|Africa and the Middle East 2009
|Regulation is not an island
|Hannes Van Rensburg
Hannes Van Rensburg is the CEO and a founding member of Fundamo. Prior to the formation of Fundamo, Mr Van Rensburg was the CIO of the Sanlam Group, a past board member of a number of IT-related companies and an IT consultant to many major South African corporations. Mr Van Rensburg is an active member of the South African Council of Natural Sciences, the Computer Society of South Africa and The South African Institute of Computer Scientists. He is also one of the founders of the Cape IT Initiative (CITI). Hannes Van Rensburg has BSc degrees in Physics & Chemistry as well as in Information Systems, and an MSc in Reactor Physics.
Mobile phones are promoting an economic and social revolution in the developing regions of the world. The widespread usage of mobile phones makes them an economically viable way to provide the world’s ‘unbanked’ population with secure access to financial services. Mobile operators and financial institutions alike want to participate in this service, but the lack of a global regulatory consensus and the lack of stable, working relationships between the financial sector and mobile operators hampers the growth of mobile payments.
The mobile phone is fast becoming the de-facto medium to deliver financial services to the global unbanked population. The uptake of mobile financial services typically outnumbers the amount of new bank accounts being set up in emerging markets as consumers embrace the freedom and flexibility of the mobile phone as a secure payment vehicle. Mobile operators and mobile service providers are keen to offer value-adding payment services to provide these communities with access to safe and convenient electronic payment systems, in ways that were not practically possible or economically feasible before. At the other end of the spectrum, mobile payments offer a safe and very convenient alternative to those customers with all the options and payment alternatives available to them. Mobile payment is an instrument in tune with the trends of moving away from geographic constraints, being portable, giving remote access, as well as delivering comprehensive services from a single instrument. Yet despite the undoubted potential of mobile financial services, the lack of a global consensus from a regulatory standpoint continues to hamper more widespread uptake. Currently, there are not yet clear consolidated views, from central banks, regulatory authorities or overseers on how to regulate these developments and systems. Furthermore, regulators are dealing with a number of different models ranging from those built on traditional payment systems to electronic money. Many grey areas remain, while the technology and the solutions are changing and developing at an ever-increasing pace. Payment systems are considered the ‘highways’ of the economy – whether your economy is emerging, developed, or, as we have seen in the past months, disintegrating. It is crucial that these highways are constructively built to ensure they support both local and global economic and social development needs. There is wide consensus that innovation should not be stifled. The emergence of mobile payments presents an unprecedented opportunity to change the way that people pay. However, any payments system must be regulated and subject to accepted practices and rules. In other words, the highway must have a solid foundation or the road will subside. Still, it is important to note that the consensus need not be imposed. Regulation has to be agreed and policed by collaborative participants. Experience with modern payment instruments indicates that an evolutionary approach works to introduce regulation. This approach is also appropriate in terms of mobile payments. Initially, it is important to concentrate on building understanding of the concept and creating user uptake to achieve critical mass. Once there is sufficient exposure and knowledge and the user base and value of transactions become substantial, it is imperative to appropriately identify and mitigate all risks so market growth is not interrupted. As the adoption of mobile payments increases, the regulatory focus changes over time. Initially the focus is on combating money laundering and terrorist financing. The idea is to contain risk by ensuring that the product is soundly structured from an anti-money laundering perspective. It is important to record and make all transactions visible right from the outset. This will create a sound statistical information base and permit better assessment and decision-making in the future. Once the growth of the user base indicates that transaction growth is imminent, it becomes important to emphasise fitting the solution to the consumer’s culture and ensuring consumer protection. Growth in both the number of users and the values transacted will attract the attention of the bank supervisors and basic legal frameworks such as national banking acts will need reconsideration. It is important that the mobile payments industry fits within the context of the national financial regulatory framework. Critical mass will also attract attention from a national payment system (NPS) perspective and the NPS overseer will have to decide whether to include the mobile payment system under its oversight umbrella or not. Roles and responsibilities must be clearly defined – otherwise complications and uncertainty creep in and undermine the trust of the user. Imposing a comprehensively defined solution too early can cause issues. Banks are not necessarily abreast of the latest mobile and related technologies; there is a steep learning curve to keep on top of the constantly changing, fast-evolving, technologies. In addition, the mobile business model addresses new market segments that banks are not accustomed to and is typically based on assumptions that cannot readily be proved. This presents a bank, used to operating within formal structures and a well-established regulatory regime, with substantial challenges. Both mobile operators and banks need to assume roles that are often new and unfamiliar and do not always fit that easily with the organisational culture and modus operandi of their respective organisations. The bank, as a licensed financial institution, will bear the brunt should things go wrong and is therefore cautious, whilst the mobile operator typically already has the footprint in the country and wants to drive the change process. This often makes the relationship, at least initially, uncomfortable. Together, they have to fuse a set of diverse factors together into a constructive solution. They are faced with various challenges, including servicing an unsophisticated, unbanked, community, rapidly changing mobile and related information technology, and meeting the expectations of their customers by delivering safe and efficient payment services, even though the transaction values are relatively small. All that while, they are sailing on unchartered regulatory waters. The way forward is to have a variety of different mobile payments models – solutions tailored to specific requirements – that meet the needs of a variety of partners. For example, instead of hosting a mobile payments solution, a bank may prefer to outsource the operation to a third party service provider. The bank can bolster its outreach by adding agents, under its guidance, to provide services to users in outlying areas. Banks can operate mobile solutions in partnership with a mobile operator who provides and manages the mobile communications infrastructure. It is also possible to involve more than one bank in such a solution – with each bank responsible for their own accounts and for the agents under their guidance. Once a number of banks and several mobile operators spread their wings to provide the population with broad-based services, mobile payments applications can be run centrally as a national outsourced operation for the benefit of all the participating service providers and customers. So how do we travel this evolutionary path, and structure mobile payments to facilitate the fast and easy introduction of mobile payments, while offering comprehensive payment facilities and shared risk management. We need to accept that there are different role players, each with its own set of specialised skills and expertise. This makes for a better solution, provided that the roles and responsibilities can be clearly understood so that risk can be managed proportionately to that role. The underlying assumption is that the all-encompassing and broadly supervised bank-led model that has its place and has served us well in the past, does not suit all situations any more. In particular it does not help to resolve every current (or future) dilemma – existing models need to be aligned, or redefined and/or new models need to be devised. We need to understand the payment instrument, the issuer, and the accounting aspects, and structure the payment instrument and its supporting infrastructure to mitigate as much as possible of the risks. We need to establish a culture and the supporting programmes, policies and procedures to ensure good governance. A regulatory framework needs to evolve that is based on a solid understanding of the underlying disciplines and the peculiarities of the mobile payment domain; based on good quality information in an information base built in the country under local conditions. We can learn from other countries: start small with an introductory service before jumping into a full blown service, build an industry in which the stakeholders know each other and have access to the authorities so as to ensure that the country and its population is serviced in the most optimal way. This approach paves the way for a regulatory environment that is focused on areas where it is really necessary and where implemented in a cost-effective manner, proportionate to the risks. All partners must be accountable – decisions must be justifiable and subject to public scrutiny. Rules and standards need to be consistent and transparent to enable the growth of mobile payments systems. Above all, we must ensure that we grow this market by employing common sense, targeting and solving the issues together. It is not always appropriate to fit new solutions into old paradigms, even in an industry as formal as financial services. While the mobile world is at ease with rapid evolution and innovation, regulators and overseers also need to keep up with the changing environment and the new types of risks it brings.