Sound Expansion of Mobile Financial Services: A Risk Matrix Approach for Developing Enabling Environments

Assuming that the question relates to a central bank’s regulatory positions related to trust- vs. bank-backed mobile money transfers, let’s consider the case of the Philippines regulatory position on this topic.  In the Philippines, the current e-money circular issued by the Bangko Sentral ng Pilipinas (BSP) does not require e-money issuers (EMI) to back up their e-money issuances with a pooled trust account.  Instead, regulators rely on a series of alternative strategies to ensure that electronic money is backed by “real” value.  In addition, Philippine e-money regulations make a distinction in the guidelines between bank EMIs and EMIs that are non-bank financial institutions.  For bank EMIs, there is no requirement for banks to hold a trust account to back e-money issuances.  Moreover, banks are not required to set aside funds since they are already highly regulated entities subject to overarching banking supervision and regulation.  For the most part, EMIs are mostly the large commercial banks and, as such, electronic money comprises a small fraction of their overall business activity.  For banks to be granted an EMI license, they are required to pass strict standards, including minimum capitalization requirements, capital adequacy ratio requirements.  Moreover, the bank must not present major supervisory concerns to the regulators.

Non-bank EMIs (such as MNOs) are required to set aside a reserve fund that will match e-money issued on a one-for-one basis.  This should be a set-aside (“ring-fenced”) account comprised of low-risk and highly liquid assets, such as a bank deposit, an investment in a government security, or other assets defined as allowable by the BSP.  In addition, all non-bank EMIs must have be designated as EMI business entities that are restricted from conducting other business activities, and they must demonstrate continuous sound management practices.  These non-bank EMIs must also comply with minimum capitalization requirements currently set at P100 mn (approximately US $2.33 mn) to ensure the strength and stability of the EMI.  The BSP monitors the non-bank EMIs for compliance with each of the requirements on a regular basis.

Conceptually, the BSP has designed mobile money to act as a type of low-value payment instrument rather than a deposit account so that it will be able to apply proportionate regulation to mobile money transactions and flows.  Proportionate regulation will give the BSP greater flexibility  to enable mobile money services to develop quickly, without the burden of having to be covered by the relatively stricter prudential standards applied to deposit accounts.  Low value transactions in e-money also facilitates proportionate AML/CFT regulations.  For example, current regulations restrict e-money service providers to transact more than P100,000 in any month unless the business case warrants an exemption.

Finally, current BSP regulation allows mobile wallet holders to link their mobile wallets to their bank accounts where the holdings are treated like any other deposit, earning interest and being covered by deposit insurance.  This is a two-step process which shows that the mobile wallet is not a deposit account and that the deposit/withdrawal transaction needs to transfer the funds to and from the bank account.  Recently, this two-step process has been simplified since the banks are now allowed to “auto-sweep” mobile money balances (in real time) from the e-wallet into a deposit account after having received authorization from the client.  (Thanks to USAID/PH and the BSP for their input into this response.)

Please see the hyper link in the power point of the presentation that will take you to GSMA’s listing of current and projected global MMT “deployments.”   You can also check CGAP's listing of MMT activities broken down by country and region.  One of the challenges we have is that is not possible to know with great certainty what the volume of accounts is from one MNO to another (and then aggregated at country/corridor levels) since the MNOs are not typically required to provide such information.

This site has a list of resources related to AML/CFT and FATF guidance that would ideally be implement locally through a national financial intelligence unit overseeing general anti-money laundering and combatting the financing of terrorism issues.  The FATF guidelines are a sound source for developing strategies for managing KYC and other issues related to AML/CFT.  The EU Money Directive document is another good source for developing national regulatory frameworks, policies, supervision and enforcement capacity to manage the KYC requirements specific to  mobile money regimes.

Neither banks nor EMIs (electronic money issuers) can on-led, co-mingle or otherwise utilize trust account funds when they are set aside in reserve to match mobile money transfer electronic reserves on a 1:1 basis.  Therefore, the reserve requirement for these trust account funds is effectively 100%.  Consequently, trust account funds cannot be used for on-lending or other investment activities by the bank and have no impact on the money supply through a multiplier effect.  Note that this 1:1 reserve requirement may apply in country contexts such as Kenya, Tanzania and Malaysia, but may not be apply in every legal and regulatory context since, among other things, trusts are generally a common law legal concept.  One good source of guidance of this issue is the EU M-Money Directive (2009) which provides sound prudential guidance for electronic money issues.  Note, however, that the EU directive is a guideline or template that was designed or intended to be used as an enforceable regulation.  In this regard, the guidance within the EU M-Money Directive should be treated differently from the way in which Financial Action Task Force (FATF) guidance can be used within an AML-CFT context.

There are field examples of AML/CFT concerns form interviews the World Bank conducted in its pivotal works, titled “Integrity in Mobile Phone Services: Measures for Mitigating Risks from Money Laundering and Terrorist Financing" and “Preventing Money Laundering and Terrorist Financing.” As early as 2008, regulatory requirements in countries where MFS was prevalent began to emerge and financial intelligence units (FIUs), such as the Korean Financial Intelligence FIU, began to collect cases of suspicious transaction reporting (STRs) for suspected illicit use of MFS.  The Korean FIU, for instance, presented sanitized case examples at an AML/CFT workshop in Bangkok.  Due to the nature of privacy and national security concerns surrounding STRs in all jurisdictions, only sanitized cases such as this are typically released as typologies.  (Thanks to Lisa C. Dawson, Lead Associate, Booz Allen Hamilton, Financial Intelligence Center of Excellence for her input into this response.)

Assuming that the appropriate risk mitigation tools, policy guidelines, and supervisory capacity are in place within the financial and non-financial institutions facilitating mobile money transfers and the regulatory entities supervising the service providers’ activities, there are benefits to be gained by formalizing otherwise informal money flows, and there is potential for capturing tax revenue through these formalized streams. 

There is always the possibility of some compromise in the integrity of the MFS/MMT transaction at any point along the supply chain, including those involving counterparties to the primary transacting entity.  This is why it is important for any MFS/MMT provider to understand fully the implications of engaging in a multi-party construct, particularly within the context of an outsourced, cloud-based platform partnership structure, including counterparty risk of non-compliance with FATF and OFAC guidelines.  For more information on OFAC guidelines related to direct and contingent liability, please see the following report.

Assuming that the appropriate risk mitigation tools, policy guidelines, and supervisory capacity are in place within the financial and non-financial institutions facilitating mobile money transfers and the regulatory entities supervising the service providers’ activities, there are benefits to be gained by formalizing otherwise informal money flows, and there is potential for capturing tax revenue through these formalized streams.