Basic Principles and Key Issues in Creating an Enabling Environment for DFS. Mohammad Moniruzzaman, 2009 CGAP Photo Contest

Transcription

1 Basic Principles and Key Issues in Creating an Enabling Environment for DFS Mohammad Moniruzzaman, 2009 CGAP Photo Contest 0

2 Proportionality Proportionate regulation maximizes the net-benefit of regulation Benefits Costs This is best to be achieved following a riskbased approach that allows for rationalizing the use of scarce supervisory resources by focusing on issues posing the highest risk to the achievement of the regulatory objectives of inclusion, stability, protection, and integrity (I-SIP) 1

3 Basic regulatory enablers in digital financial services Broad consensus about short list of most critical topics Main issues 1. E-money issuance 2. Agents 3. AML/CFT 4. Competition 5. Consumer protection Nonbank players permitted? Bank and nonbank agents? Tiered, risk-based KYC structures? Different types of institutions? Tailored to specific risks? 2

4 Regulating Nonbank E-Money Issuers Md Farhad Rahman, 2013 CGAP Photo Contest 3

5 Basic enabler #1: Regulations permitting and governing e-money India - yes No nonbank e-money issuance, but: Prepaid Payments Instrument Issuers (Restrictions on cashout/requirements to partner with banks) Soon: Payments banks Rwanda - yes E-money issuer defined in PSP regulations, but same rules apply as for PSPs except for trust account rules Bangladesh - no Not really, but bkash very much operates like a nonbank e-money issuer Pakistan - no The PSEFT Act provides for e- money institutions to be authorized by SBP, but if it s not used in practice (similar in Bangladesh). Different types of banks can issue stored value accounts and MNOs have been permitted to own banks Uganda - yes Mobile money service providers (MNOs and other nonbanks) can offer e-money services, but in partnership with banks as the entity receiving the regulator s no objection 4

6 What do we want to see and how do we get there? Appropriate e-money regulation Nonbanks or limited purpose banks can issue e-money / stored value accounts / small savings accounts Typical steps required to get there National Payment System Law or clear authority in another law to regulate payment system Sufficient fund safeguarding and fund isolation rules Implementing regulations governing the issuance of e- money by nonbanks (and banks?) Not subject to full range of prudential regulations applied to financial intermediaries Alternatively: Limited purpose banks ( differentiated banks, niche banks) 5

7 Regulating bank and nonbank agents GMB Akash, 2011 CGAP Photo Contest 6

8 Two important issues to address in agent regulations How to ensure level playing field between bank and nonbank agents? No material difference between bank and nonbank agents regulatory treatment (but bank agents might be permitted to do more) Best achieved by single regulation covering both types of agents or by identical regulations applying to both types Otherwise risk of regulatory arbitrage and contradictory treatment of shared agents Liability of the provider core element of both agent types Who can be an agent? Set minimum standards without unnecessarily circumscribing growth potential Business registration? Length of operations? Credit history? Criminal record? Avoid geographic restrictions or barring certain legal entities from operating as agents Allow for tiered agent structure and use of agent network managers 7

9 Basic enabler #2: Regulations permitting and governing the use of agents by banks and nonbanks India - yes Have had agent rules for a long time (since 2006), but restrictions were only lifted over time Kenya, Tanzania, Bangladesh - yes Different rules for bank and nonbank agents potentially leading to level playing field issues Myanmar - yes Mobile Banking Directive permits agents, but lacks clarity (e.g. on exclusivity, tiered agent structure) Uganda - no Only for nonbanks (MFSPs), but not permitted for banks Additional issues to consider Agent exclusivity and tiered agent structure 8

10 What do we want to see and how do we get there? Appropriate agent regulations Use of agents permitted by range of relevant providers Typical steps required to get there First step is to permit agents (Uganda example for what happens if not) and to establish general principal agent principles Provider liability clearly stated Second step is to define clear rules Preferably other relevant elements clearly prescribed Other relevant issues: (i) exclusivity; (ii) level playing field for different types of agents; (iii) tiered agent structure; (iv) use of prefunded accounts; etc. 9

11 KYC Regulation Bir Azam, 2013 CGAP Photo Contest 10

12 Basic enabler #3: Tiered, risk-based KYC structures Pakistan - yes Separate KYC rules for branchless banking, while in most other countries existing rules for banks apply mutatis mutandis Bangladesh - yes Central bank-issued rules vs. general rules under AML Law: One can be better at defining proportionality than the other, but AML Law generally prevails Kenya - yes Coverage of ID and accessibility of database: if good, even low risk accounts can make use of official ID and the need for alternative forms of identification for low risk accounts is less important India and Pakistan - yes e-kyc allows customers to open accounts at agents (and in Pakistan even on the phone with biometrically verified SIMs) Rwanda - no Not clear whether PSPs (and thus EMIs) fall under definition of reporting entity in the AML Law 11

13 KYC requirements limit risks associated with anonymity and lack of oversights and puts restrictions on elusiveness and rapidity General risk factors Cash Digital financial services Before Controls After Anonymity *** ** Elusiveness *** ** Rapidity * *** Customer profile building, includes registration info (name, unique phone number etc.) Limits on amount, balance, frequency and number of transactions Real time monitoring Real time monitoring Frequency restrictions on transactions Restrictions on transactions amount and total account turnover in a given period * * * Lack of oversight *** * * Indication of risk: *** Highly prevalent ** Somewhat prevalent * Low 12

14 What do we want to see and how do we get there? Risk-based KYC rules Simplified CDD for low risk accounts Typical steps required to get there Ideally the AML law provides room for simplified CDD The extent to which KYC/CDD is a problem strongly depends on the quality of the ID system The question of how simplification will look like strongly depends on quality of ID system Biometric verification of SIMs can be a game changer Pakistan as example that pricing can also play important role 13

15 Consumer protection regulation in DFS Sumon Yusuf, 2013 CGAP Photo Contest 14

16 The same three core objectives in consumer protection apply to DFS Three core objectives TRANSPARENCY Disclosure requirements: Product pricing, terms and conditions Plain language, simple (and possibly standardized) formats Whether customer can seek recourse and how Required display at agent premises FAIR TREATMENT Provider liable for agent conduct in transaction Allowable charges by agents Data privacy and security Fraud prevention/ detection, incl. receipts Protection of customer funds EFFECTIVE RECOURSE Require providers to offer internal dispute resolution regulation sets standards Workable for low-income and inexperienced consumers (e.g., accessibility, cost, literacy factors) Complaints/resolution data valuable to regulators for market monitoring 15

17 What do we want to see and how do we get there? Appropriate consumer protection regulation Consumer protection rules specific to the provision of digital financial services Typical steps required to get there Broad authority in law (increasingly under stand-alone FCP law) This could be part of a broad FCP regime or something specific for agents / e-money / digital credit etc. Rules tailored to the specific consumer protection risks in DFS 16

18 Some broad lessons from CGAP work on creating enabling environment for DFS Takes time (often two steps forward, one step back) Important to build trust with regulators and industry Requires good understanding of local market Draw on deep expertise and global knowledge of basic enablers 17

19 Emerging regulation issues Competition and market conduct New services like digital credit Telecom related issues: USSD access and pricing, open API Payment systems integration and interoperability Supervision of digital financial services 18

20 شكرا Thank You 19

21 It is important to draw clear lines between payment, e-money, and deposit Definition Who can issue? Prudential requirements Deposit insurance Payment Electronic money Deposit Transfer between two parties; Time restricted (e.g. within T+3) Payment Service Providers Special type of repayable funds with transaction focus E-Money Institutions; regulated financial institutions Repayable funds, intermediation Regulated financial institutions Low Medium High NA In most cases not Typically yes

22 Fund safeguarding and fund isolation are two key regulatory provisions Fund safeguarding Fund isolation Maintain liquid assets equivalent to e-float Restrictions on use of funds Diversification of e- float fund holdings Ownership of funds Trust account/escrow account Issuer failure: hierarchy of claims

23 Transaction limits constitute additional risk mitigation measures Maximum transaction values Maximum value of individual transaction Maximum monthly/periodic load Maximum holdings Use tiered accounts with varying levels of KYC

24 Emerging regulatory enablers in DFS Paying interest to e-money holders Typically not permitted in order to differentiate from banking Could be pass through of interest on pooled account Bringing e-money accounts under deposit insurance Coverage limits too low or e-money excluded from coverage Pooled accounts in insured institutions can provide coverage for each customer

25 Tiered account structure The example of Mexico Level 1 Level 2 (1,114 USD) Level 3 (3,715 USD) Level 4 Traditional bank account (no limit) Max amount in monthly transactions Customer information required to open account US$ max balance of US$ 370 None US$1,110 US$3,700 No limit Basic Information (Name, Address, Gender) Documentation N.A. No paper copy required Full customer information required Paper copy required Customer present at opening No No (but bank has the option to request it) Yes Yes Access point Only debit card. No mobile Mobile, card, bank transfer Mobile, card, bank transfers The same plus cheques Source: Banxico Circular 2019/95 as modified by Circular 14/

26 Using biometrically verified SIMs for account opening The case of Pakistan 18,000 Branchless Banking Accounts (in thousands) 16,000 15,322 14,000 13,192 12,000 10,000 10,881 8,000 7,538 6,000 4,000 2, ,060 1,447 1,761 2,112 2,399 2,643 2,966 3,475 3,832 4,238 4,713 5,415