|Latin America 2011
|Mobile payments, banking the unbanked, and cross-border payments in the Dominican Republic: challenges to central banking
|Ms. Fabiola Herrera
|Payment Systems Department Director
|Central Bank of Dominican Republic
Fabiola Herrera is the Payment Systems Department Director for the Central Bank of the Dominican Republic
Ms Herrera areas of expertise are IT Project Management and Control, Strategic Planning, Payment Systems, Process Analysis and Redesign, Business Continuity Planning. She has been a teacher and international lecturer in her areas of expertise since 1998. She began her career at the Central Bank in 1996. In 1998, she was appointed IT Assistant Director. In 2003 she was appointed National Consultant for the Inter-American Development Bank (IDB). In 2005, she returned to the Central Bank as a Technical Consultant for the Governor and in 2006, was appointed Director of Payment Systems Department. She is also the Director of the National Cheques Clearing House. Since 2005, she represents the Central Bank in the Payment Systems Technical Committee of the Central American Monetary Board (CMCA), which has successfully implemented a new regional payment system earlier this year.
In the Dominican Republic, a Real-Time Gross Settlement (RTGS) system has been developed since 2006. It brings together the banks, distribution channels, mobile operators, payment system administrators and the central banks. Last year the first mobile payment system, ‘tPago’, was launched. Yet some questions remain unsettled, especially the balance between freedom of innovation and regulation to prevent risks and fraud. Also needs to be considered is a cross-border mobile payment facility, which can be supported by the joint organisation of six national RTGS. While regulation must not be an obstacle in ‘banking the unbanked’, central banks and regulators must still ensure fair and safe service with universal access to it.
According to a study conducted by Latinia last year, with the 100 major financial institutions of Latin America in countries whose economies have the lowest regional specific weight, there has been a huge development in banking through mobile phones in recent months. Among the countries mentioned is the Dominican Republic. This reflects a trend that we have been watching and supporting from the Central Bank, and this is the experience we would like to share with the readers.
Dominican Republic´s payments “ecosystem”, regulatory and operational aspects
Dominican Republic, with a population of 10,010,590 inhabitants (data from the 2010 National Census), of which 60 per cent is between 15-59 years of age, is one of the Latin American countries with higher rates of mobile phones per capita. According to the Instituto Dominicano de las Telecomunicaciones (INDOTEL) , in June 2011, 8,773,699 mobile phones were operating, which represents 87.6 per cent of the total population and 145 per cent of the population aged 15-59 years.
In addition, a huge project was launched in 2006 to reform the national payment system, which involved the creation of a regulatory framework to cope with the payments infrastructure dynamic and changing environment. This project conceived and implemented an RTGS system , which allows payments in real time and centralizes the settlement of all payment transactions in the country operated by non-bank payment processors. In total, there are eight recognized payment systems in the Dominican Republic, each with its authorized payment system administrator (PSA), and all processing the final settlement of their operations in the RTGS system of the Central Bank.
Among these payment systems is the first mobile payment system authorized in the Dominican Republic, which has been operating since July 2010.
Mobile payments: meeting point
The scheme of this system that was brought to production represents the harmonious interaction of players from five different backgrounds:
– the PSA, who is the central node of the scheme and its control structure;
– the banks, which provide the funds of clients associated with mobile payments service;
– the telephone company that provides customers’ mobile phones and networks;
– the companies which own the POS (Point Of Sale) networks and who are also PSA´s;
– the Central Bank, which provides the mechanism for final settlement through its RTGS system.
“A span of three years took place from its inception to its public rollout, i.e. for research, platform and technology election, business model creation and marketing plans. On July 2010 tPago – the country’s first mobile payments platform was rolled out publicly. tPago is a powerful tool that allows customers to link their bank products (such as loans, credit card, checking and saving accounts) so they can transact using any GSM mobile phone. For telephone companies, acquirers, banks and billers it offers a new alternative to the traditional way of business and a new channel for their customers. Dominicans have the ability to use their mobiles to pay bills, make financial payments to banks, top up airtime for prepaid phones, peer-to-peer transfers between clients, non-clients and banks… It is an integrator of banks, telephone companies, acquirers and billers in one centralized platform”. Y. Nunez M. tPago Marketing Director
A year after the implementation of this system, a number of questions come up from the perspective of the regulator, some of which were raised by Francisco Linares, from Banco de España, in his conference at the recent ELUS 2011 :
Do payments by mobile phone have any potential? The answer is YES. Definitely yes, even more because statistics indicate that by 2012 it is expected that the manufacture and sale of smartphones will exceed desktops and laptops globally.
Which would be the ideal channel to reach the client? The dilemma here is who is responsible for this service. The clients belong simultaneously to three service providers: the bank (for both banked and unbanked users), the phone company, and the mobile payment system administrator. In theory, the latter is who should reach the customer, but the reality is that the first two have greater penetration. Therefore, and in order to better sell the product, a synergistic marketing agreement between all parties involved should be reached.
What should be the role of a central bank in all of this? Regulating and overseeing payment infrastructures that are often operated by non-banks, preventing these platforms and systems from being used for fraudulent transactions or money laundering, being “strong but flexible enough” to regulate payment systems, and performing “cross regulation” in a scenario such as mobile payments, where there are at least five different types of players.
In this transitional stage, evolving the regulatory environment for the payments industry has become a race against time and innovation. While regulation is extremely important, it should not be an obstacle for the development of new methods of payment. The great dilemma that we face is that on the other side of the scale, we put the central banks’ obligation to prevent risks in the financial system (including money-laundering risks) and ensuring fair competition, equal access, and efficiency within that system.
One possible solution can be to consider the administrator as a semi-regulated non-bank entity. This has worked out in the Dominican Republic, where existing legislation is very clear about who is authorized to perform financial intermediation.
Banking the unbanked: next phase
Many options have been discussed in order to make financial services available to those citizens unable to access traditional banking services, but the most feasible seems to be the one associated with mobile phones. While it is true that in Dominican Republic (as in the rest of Latin America) mobile payments are aimed at bank customers, we have an eye on the next phase, which is reaching the unbanked.
The challenge present here is: What is it that the unbanked really need: Banking services or payment services? If the answer is the later, what would be the best way to implement these services under existing and new laws in our countries? I think the answer lies in distribution channels, which should necessarily be shared between the three service providers involved (mobile payments system administrator, banks that will get the new customers, and telephone companies, whose unbanked clients would be offered the service).
Cross-border payments: third phase
In an era in which the economy of many countries relies on remittances received from its citizens abroad, the way in which money travels from one country to another takes on great importance. In this light, last February the central banks of Central America and the Dominican Republic implemented a regional system for cross-border payments between the member states of the Central American Monetary Council (CMCA in Spanish), interconnecting the 6 national RTGS´s. This is an RTGS of all RTGS´s. We called it SIP. Payments through SIP are settled in a maximum time of two hours from customer to customer, and have a cost of USD5 per transaction.
This platform could serve in the future as a settling hub for payment systems that process remittances, including cross-border payments via mobile phones, given that all the central banks of the participating countries converge in a single point.
I would like to extract the five main ideas arising from this article, and leave them on the table for further discussions on how to promote mobile payments in Latin America:
1. ”Grey” regulatory area for new payment services: The need to redefine the roles of the FI´s and non-banks payment services providers. No clear regulation, no strong development.
2. Joint promotion (product distribution channels): This should be based on collaboration, with active participation of all parties involved.
3. Encouraging more operators of mobile payments: Monopolies in financial services are never good!
4. Banking the unbanked via mobile phones: New type of bank account is needed.
5. Cross-border payments via mobile phones systems: The need for centralized clearing and/or settlement.
Finally, I agree with the payment systems experts that are of the opinion that market infrastructures are more than “commodities”; they are services of public utility. Mobile payments fall perfectly into this category, and it is our responsibility to regulate them so that they operate efficiently, safely and with voluntary universal access.
Santo Domingo, DR, July 18, 2011