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Policies to foster mobile banking development

Eva M. Gutiérrez's picture

Mobile banking (m-banking) — the use of mobile phones to conduct financial and banking transactions — represents a key area of financial innovation in recent times. Mobile banking allows banks’ customers convenient access to a variety of banking functions, and increases efficiency.  Customers can access funds in their bank accounts at all times through mobile phones, and transaction costs are driven down. Even when individuals have access to bank accounts with low fees, m-banking can reduce the opportunity cost of financial transactions.

Mobile banking has also been identified as a potentially significant contributor to financial inclusion by the G-20. While half the adults worldwide do not have access to formal bank accounts, it is estimated that more than 2 billion of those unbanked already own a mobile phone. Unbanked individuals cite difficulties in obtaining a bank account such as living too far away from branches, not possessing necessary documents, or high banking costs.  All such barriers to finance can in theory be overcome through a pivot in business model that is supportive of m-banking.

M-banking has flourished both in developed and developing countries in various forms in response to structural characteristics. The model of providing financial services through a mobile phone linked to a bank account is referred to in the literature as the additive model. The use of m-banking in developed economies often follows the additive model. This contrasts with the practice of using m-banking to target the unbanked - the transformative model. Under this model, non-banks issue electronic currency to offer costumers payment services and value storage services.

The uptake of m-baking though, has been quite heterogeneous due to the diversity of demand and supply side considerations. Various individual characteristics such as age, income and education level are important determinants of m-banking usage. Country characteristics such as existing access to banking, the penetration of bank branches and ATM’s, and overall financial development have significant impact on both the demand and supply of m-banking. How an m-banking deployment has marketed its product in recognition of such individual, regional and country level variables is unarguably crucial to its successful adoption.

A comparison of the development of m-banking services in countries as diverse as Korea and Uganda provides some insights on what factors support this development[1]. A first lesson is that the development of mobile banking services can appear at very different stages of financial sector development, but it requires a vibrant and competitive telecommunications sector. Fostering competition among telephone service providers will foster the development of alternative services as margins in the industry decline. Services offered by mobile money providers will differ depending on the degree of economic and financial development with pre-paid mobile services and transformational mobile money services being more prevalent in developing countries. Basic mobile communication technologies can already support a variety of transactions including person-to-person and retail payments.

A key ingredient at the country level is the role of m-banking enabling legislative and regulatory environment. Changes in the legal and regulatory framework can either provide the right conditions for innovative m-banking players to thrive, or hinder its growth by compounding the risk already inherent in the acceptance of a novel product. The challenges of regulation are compounded by the diverse nature of operators in the market –  m-banking models vary in their implementation from being entirely bank driven, to being purely driven by a mobile network operator, and more commonly a mixture of the two. Both telecommunication and banking regulators, as well as competition authorities, have a stake in the industry. Nevertheless, many countries have already adopted reforms supporting m-banking environment according to the CGAP (2010) Financial Access database.

While there has been research on legal and regulatory principles that may help mobile banking expand, such studies have primarily been qualitative and concentrated on specific case studies. Using data on m-banking usage from Findex  for 37,000 individuals in 35 countries, we explored the empirical relationship between regulatory frameworks and m-banking usage in a recently published working paper[2]. Overall, we find evidence that enabling legal and regulatory frameworks are strongly associated with higher usage both for the banked and unbanked.

While supporting frameworks do not necessarily require a detailed regulation of mobile banking industries, some elements appear key; the legal framework should allow (or at least not explicitly forbid) non-bank financial institutions to issue money and the use of banking agents or correspondents. An electronic signature law will help support the development of retail payment services. As per what identifying features of the regulatory framework encourages usage of m-banking amongst the poorest,  we find that a regulatory framework that supports interoperability is associated with higher usage but stronger consumer protection is associated to lower usage among this segment.

This fact that stronger consumer protection is associated with lower m-baking using among the poorer is a puzzling result that requires further research. One hypothesis though is that strong consumer protection regulation increases the cost of the service. Lack of strong consumer protection regulation has not prevented the development of mobile money services in Uganda albeit if current problems with agents persist it may hamper the extension of the network agent and curtail the provision of services. To ensure wider use of the service by the population it is important to educate the population regarding the possibilities offered by mobile money services.

 
[1] Gutierrez, E. and Choi, T., 2013, “Mobile Money Services Development: The cases of Korea and Uganda”. World Bank Policy Research Working Paper 6786, World Bank, Washington DC.
 
[2] Gutierrez, E. and S. Singh 2013, “What regulatory environments are more conducive to mobile banking? Evidence from Findex data”, World Bank Policy Research Working Paper 6652, World Bank, Washington DC.