Tuesday, September 07, 2010

Utilising competitive forces in regulating for mobile banking

Financial regulators have a difficult balancing act to follow. They have the responsibility, on the one hand, to ensure that the monetary system work, while also making financial products available to as many of the population as possible. A very restrictive regulatory dispensation would probably be the safest approach to protect the monetary system, but would lead to exclusion for a large percentage of people.

It would also be irresponsible to just have an approach of "everything goes". While this approach may ensure that more people have access to financial services, this would put the whole system at risk.

Financial regulators in general follow a very prescriptive approach in the way that they regulate. Their view of the world is that some rules exist and that if an institution can demonstrate that they can (or intend to) conform to those rules that the institution would receive a license. It is almost a case that any institution has a right to a license if they can demonstrate that they comply.

Another approach would be to limit the number of licenses and only offer licenses to a select (pre-determined) number of institutions in a specific sector (say mobile payments). These institutions would be carefully selected, so that a highly competitive market gets created. In this way, proper market forces would keep the industry in balance. This is a novel way of looking at regulations with many pros and cons, but worth considering.

It is my impression that this approach (of creating a competitive environment for mobile banking/payments through only licensing a limited number of players) is being considered by more than one country at the moment. The most recent announcements from CBN (Central Bank of Nigeria) and RBI (Reserve Bank of India) seems to encapsulate some of this thinking.

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