Friday, February 23, 2007

Regulatory considerations

Let us agree that, even though some of the functions are very similar to other types of banking, mobile banking is different. For a start this is the only type of banking where you can enter your own PIN on your own secure device. It is the only type of banking where you can be informed of banking transactions and be asked to confirm actions at any time or place in the world, providing you have cellphone reception.

The question frequently asked is what is the regulatory implications of all of this? or.. does it impact regulatory considerations at all? These are very important questions and should be properly resolved prior to deploying any solution. It is far better to ensure Central Bank approval prior to launch than having to suspend a product launched in haste in order to get the regulatory dispensation in place. This is especially embarrassing when the product is particularly successful.

In considering regulatory issues four areas are important:

Deposit taking

The basis of banking anywhere in the world is the management of systemic risk. Central banks are primarily concerned of situations where an institution holds money on behalf of some-one else and then is not capable of repayment if required. Organisations that take deposits from consumers and hold it on their behalf forms the basis of banking and is carefully controlled. These organisations are usually called banks and must conform to Central bank's regulations (like strict reporting and capital adequacy considerations). When deploying mobile banking solutions the regulator must be consulted especially in instances where a wallet, or pseudo bank account is created or even in instances where clearing is a delayed process.

Know your customer (KYC)

One of the most difficult problems to solve in the provision of entry-level banking to low income people is the disproportional high cost of opening a bank account. Some of the regulatory prescriptions regarding KYC, if implemented according to the letter of the law, often kills the business case. It is important to consider the characteristics of the phone, the objective of the service and special dispensations often available in banking law to solve this problem in a legal way. The registration process and take-up procedure in many mobile banking solutions often contravene regulatory prescriptions. In many cases the solutions had to be suspended in others the Central bank accommodated solution providers by making small modifications to the rules. We at Fundamo are of the opinion that this work should be done prior to product launch.

Dispute management

One of the strengths of the existing banking world is the clear definition of liability. If you accepted a card payment without checking the signature, then you may be liable to refund the whole amount. Payment systems have been clearly defined to cater for situations like when your PIN has been compromised, when a card payment is accepted while the card is not present at the merchant, what happens if the terminal is not certified etc. etc. In many instances the rules usually applicable in the classic world can not be applied as is for mobile initiated transactions. Liability and dispute mechanisms must be re-developed, tested and then applied. These rules should conform to laws and existing relationships between banks and clients. It is not trivial to adjust these rules for mobile payments/banking, but critical to ensure that disputes can be managed accurately.

Clearing and settlement

Many countries have promulgated advanced electronic payment laws. These laws prescribe regulations regarding the clearing and settlement of transactions between banks. When implementing mobile banking solutions, it is critical to consider these rules carefully. Considerations should be given to the legal implications of aggregated settlement and/or nett settlement designs. The need to be a member of or even the establishment of ACH's must be considered carefully.

Regulatory considerations is not trivial and differs from one country to another. It is best to contract experts in this space when deploying mobile banking solutions. The small additional cost is not even closely comparable with the potential risk and loss of income that may accrue to a customer if regulatory mistakes are made.

1 comment:

Anonymous said...

Your blog is very informative!
I am student from columbia university, NY and am doing a research paper on mobile banking. I need some information particularly from the pricing part:

1) How much does the vendor charge the bank for a per user basis?
2) How much does the vendor charge the bank for a per user basis?
3) What percentage of the per user charge does the vendor pay to the carriers?

Any advice is appreciated.