Mobile Payments on Regulatory Radar

August 26, 2010

Mobile payments makes microfinance a much more viability for billions of people worldwide.

One need only look to examples like M-PESA, the mobile money transfer service in Kenya which in just three years has signed more than 9.5 million customers. That's 9.5 million customers in a country with where there are only 8.4 million bank accounts.

As mobile payments and mobile banking become more viable, however, concerns are being raised about systemic safety and soundness, as well as consumer protections. Complicating matters, unlike other technology innovations in financial services, mobile payments aren't being driven by banks, as much as by telecomm companies, Apple and device manufacturers.

A recent paper from CGAP describes the situation aptly. "Nonbanks are rarely subject to the kind of prudential regulations that apply to banks," it stated. That paper - Nonbank E-Money Issuers: Regulatory Approaches to Protecting Consumer Funds - is available for download on the CGAP web site.

Earlier this week, the U.S. non-profit group Consumers Union raised the same point in a public statement calling on the Federal Reserve Board to take steps to clarify the application of rules covering consumer electronic payments (known as the Fed's Regulation E) to mobile payments. If the Fed fails to act, Consumers Union said it will take its case to the Consumer Financial Protection Bureau, which was authorized under the recently passed Dodd-Frank financial regulatory reform bill but has not yet been staffed.

"Now that mobile payment ventures are emerging in the U.S., it's time to harmonize and extend consumer protections for all payment services," said Michelle Jun, a staff attorney with Consumers Union.

Technology Driven

By 2012, there are expected to be 1.7 billion people in the world who have mobile telephones but not bank accounts, according to CGAP

The technology research firm Gartner, predicts that worldwide 108.6 million mobile phone customers will be using those devices to make small-dollar payments by year-end 2010.

In North America, 3.5 million mobile phone subscribers will be making mobile payments by year end, by Gartner's reckoning. It's not many people, but then the speed with which technology advances take place in mobile telephony, and the social significance of adoption are like nothing previously witnessed.

Earlier this year, mopay, a Denver-based firm with a platform that support mobile marketing and payments, announced its technology now supports mobile telephone-based micro-payments (amounts under $25) at brick and mortar merchants in 28 countries, including the U.S.

Clearly, the mobile carriers are well positioned to support mobile payments, and in many parts of the world policymakers have been rewriting regulations to expressly permit nonbanks to operate mobile money programs.

Nonbank E-Money Issuers: Regulatory Approaches to Protecting Consumer Funds reviews the regulatory approaches taken to protecting consumer funds in the context of nonbank providers, and concludes it's viable, especially when the goal is to financial inclusiveness in emerging markets.

Consumers Union Troubled by Varying Protections

Mature markets are a different story, however.

Consumers Union points out, for example, that fragmented consumer protection laws - e.g.: differences in consumer liability limits related to lost/stolen credit, debit and prepaid cards in the U.S. - could thwart adoption, and certainly places consumers at a disadvantage.

"Consumers should not be expected to figure out what protections apply to each competing new payments venture" Jun said. "Regardless of the technology or business organization involved, the same high level of consumer protections should be guaranteed by law for any payment service."

The questions become then which federal agency takes the lead on this front, and when>?

2.5 billion adults, just over half the world's adult population, do not use financial services to save or borrow

^{_{The Financial Access Initiative}}