opportunity to extend financial services to rural areas • In 2008, Ghana issued guidelines on Branchless Banking (BB) focused on a bank-led and bank- based approach to BB
- 21. Branchless Banking Guidelines •Mobile money viewed as a channel for use by only banks and deposit-taking financial institutions to reach unbanked segments of the population • MNOs and other Non-banks: Regarded as Agents to make their platforms available to banks to use • Mandated that banks alone should lead the process, own the customers as well as the agents • Interoperability: “Many-to-many” model - Group of banks to partner with a group of MNOs; agents were required to be shared
- 22. Poor incentives weakeningsupply- side deployments • Banks were mostly disinterested; Happy to keep the float accounts • Active banks reluctant to make investments in new developments for fear of free-riders • MNOs made investments, did all the work but were in contravention of the regulations • Weak support of agents by banks stifled the adoption of Mobile Money by users
- 23. Low access tofinancial services According to Finscope Report of 2010…… • 59% of population lived in rural areas • 56% adults had access to financial services – 41% formal, 15% informal • 44% had no access at all and were financially excluded • Only 34% of Ghanaians had a bank account • However, 80% of population had access to mobile phones (Also in rural areas)
- 24. The Financial Landscapein Ghana 2010 Finscope Survey, 2010 34% 7% 15% 44% Bank Non-bank formal Informal only Excluded
- 25. The Solution: • Innovation •Incentives • Security • Risk Management • Consumer Protection • Well articulated sanctions
- 26. The Solution: Revise,Experiment, Monitor • Introduce clear, pragmatic and flexible regulation that would enable and foster a healthy environment for financial inclusion to succeed • Revise the BB Guidelines to fit market dynamics • Adopt flexible experimental stance (Kenya, Philippines, Tanzania, Mexico) • Adopt proportionate risk-based approach to regulation • Keep eyes on the ball: Monitor and manage emerging risks
- 27.
- 28. Engineering Incentives • Allownon bank-led model but require them to establish non-bank subsidiaries licensed and regulated by the central bank • Abolish many-to-many requirement to free operators from tight and unmanageable relationships • Mandate Non-banks to keep the float with RFIs • Designate a 15% threshold beyond which the float should be split and transferred to other banks to safeguard against bank insolvency
- 29. Engineering Incentives Financial Inclusion: •A three-tiered account structure with related transaction limits; risk-based approach to KYC and CDD so that Individuals with little ID could be included in the formal financial sector • Require float-holding banks to pay interest on the float • Require electronic money issuers to pay not less than 80% of interest to account holders
- 30. Engineering Incentives • Establishstrong consumer protection, complaints resolution structures to afford consumers safeguards against abuse • Set technology, security and compliance framework with requirement for certification in PCI DSS and ISO 27001 standards • Detailed reporting requirements • Well articulated sanctions
- 31. Permissible Transactions ▪ Domesticpayments ▪ Domestic money transfers, including to and from bank accounts ▪ Bulk transactions (Salaries, benefits, pensions etc.) ▪ Cash-in-cash out transactions ▪ Over-the-counter transactions ▪ Inward international remittances ▪ Savings/credit products under-written by Regulated Financial Institutions (RFIs) ▪ Insurance products under-written by duly licensed insurers.
- 32. Implementation Challenges • Negativereaction from banks • Requirement for agents to take images of photo IDs of customers upon presentment • Requirement for compliance with ISO and PCI DSS standards • Interest payment and its sharing between DEMIs and account holders
- 33. A changed picturein 2015 Access Strand in FII 2015 vs FinScope 2010 Note: Figures show access to services, not accounts 34% 36% 7% 22% 15% 17% 44% 25% 2010 2015 Bank Non-bank formal Informal only Excluded
- 34. The main driverin Ghana has been nonbank formal services Access to these services tripled in five years 34% 36% 7% 22% 15% 17% 44% 25% 2010 2015 Bank Non-bank formal Informal only Excluded 3x
- 35. Exercise The Central Bankof Gagastan
- 36. AML/CFT: do transaction limits provide sufficient comfort? Needof regulatory oversight for simple “payment services”? Interest payment and deposit insurance on e- money accounts? Transaction limits as sufficient AML/CFT measure? Rules on use of prepaid funds?
- 37. GMB Akash, 2011CGAP Photo Contest Regulating bank and nonbank agents 41
- 38. Regulating agents asa new channel FSP ClientAgent DFS participant Regulatory environment Prudential regulation of banks and e-money issuers 1 Agent regulation2 KYC regulation3 Consumer protection regulation 4 42 Competition regulation
- 39. Which risks areregulators most concerned about? Operational risk Agents as a new channel give rise to new operational risks Issues such as IT continuity, contingency planning, and internal controls Consumer risks The other main concern of supervisors and one that receives increasing attention Issues such as fraud, unauthorized fees, lack of receipt, lack of liquidity (cash at agent), system downtimes, inadequate dispute resolution, abusive treatment Money laundering and terrorist financing risks The supervisors’ focus on this depends on importance of the topic more generally (e.g., a high priority in Pakistan) 43
- 40. Authorizing the useof agents: Observed tools and techniques and recommendations Current practice Recommendation Authorization of channel use and of individual agents • 1 or 2 stage (channel authorization and authorization of individual agents) • Risk of delaying agent rollout/closure; overstretching supervisory capacity no approval of individual agents and only new authorization for significant changes to original agent business proposal What to check at time of authorization? • Contract review • Business and operational plan • Financial projections • Agent due diligence docs and agent roll-out plan • IT infrastructure • Opportunity to bar poorly designed agent businesses • Use model agent contract to be approved by supervisor or min. standard clauses • Check contracts with third parties such as aggregators • Look at agents as part of broad operational risk review of the supervised entity 45
- 41. Ongoing supervision: Observedtools and techniques and recommendations Current practice Recommendation Inspecting providers • Targeted inspection vs. being part of regular inspections • Transaction simulations • Agent due diligence procedures • Internal controls • Access rules to IT system • Transaction simulation • Etc. • Consider materiality of agent business for the provider • Make use of offsite analysis and previous onsite inspections to plan for visits • Focus on headquarters and review of risk management program • Also visit agent network managers if heavily involved in operation of agents • Check quality of reporting process Offsite surveillance • Wide range of intensity from detailed database with data on agent level to no regular reporting on agent activities • Only collect information that feeds into the risk assessment or serves other regulatory purposes (e.g., financial inclusion monitoring) • Automated process • At a minimum quarterly reporting on aggregate level 46
- 42. Ongoing supervision: Observedtools and techniques and recommendations (contd.) Current practice Recommendation Inspecting agents • Random sample • Targeted samples according to certain criteria (top/worst performers, most fraud cases, most complaints, etc.) • Mystery shopping • Most countries don’t do this on a regular basis • Inspect individual agents only with very clear supervisory purpose (e.g. To check price disclosure, conduct transaction similations, audit particularly problematic agents) and prioritize targeted sampling Enforcement actions • Wide range of measures available vs. only withdrawal of letter of no objection • No serious enforcement actions have been taken yet • Sufficient enforcement powers needed including changes in contracts, suspending or prohibiting certain practices, and penalties 47
- 43. Two important issuesto consider in agent regulations How to ensure level playing field between bank and nonbank agents? Who can be an agent? • No material difference between bank and nonbank agents’ regulatory treatment (but bank agents might be permitted to do more) • Best achieved by single regulation covering both types of agents or by identical regulations applying to both types • Otherwise risk of regulatory arbitrage and contradictory treatment of shared agents • Liability of the provider core element of both agent types • Set minimum standards without unnecessarily circumscribing growth potential • Business registration? • Length of operations? • Credit history? • Criminal record? • Avoid geographic restrictions or barring certain legal entities from operating as agents • Allow for tiered agent structure and use of agent network managers 48
- 44. Exclusivity Non- exclusivity Should providers beallowed to impose exclusivity on agents? There is a trade off between different considerations and no simple answer Some countries have opted for limited exclusivity periods Require technological capability to interconnect with other payment systems
- 45. How does M-Shwarifit Kenya’s current legal framework? Bank product: The provider is a bank (CBA) and the customers open bank accounts with CBA no e-money involved No direct physical channel for redeeming funds: M-Shwari customers are not permitted to use CBA branches. There are no M-Shwari agents. Customers can only move money into and out of their account by first transferring it to M-Pesa (with a corresponding change in the M-Pesa float as the aggregate amount of e- money issued changes) 50 Neither agency banking nor e-money regulations apply, M-Shwari customers use M-Pesa agents, but only after bank money has been converted to e-money (or vice versa)
- 46. India - yes Havehad agent rules for a long time (since 2006), but restrictions were only lifted over time Kenya, Tanzania, Bangladesh - yes Different rules for bank and nonbank agents potentially leading to level playing field issues Uganda - no Only for nonbanks (MFSPs), but not permitted for banksMyanmar - yes Mobile Banking Directive permits agents, but lacks clarity (e.g. on exclusivity, tiered agent structure) Basic enabler #2: Regulations permitting and governing the use of agents by banks and nonbanks 51
- 47. What do wewant to see and how do we get there? Use of agents permitted by range of relevant providers Provider liability clearly stated Preferably other relevant elements clearly prescribed Appropriate agent regulations First step is to permit agents (Uganda example for what happens if not) and to establish general principal agent principles Second step is to define clear rules Other relevant issues: (i) exclusivity; (ii) level playing field for different types of agents; (iii) tiered agent structure; (iv) use of prefunded accounts; etc. Typical steps required to get there 52
- 48. KYC Regulation Bir Azam,2013 CGAP Photo Contest 53
- 49. Responding to AML/CFTconcerns FSP ClientAgent DFS participant Regulatory environment Prudential regulation of banks and e-money issuers 1 Agent regulation2 KYC regulation3 Consumer protection regulation 4 54 Competition regulation
- 50. The Financial AccessTask Force (FATF) stipulates that a risk-based approach may be taken to KYC requirements The regulation provides guidance at very high level, leaving room for interpretation under local market conditions Countries and FI’s are required to “identify, assess and understand their ML/TF risk” 1. “Identified Higher Risk”: Enhanced measures must be applied (i.e. obtaining additional information on customer (occupation, volume of assets, source of funds, etc.) and more frequent updates) 2. “Identified Lower Risk”: Countries may simplify measures to be applied by FIs 3. “Proven Low Risk”: Countries may exempt FIs from certain recommendations Who determines the regulation? What does the regulation say? The FATF is an Intergovernmental body which develops international standards on combating: • Money laundering • Terrorist financing, and • Proliferation of weapons of mass destruction • Feb 2012: Issue of Revised Standards • 40 Recommendations + Interpretive Notes 55
- 51. Source: Banxico Circular2019/95 as modified by Circular 14/2011 Level 1 Level 2 Level 3 Level 4 Traditional bank account Max amount in monthly transactions US$ 280 + max balance of US$ 370 US$1,110 US$3,700 No limit Customer information required to open account None Basic Information (Name, Address, Gender) Full customer information required Documentation N.A. No paper copy required Paper copy required Customer present at opening No No (but bank has the option to request it) Yes Yes Access point Only debit card. No mobile Mobile, card, bank transfer Mobile, card, bank transfers The same plus cheques Tiered account structure The example of Mexico 59
- 52. Using biometrically verifiedSIMs for account opening The case of Pakistan 439 665 929 1,060 1,447 1,761 2,112 2,399 2,643 2,966 3,475 3,832 4,238 4,713 5,415 7,538 10,881 13,192 15,322 - 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 Branchless Banking Accounts (in thousands)
- 53. Basic enabler #3:Tiered, risk-based KYC structures Pakistan - yes Separate KYC rules for branchless banking, while in most other countries existing rules for banks apply mutatis mutandis Bangladesh - yes Central bank-issued rules vs. general rules under AML Law: One can be better at defining proportionality than the other, but AML Law generally prevails India and Pakistan - yes e-KYC allows customers to open accounts at agents (and in Pakistan even on the phone with biometrically verified SIMs) Kenya - yes Coverage of ID and accessibility of database: if good, even low risk accounts can make use of official ID and the need for alternative forms of identification for low risk accounts is less important Rwanda - no Not clear whether PSPs (and thus EMIs) fall under definition of “reporting entity” in the AML Law 62
- 54. What do wewant to see and how do we get there? Simplified CDD for low risk accounts The extent to which KYC/CDD is a problem strongly depends on the quality of the ID system Biometric verification of SIMs can be a game changer Risk-based KYC rules Ideally the AML law provides room for simplified CDD The question of how simplification will look like strongly depends on quality of ID system Pakistan as example that pricing can also play important role Typical steps required to get there 63
- 55.
- 56. Agent Guidelines • Servesto regulate both banking agents as well as agents of e-money issuers • Requirement for central bank authorisation to use agents with submission of ADD, AML, risk- assessment and conflict resolution policies • Specifies strict agent eligibility and due diligence requirements • Non-exclusivity of agents • Strict adherence to consumer protection regulations set forth in the EMI Guidelines
- 57. Agent Guidelines Permissible Activities:E-Money • Opening of Minimum and Medium KYC e- money accounts on behalf of principals • In addition, master-agents may open Enhanced KYC e-money accounts • Balance inquiry and provision of account statements • Cash-in and cash-out to/from the customer’s own account
- 58. Agent Guidelines Permissible Activities:E-Money • Cash-out of direct transfers not received to an account, including international remittances, salaries, benefits, loan disbursements • Funds transfers, domestic remittances, • Inward international remittances • Marketing of credit, savings and insurance products offered and provided by licensed financial institutions
- 59. Agent Guidelines Permissible Activities:Banks • All functions analogous to those under e-money, except the opening of bank accounts • Receipt, verification and forwarding of applications for credit, savings, investment and insurance products to principals • Receipt and forwarding of applications for credit cards and check books to principals • Delivery of bank mail and check books to bank customers
- 60. Threats • Lack ofreliable national personal identification system • System related fraud: Systems should be secure and robust to prevent fraudulent access • Agent related fraud: Some agents access customer accounts while supporting them and withdraw additional funds when not authorized • Consumer related fraud: PIN secrecy rules are not enforced and therefore relatives and agents get access to consumer account and defraud them • Cybercrime and Money Laundering
- 61. The Way Forward •National strategy on financial inclusion to address some payment related issues • Build capacity, strengthen regulation & supervision to check abuses • Set up an agent registry to take stock of all financial agents in Ghana • Continuous and closer collaboration with other regulators in the financial space • Set up Payment System Council to continue to drive payments ecosystem
- 62. Consumer protection regulation inDFS Sumon Yusuf, 2013 CGAP Photo Contest 71
- 63. Protecting consumers FSP ClientAgent DFS participant Regulatory environment Prudential regulationof banks and e-money issuers 1 Agent regulation2 KYC regulation3 Consumer protection regulation 4 72 Competition regulation
- 64. Whose job isit to protect DFS customers? Providers Regulator Customers 73
- 65. Responsible finance stakeholdersurvey Summer 2014 What level of responsibility do each of the following actors have to mitigate consumer risks? 0 10 20 30 40 50 60 70 Consumer Advocates Donors International SSBs Consumers Regulators Providers Results from Pulse Survey Summer 2014 primary responsibility medium responsibility no responsibility 74
- 66. Seven Key Concernsof DFS Customers 1. Inability to transact due to network/service downtime 2. Inability to transact due to insufficient agent liquidity/float 3. Complex and confusing user interface Source: CGAP 76
- 67. Seven Key Concernsof DFS Customers Cont’d. 4. Inadequate provider recourse 5. Lack of transparency 6. Fraud perpetrated on the customer 7. Inadequate data privacy and protection Source: FSD Kenya 77
- 68. Some insights fromCGAP research: Inconsistent disclosure practices 79
- 69. Recourse in DigitalFinance: Emerging good practices Opportunities: Increased consumer touch points and choice; SMS transaction records and confirmations Good practices seen amongst DFS providers: Specialized DFS line and staff Specialized desks for common complaint types: Reversals, lost SIM/PIN, non-payment products Dedicated agent hotline Training of agents on complaints handling and fraud detection Enforcement of prominent display of hotline signage at agent locations 82
- 70. Basic Enabler #4:Consumer protection rules considering specific risks in DFS What is special about consumer protection in DFS? Effectiveness of CP rules on fair treatment, disclosure, redress in practice? Tanzania, Ghana, India, Myanmar (no), and Pakistan (yes) A few lines in the relevant regulations – is this enough? Or do we need a dedicated financial consumer protection law? Kenya Relevance of other regulators beyond financial regulator (in particular Competition Authority of Kenya) Kenya, Tanzania Digital credit as newly emerging area 84
- 71. What do wewant to see and how do we get there? Consumer protection rules specific to the provision of digital financial services This could be part of a broad FCP regime or something specific for agents / e-money / digital credit etc. Appropriate consumer protection regulation Broad authority in law (increasingly under stand-alone FCP law) Rules tailored to the specific consumer protection risks in DFS Typical steps required to get there 85
- 72. Some lessons fromBoG’s experience with introducing regulatory changes • Leadership important • Market driven • Partnership with private sector: – Provides visibility – Lends credibility and trust – Raises understanding and cooperation and collaboration – Ensures sustainability of innovations • Incorporate incentives that create win-win situations • Should cross-reference with existing and planned laws • Access without usage does not promote financial inclusion consumer education highlighting benefits of electronic payments and transactions as well as key consumer-related risks and how to mitigate them 86
- 73. Some lessons fromCGAP work on creating enabling environment for DFS • Takes time (often two steps forward, one step back) • Important to build trust with regulators and industry • Requires good under- standing of local market • Draw on deep expertise and global knowledge of basic enablers 87
- 74. Advancing financial inclusionto improve the lives of the poor www.cgap.org 88