MICROFINANCE PAPER WRAP-UP: Non-bank E-Money Issuers: Regulatory Approaches to Protecting Customer Funds; by Michael Tarazi and Paul Breloff; Published by CGAP (Consultative Group to Assist the Poor)

By Michael Tarazi and Paul Breloff, published by CGAP (Consultative Group to Assist the Poor), Focus Note 63, July 2010, 12 pages, available at: http://www.cgap.org/p/site/c/template.rc/1.9.45715/

This paper reviews various regulatory approaches to protecting customer funds in the context of non-bank e-money issuers. Michael Tarazi and Paul Breloff begin by introducing mobile network operators (MNOs) as organizations that some microfinance institutions (MFIs) have partnered with to support the expansion of financial services to low-income populations through the use of mobile phones.

While most MNOs that assume the role of “non-bank e-money issuers” claim to solely conduct money transfer services, the authors state, “Regulators are often reluctant to permit MNOs to directly contract with customers for the provision of financial services. Taking money from the public, even for purposes of effecting payment rather than for saving, is uncomfortably close to accepting public deposits – an activity almost always reserved for prudentially regulated financial institutions.”

The authors claim the two most common regulatory approaches to non-bank e-money issuers are “fund safeguarding” – the requirement that issuers maintain unencumbered liquid assets equal to the amount of issued electronic value, and “fund isolation” – the requirement that the funds underlying issued e-money be insulated from institutional risks, such as claims by creditors in the case of issuer bankruptcy.

While “safeguarded funds” are most commonly maintained in a prudentially regulated bank, the authors raise the concern that “in countries with weak banking sectors there is the risk of bank failure coupled with the possibility that no deposit insurance exists.” Furthermore, “even where deposit insurance exists, the value of pooled accounts held by non-bank e-money issuers is typically much larger than deposit insurance coverage limits.”

The authors also note that even if funds are maintained in insured, commercial banks, the accounts are usually held in the name of the issuer, not the customers. Therefore the non-bank e-money issuer is the legal owner of the account, making the funds vulnerable to claims by the issuer’s creditors if the issuer goes bankrupt or if accounts have been used as collateral to secure debt.

The authors note the actions of several MNOs to counter these difficulties, such M-PESA’s “trust accounts” where customers are isolated from creditor claims by an account administered by a third-party trustee and held for the benefit of M-PESA customers. The authors also cite a practice in Afghanistan, whereby when a issuer’s e-money account exceeds a specified amount, no more than 25 percent may be held at a single financial institution.

Looking ahead, the authors predict that the continued success of mobile banking will require more explicit regulation. They anticipate that growth in volume, as well as service offerings such as savings, will force regulators to confront issues like permitting MNOs to pay interest on e-money accounts and to offer deposit insurance coverage. The authors recommend “regulatory policies that mitigate risks to customer funds without stifling the dynamism, creativity and potential of these new actors.” With this in mind, they foresee the next phase in branchless banking as one in which non-bank e-money issuers deliver a full range of financial services to those underserved by traditional banking models.

About CGAP (Consultative Group to Assist the Poor):

Housed at the World Bank Group, CGAP is an independent policy and research center dedicated to providing financial access for the world’s poor. CGAP is supported by over thirty development agencies and private foundations. Its mission is to provide market intelligence, to promote standards and to offer advisory services to governments, microfinance providers, donors and investors.

By Matthew Fox, Research Assistant

Sources and Additional Resources:

MicroCapital Brief: One of the Largest Mobile Operators in Kenya, Safaricom, and Equity Bank, a Microfinance Bank, Join Together to Launch Mobile Banking Program, 2 June 2010: https://www.microcapital.org/microcapital-brief-one-of-the-largest-mobile-operators-in-kenya-safaricom-and-equity-bank-a-microfinance-bank-join-together-to-launch-mobile-banking-program/

MicroCapital Brief: Nokia Expects Huge Growth in Mobile Payments in India, Other Emerging Economies, 25 November 2009: https://www.microcapital.org/microcapital-brief-nokia-expects-huge-growth-in-mobile-payments-in-india-other-emerging-economies/

MicroCapital Universe: CGAP (Consultative Group to Assist the Poor): https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=CGAP+(Consultative+Group+to+Assist+the+Poor)

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