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It is no longer the case that Kenya is the only market where mobile money is scaling fast. In two neighbouring countries, Uganda and Tanzania, mobile money is now reaching millions of customers. Two services in particular have grown particularly fast. Who’s behind them? Standard Bank in Uganda and the National Bank of Commerce in Tanzania.
Surprised? You should be. The two services I’m referring to are MTN MobileMoney and Vodacom M-PESA. MTN Uganda and Vodacom Tanzania take responsibility for branding and marketing these services. They have set up and manage network of cash-in/cash-out agents. They provide customer care. And they selected and manage the technology vendors who supply the transactional platforms which underpin the service. Perhaps more to the point, they have made the significant investment that has been necessary to scale mobile money, and they will reap the benefits if mobile money is a commercial success.
Yet neither MTN nor Vodacom holds a license to offer a mobile money service from their financial regulator. Instead, their bank partners hold such licenses, and then authorize the operators to run the service under their regulatory umbrella. That’s because the Bank of Uganda and the Bank of Tanzania, like a number of other central banks in the developing world, do not issue payment or e-money licenses to non-banks.
This is a bit surprising. Consider two of the biggest names in payments globally, Paypal and Western Union. Neither is a bank. Rather, they are regulated (depending on the jurisdiction) as payment providers or e-money issuers. A bank license, and the supervisory obligations that go with it, would be unsuitable for these players, because they, like mobile money providers, do not engage in the risky business of financial intermediation: converting customer deposits into loans. Money that they hold on behalf of customers and agents is entrusted to a regulated bank.
There are a variety of reasons why certain central banks decline to license non-banks directly. But the arrangement comes with its share of problems, to the detriment of operators and (more importantly) customers.
- First, it can significantly slow down the speed at which non-banks can launch services, because they must first find a bank partner that is willing to secure a license on their behalf. We know of operators who have been negotiating with potential bank partners for more than a year, in part because banks legitimately worry about taking on the risks associated with mobile money when operationalizing the service will be up to another entity.
- Second, it can limit the degree to which non-banks can forge effective distribution networks. By appointing banks to act as superagents to support agent liquidity, operators can improve the service level that customers experience at retail. But it’s often important to appoint multiple banks as superagents, particularly if an operator’s partner bank has a limited branch network in rural areas. But license-holding bank partners are sometimes reluctant to let their operator partner work with other banks.
- Third, it can slow the integration of mobile money into the broader financial system. M-PESA in Kenya has integrated with at least a dozen banks so that customers can easily move money between their bank accounts and their M-PESA wallets. Operators who are tied to a single bank may find that that bank wants to offer this functionality to their, and only their, customers—good for the bank, but not for customers of other banks.
- Finally, it can restrict the range of services that non-banks offer customers. We know of one operator which sought to offer a kind of bulk payment functionality to its mobile money customers, only to be told ‘no’ by its bank partner—which feared that the new service would cannibalize its own wholesale offering.
Most of the operators we know in this situation would prefer to be directly regulated by their central bank as an e-money issuer or payment services provider. Doing so gives regulators better visibility into and oversight over mobile money services, and makes it more likely that customers will have more services from which to choose in the financial services space. It’s a win for everyone involved.
Mobile operators are directly licensed to offer payment services by central banks in a number of markets around the world, including the Philippines, Malaysia, Thailand, and Indonesia. To read more about how regulators in those jurisdictions make sure that customers’ money is safe, see Nonbank E-Money Issuers: Regulatory Approaches to Protecting Customer Funds. And for more about the relationship between banks and operators when it comes to mobile money, see Mapping and Effectively Structuring Operator-Bank Relationships to Offer Mobile Money for the Unbanked.