The Role of Regulators in Mobile Money Deployment

PREAMBLEmobile runner

Mobile Money (MM) is hailed for accelerating financial inclusion and its potential for reining in an even greater multitude of unbanked global citizens into the formal financial systems. To harness its potency, policy and regulatory environments hold the key to exhausting its potential. It falls within the domain of Telecommunications and Financial Regulators/ Central banks. Central banks have asserted their regulatory authority in more recent times as Mobile Money (MM) has emerged as a remedy for financial exclusion risk. Central Banks in developing countries, including Sub Saharan Africa, are keen on leveraging MM to further their cause.

First, it’s important to state that Central Banks in emerging economies have a vast and vested interest in the success of mobile payment services. Indeed, as mentioned above, mobile payment services can contribute directly to the economic growth of the country – GFG group

Regulating MM presents simultaneous challenges and profound benefits. Regulatory and policy objectives have to be balanced with sensitive competitive market dynamics. Restrictive regulation can stifle competition, innovation and market adoption.

The importance of policy and regulatory frameworks in mobile banking development has inspired empirical research reports on the subject  such as What Regulatory Frameworks Are More Conducive to Mobile Banking? – World Bank. A 2013 GSMA report, titled Mobile Money: Enabling regulatory solutions, broadly categorized aspects encompassing all pertinent areas of MM regulation.


Traditionally, financial institutions (FIs) have been the custodians of money, its distribution and transfer. FIs are governed by prudential regulations of Central banks that espouse the stability and integrity of financial systems. MM is a peculiar value proposition relative to conventional banking models. It (MM) threatens the incumbency of financial institutions while presenting a novel financial regulatory challenge compared to existing regulation.

Central banks strive for a stable financial system and integrity within the financial system i.e. guard against its use for financing criminal activities and laundering money.

For these reasons, MM should meet typical financial objectives such as liquidity. MM operators are obliged, in certain regimes, to back up liquid reserves equaling total amount of issued e-money. MM electronic funds are not entitled to earn interest. Paradoxically, interest offers a huge incentive for luring people onto the service, but, financial regulators seem reluctant to grant this incentive; interest bearing deposits are considered an activity of banks. Regulators also express concern over the effect of MM on monetary policy. A rebuff to this apprehension suggests MM transactions are small and constitute a small part of the overall financial sector. They are not perceived to pose a threat to the overall economy if they fail.

In 2010 the accumulated balance of all M-PESA accounts represented just 0.2% of bank deposits by value, and although M-PESA transactions represented about 70% of all electronic transactions in the country, it only accounted for 2.3% of the total value. Even with its wide reach, M-PESA is far from posing a systemic risk.GSMA

A constant threat of criminal activities related to financing of terrorist activities and money laundering compels measures to regulate MM. The Financial Action Task Force (FATF), continually works with Central Banks and sets standards on AML (Anti-Money Laundering )/CTF (Combating the Finance of Terrorism) guidelines for prudential regulation of banks. MM necessitates a reconsideration of conventional standards.


Customer due diligence requirements are a major hindrance to developing mobile money development up to scale. The capacity of MM is dependent on non-anonymity. Developing countries commonly have insufficient identification systems; impeding sign up and access to formal financial and MM services. Potential mobile money customers, who are mainly unbanked, characteristically have no permanent address and in some cases no identification. An onerous process dissuades participants from enrolling for the service. Historically, this deterrence is partly responsible for the seeming failure of banks.

Identification of users is necessary to curtail AMF/CFT risks. An equilibrium is required to meet both financial inclusion objectives while preserving the integrity of the financial system. MM risk assessments indicate low risk due to their low transaction limits, monitoring systems for every transaction, ID requirements for transactions and mobile network based locators. These offer alternative avenues to mitigate money laundering (ML) & financing terrorism (FT) risks. Lower risks favor simpler KYC rules; a factor the FATF has inculcated in new guidelines for MM that address the need for financial inclusion, while implementing favorable AML and CFT measures.

Whereas it is critical to ensure that services offered by mobile money providers (and their agents and third parties) are subject to proper controls, these controls should be flexible enough to include poor and unbanked customers. If a risk assessment deems a product to be low risk, simplified KYC rules should be applied to permit alternative forms of customer identification and verification – S di Castri

In regulatory regimes where MM licenses are held by banks while partnering with MNOs, the conservative approach by banks in CDD & KYC requirements, similar to issuing banks accounts, smothers regulators’ and operators’ targets of an inclusive financial system.


Fostering MM requires assuring customers their funds are secure. Consumers need to gain confidence in MM’s security from third party fraudulent threats, privacy of their data, avenues for recourse, insurance protection and availability of funds on demand. Being a new service, MM needs a comforting image to encourage uptake and perpetual use by customers.

Regulators enhance consumer protection by setting out parameters for operators on transparent prices of MM products and recourse for lost funds, erroneous transfers and third party fraud. Dogmatic impositions could complicate adherence and increase costs related to offering MM.

Financial institutions typically have minimum capital reserve requirements and deposit insurance frameworks to guard against bank runs and subsequent failures. MM regulators strictly set out full capital reserves for total electronic money issued. Additionally, these reserves are held separately from the issuer’s own funds to protect against claims from the issuer’s creditors. Some regulators have asserted that funds be held in liquid assets; others allow for reinvestment in government issued securities; others make room for insurance policy covers.

It is in the best interests of consumers to have a variety of electronic money issuer. The minimum capital requirements for becoming an issuer of electronic money are set out by the regulators; set limits can deter or promote a competitive MM landscape. This GSM report advocates the lowering of minimum cap requirements or even a complete overhaul for new entrants. It suggests that supervision of MM issuers can easily be done electronically which requires less resources. Less stringent barriers of entry can be adopted without compromising the supervisory function of regulators.


The third party network adopted by MM in East Africa has been essential to its sprawl and success. It extends the reach to remote areas and closer to people. This is one of the ways MM was able to surpass incumbent banks, compelling them to fast track the adoption of an agency banking model. The agent network is a key area of competitive advantage for competing MM operators.

Regulatory concerns stem from a need to mitigate broad distribution risks. Specifically, risks linked to the financial nature of MM: liquidity, solvency, operational, integrity, settlement, and reputational risks. Nevertheless, MM offers electronic means of monitoring latent occurrences of these risks.

MTN Mobile Money in Uganda

MTN Mobile Money Agent in Uganda

Agents are granted authority to operate based on criteria set out by regulators. Limitations on who can be an agent and necessary qualifications, if stringent, can hamper roll out of elementary third party networks. Other issues centered on third party agents concerns their exclusivity. Should agents be shared as a single point for all MM issuers? Pioneer commercial issuers regard this as an infringement on their proprietary agency network. In March, the Reserve Bank of Zimbabwe, in a landmark ruling, barred MM operators from having exclusive contract agreements with agents.

While third party exclusivity can secure first-mover advantage in the early stages of market development by helping to protect the first mover ’s higher investments of time, energy, and money in identifying, training, and equipping third parties, ongoing exclusivity can limit the ability of other providers to establish effective distribution networks, and this could stifle competition. – S di Castri


There is no doubt that offering MM services compatible across multiple MM platforms, irrespective of the issuer, would benefit the ecosystem, users and financial inclusion objectives. The value proposition of MM would be compounded. Interoperability proposals take into consideration the maturity of MM deployment, impact on market competition and dialogue with issuers. Susan Lonie, a co-creator of the first MM platform (M-PESA), suggests that interoperability should be done at the right time of the maturity of MM deployment. She further suggests pursuing interconnectivity between existing financial service networks and mobile money networks as a logical initial step. Some markets have taken this step and interconnected mobile money services with interbank networks and money transfer services.

Interoperability has immense benefits for the ecosystem: deeper penetration of MM, lower cost of transactions, broader customer choice, and increased competition and break down of dominant positions. Regulators have a role to address regulatory risks related to interoperability & interconnectivity, as well as making sure such a move benefits both customers and providers.

Inherently, interoperability presents challenges of a technical nature that may distract the providers from focusing on improving MM service. Compliance costs may increase with implementation of this scheme. Like all else, a thin line separates objective regulation and interference in competitive markets.

The timing and cost-effectiveness of any regulatory intervention must be appraised carefully, and market-led solutions should always be the preferred option. S di Castri


Image cred: DN

Image cred: DN

The aforementioned aspects are core issues that regulators in MM environments have to consider in charting a path for mobile money development. These aspects permeate every market where MM is deployed; regulators in various markets have taken dissimilar approaches. A salient theme that reverberates across these markets, is an unwavering pursuit to achieve financial inclusion while balancing other variables for an optimal result.

Most regulators are just starting to learn about MM, the opportunities to improve governance offered by the technology, and where the risks lie; banking culture tends to be cautious and risk averse. Of noteworthy mention, MM is globally driven by emerging and developing countries; they are charting the path on this one, and have little to go on from the non-existence of similar models in developed markets. Susan Lonie

In upcoming posts, I will highlight the various forms of regulation presently adopted across selected Sub Saharan economies based on these aspects: Kenya, Nigeria, and Zimbabwe.



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