Riskier than we think? A focus on insolvency frameworks to protect mobile money users

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Woman using mobile payments at fruit stand in market
Photo: Nzewi Confidence from Nzewi Confidence's Images

Mobile money is making life more convenient for billions of people in developing countries. There are now over one billion mobile money accounts in about 95 developing countries, processing over a combined US$2 billion in transactions daily. Keeping funds in a mobile money firm is not the same as keeping it in a bank and it may be riskier than people think. Our recent note, Insolvency of Mobile Money Firms in Developing Countries explains that in many countries, funds provided by customers into a mobile money service may be far more exposed to risks from the insolvency of a mobile money firm than customers and policymakers might realize.  These risks arise because, in most countries, mobile money firms are subject to a country's regular corporate insolvency regime, and not to any special resolution mechanisms, such as those that apply to more traditional financial institutions such as banks. Insolvency proceedings can expose funds to two kinds of risks: (i) loss of value: a potential reduction in the funds returned to customers; and (ii) illiquidity: a delay in returning funds to customers because of the time required to conclude proceedings. The risks could even become systemic in countries where mobile money adoption is significant. 

Many policymakers have used safeguarding tools to protect funds against loss of value and illiquidity risk, but the rules may not provide sufficient safety in practice. For example, many common law countries require mobile money firms to store funds in a trust. A trust structure aims to ensure funds provided by customers are unreachable by the firm's creditors during insolvency proceedings. However, upon closer inspection, policymakers may find that such mechanisms are not consistent with the applicable corporate insolvency law. Given the limitations that authorities may have for enforcing these rules, funds provided by customers are sometimes commingled with other assets. These issues are also compounded by the fact that few insolvency systems are fully consistent with the World Bank Principles for Effective Insolvency and Creditor/Debtor’s Regimes, a set of international good practices.

A recent example is illustrative of illiquidity risk. The 2019 insolvency of the British e-money firm, Ipagoo, illustrates the dangers policymakers may face if they fail to properly examine fund safeguarding rules for mobile money firms as part of ongoing supervisory regulation before one of these firms enters financial distress. Ipagoo was authorized to issue e-money and provide other services. Once Ipagoo became insolvent, like other e-money providers, it was subject to the United Kingdom’s regular corporate insolvency regime. A lack of clarity of how funds were to be distributed resulted in several years’ delay for customers to get their money. Since Ipagoo became insolvent, the United Kingdom has tried to protect e-money funds against illiquidity risk by introducing a “special administration” insolvency scheme for payment and electronic money institutions. Most other countries, particularly in the developing world, have not introduced specialized regimes for distressed mobile money firms or updated their fund safeguarding rules, possibly exposing customers' funds to significant risks they have not considered.

Policymakers should start examining their frameworks now to assess risks to funds provided by customers. Even in countries where the use of mobile money is not widespread, these issues can cause risk in other fintech models where a non-bank entity handles customer funds.  More research is required into the precise operation of these risks and the extent to which regulatory tools can address them. Policymakers need to ensure regulatory mechanisms in their jurisdiction protect such funds against loss of value and illiquidity risks. Several steps listed in our note Insolvency of Mobile Money Firms in Developing Countries provide starting points for that process.


Andrés F. Martínez

Senior Financial Sector Specialist

Harish Natarajan

Lead Financial Sector Specialist

Will Paterson

Senior Financial Sector Specialist

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