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Regulatory Imperatives in Mobile Microfinance

Remarks based on a Transcel/DBJ policy assessment Hugo Daley

B ACKGROUND
Microfinance is widely viewed as a potent instrument for reducing poverty, enabling the poor to accumulate assets, and reduce their vulnerability to economic stress. One of the major challenges the

industry faces in Jamaica is the cost of disbursing loans and collecting loan payments. More significantly it is the single greatest obstacle to MFIs lowering the comparatively high interest rates they charge on microloans. Another hurdle to the widespread adoption of microfinance is the difficulty in accessing rural populations. For both of these

challenges - and many others which tend to hobble the expansion of micro-financial services -- a potential solution is Mobile Money defined as monetary transactions carried out using mobile phones including mobile banking, money transfers and mobile commerce. We coin the term mobile microfinance to refer to the use of Mobile Money for lowvalue transactions and financial services for microenterprises and microsavings of the unbanked. It is now widely accepted that the low transaction costs associated with mobile networks and the ubiquity of mobile phones, mean that Mobile Money can play an important role in the accessibility of microloans for small business and financial inclusion for the poor. Furthermore,

important innovations in microfinance such as repeated lending, which

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breaks down loans and repayments into small installments and progressive lending, which increase loan disbursements gradually over time, could be best implemented using low-cost Mobile Money. The challenge is now to determine what regulatory or public policy position best supports the emergence of an effective mobile microfinance infrastructure.

R EGULATORY AND P OLICY P RIORITIES

For the past year, Transcel has been working with the Development Bank of Jamaica (DBJ) in developing policy priorities in the areas of Mobile Money service and regulatory policy. The present remarks are based on this activity. Much of this work has been focused on the concerns of the MFI community. Input from the MFI community to date focused on the concern that the potential benefits of Mobile transactions in the areas of costs and ubiquity, should not be degraded by poor implementation or regulatory barriers. Results from a June 2010 questionnaire and

subsequent workshop deliberations showed the following priorities: 1. Low start-up costs and service fees for MFIs and their customers; 2. Open access to services across networks on a wide range of mobile devices; 3. Integration with MFI operations without onerous additional KYC burdens. Recommendations ranged from regulating service fees across Mobile Money service offerings to a risk-based approach to regulation that would reduce KYC requirements for low-value transactions.

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R EGULATORY C HALLENGE
Mobile microfinance in Jamaica faces a dual regulatory challenge: on the one hand, much of the microfinance sector remains unregulated and is free to innovate without a regulatory burden; on the other hand, mobile financial service implementation almost invariably involves commercial partners who are subject to either banking or telecommunications regulations. The microfinance community is thus in a position where it must lobby regulators with its own priorities for regulatory reform. With respect to costs, it must lobby both banking and telecom regulators to control charges for transactions traversing these networks. With respect to accessibility, telecom regulators must be encouraged to act to assure fair access rules for data services on mobile networks. With respect to integration of mobile platforms into its own business processes, the MFI community must lobby financial services regulators to permit the use of its existing customer data and identity process in a Mobile Money KYC regime. The regulatory imperative in mobile microfinance goes beyond the concerns of the MFI community. Given that the informal sector in the Jamaican economy represents over 40% of the national GDP, the potential for mobile microfinance to become a vehicle for economic transformations is enormous. The regulatory imperative in mobile microfinance becomes a broad public policy concern.

T HE P UBLIC P OLICY I MPERATIVE

A focus on mobile microfinance has significant implications for public policy options for Mobile Money. MFIs in Jamaica serve less than 50,000 customers out of a potential customer-base estimated at 500,000. Industry growth is slow, costs are high. There is clearly a need for a new

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microfinance infrastructure to accelerate industry growth. Yet, it has become very clear from the introductions of Mobile Money services to date that many models for Mobile Money service do not serve the needs of microfinance. The major commercial players in Jamaica are clearly incentivized by the competitive environment NOT to meet the needs of the microfinance sector: Banks are focused on providing more convenient access to accounts for their existing customers. All announced m-banking offerings have had that focus. The core business model in the banking community is to serve those who have the most money not those who have the least. Mobile operators are in a 3-way death-match, with barriers raised to network interconnection and independent services on their networks. The mobile network operators focus is on growing the ARPS Average Revenue Per Subscription without the major changes to network

operations that would be required by the additional transaction security and KYC requirements of financial service delivery. The Transcel/DBJ assessment suggests that public policy for Mobile Money would be best guided by an analysis of the deployment factors that best serve economic development and broad financial inclusion objectives. The Preliminary conclusion is that the primary public policy goal should be support for a mobile microfinance infrastructure that preserves the radical cost-advantage of mobile transactions over traditional financial service delivery. Recommended is regulatory support for of a future mobile financial service infrastructure that includes the following:

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1. New interoperation and interconnection services to support secure, transparent integration of the data networks, offerings and services of financial institutions and mobile network operators. 2. An information sharing infrastructure that allows authorized access to and analysis of user transaction data to facilitate value-added service to the unbanked - including intelligent credit worthiness assessment, interest rates, and service pricing. 3. Open network regulations that allow rational-cost, any-to-any, service delivery across mobile networks. 4. Identity authentication and authorization standards and services that serve the needs of populations currently outside of the formal financial service sector. 5. Financial network fees tagged to transaction value and transaction costs. 6. Regulatory burden on Mobile Money accounts and transactions scaled to financial risk.