Why M-PESA may be a one hit wonder: the regulatory angle

Picture credit: SodaHead

This post is written by Shital Shah, SBI Associate Consultant.

The advent of M-PESA, a successful mobile money deployment in Kenya, raises the question of why such efforts have difficulty replicating in countries that are seemingly ripe for the use of mobile phones to increase access to financial services. If a large chunk of the population has a mobile phone in their hands, but they don’t have access to bank accounts, then they should be able to link the two together and solve the problem. This sounds reasonable in theory, but financial services are not offered in silo – they are primarily informed by regulations and a legal framework, which varies from country to country.

One reason why M-PESA may be a one hit wonder is due to Kenya’s regulatory environment with regard to mobile money, which was non-existent when Safaricom, the largest telecom operator in the country, first started M-PESA. As a result, regulations in Kenya were created as a reaction to a telecommunications company offering banking services, rather than a proactive central bank guiding the development of a banking innovation. By the time regulations came out of Kenya, M-PESA had reached scale. The likelihood of a similar trajectory happening in other countries, where banking industries may be more active in influencing policy or where regulators are proactively putting in place measures to control financial services beyond bank branches, is slim.

SBI’s South Asia team handles active projects in Bangladesh, India, and Pakistan, and all three countries are seeing exciting developments in mobile banking. Interestingly, the three countries also have different regulatory environments, and this leads to the creation of varied business models. Pakistan’s progressive financial regulatory environment has a central bank at its helm that is encouraging banks to roll out branchless banking services. Banks are responding enthusiastically and are looking to link up with new channels. Bangladesh, after a period of ambiguity, is now offering payment systems operator and payment system provider licenses to banks and third-party financial service providers. In both these countries, telcos will not lead, but may be a key partner as banks develop mobile banking channels.

The Reserve Bank of India has had a more cautious approach by first allowing banks to use third-party business correspondents (BCs) to deliver financial services outside bank branches – but for a long time, had restrictions on nonbanks accepting funds from the public and did not allow e-money issuance and transfer by nonbanks. That has changed more recently, allowing even for-profit entities to become BCs. On top of that, India has the Inter-bank Mobile Payment System (IMPS), a switch which allows transactions from one bank account transfer to an account from another bank via a mobile phone. India will see a whole different set of businesses pop up around aggregating these BCs and linking them back to banks.

An M-PESA clone is unlikely to plant itself in a country outside of Kenya, but that does not mean innovative use of mobile technology to offer financial services cannot play itself out in new ways. As we see with our partners in South Asia, banks and financial services providers are adapting business practices to match the country’s regulatory framework and offer an exciting proposition to bank customers via their mobile phones. M-PESA may be a one hit wonder in terms of its genesis and model, but the potential to achieve similar scale and reach out to a large population of previously unbanked clients will stick. We will have to stay tuned to see how regulations both shape and react to the development of mobile banking around the world.


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