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Basic Principles and Key Issues in Creating
an Enabling Environment for DFS
0Mohammad Moniruzzaman, 2009 CGAP Photo Contest
Proportionality Proportionate regulation maximizes the net-benefit of regulation
Benefits Costs
1
This is best to be
achieved following a risk-
based 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)
“Basic regulatory enablers” in digital financial services
Broad consensus about short list of most critical topics
1. E-money issuance
2. Agents
3. AML/CFT
4. Competition
5. Consumer protection
2
Nonbank players permitted?
Bank and nonbank agents?
Tiered, risk-based KYC structures?
Different types of institutions?
Tailored to specific risks?
Main issues
Regulating Nonbank E-Money
Issuers3Md Farhad Rahman, 2013 CGAP Photo Contest
Basic enabler #1: Regulations permitting and governing e-money
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India - yes
No nonbank e-money
issuance, but:
• Prepaid Payments
Instrument Issuers
(Restrictions on cash-
out/requirements to
partner with banks)
• Soon: Payments banks
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
Bangladesh - no
Not really, but –
• bKash very much operates
like a nonbank e-money
issuer
Rwanda - yes
E-money issuer defined in
PSP regulations, but same
rules apply as for PSPs
except for trust account rules
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
What do we want to see and how do we get there?
Nonbanks or limited purpose banks can issue e-money / stored value accounts / small savings accounts
Sufficient fundsafeguarding and fund isolation rules
Not subject to full range of prudential regulations applied to financial intermediaries
Appropriate e-money regulation
National Payment System Law or clear authority in another law to regulate payment system
Implementing regulations governing the issuance of e-money by nonbanks (and banks?)
Alternatively: Limited purpose banks (“differentiated banks”, niche banks)
Typical steps
required to get there
5
6GMB Akash, 2011 CGAP Photo Contest
Regulating bank and
nonbank agents
Two important issues to address in agent regulations
How to ensure level playing field
between bank and nonbank agents?
Who can be an agent?
• 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
• 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
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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
Uganda - no
Only for nonbanks (MFSPs),
but not permitted for banks
Additional issues to
consider
Agent exclusivity and tiered
agent structure
Myanmar - yes
Mobile Banking Directive
permits agents, but lacks
clarity (e.g. on exclusivity,
tiered agent structure)
Basic enabler #2: Regulations permitting and governing the use
of agents by banks and nonbanks
What do we want to see and how do we get there?
Use of agents permitted by range of relevant providers
Provider liability clearly stated
Preferably other relevant elements clearly prescribed
Appropriateagent
regulations First step is to permit agents (Uganda example for what happens if not) and to establish general principal agent principles
Second step is to define clear rules
Other relevant issues: (i) exclusivity; (ii) level playing field for different types of agents; (iii) tiered agent structure; (iv) use of prefunded accounts; etc.
Typical steps
required to get there
9
KYC Regulation
10Bir Azam, 2013 CGAP Photo Contest
Basic enabler #3: Tiered, risk-based KYC structures
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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
India and Pakistan - yes
e-KYC allows customers to
open accounts at agents (and
in Pakistan even on the phone
with biometrically verified
SIMs)
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
Rwanda - no
Not clear whether PSPs (and
thus EMIs) fall under definition
of “reporting entity” in the AML
Law
General risk factors Cash Digital financial services
Before Controls After
Anonymity *** **Customer profile building, includes
registration info (name, unique phone
number etc.)*
Elusiveness *** **Limits on amount, balance, frequency and
number of transactions
Real time monitoring*
Rapidity * ***
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
KYC requirements limit risks associated with anonymity and lack of
oversights and puts restrictions on elusiveness and rapidity
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What do we want to see and how do we get there?
Simplified CDD for low risk accounts
The extent to which KYC/CDD is a problem strongly depends on the quality of the ID system
Biometric verification of SIMs can be a game changer
Risk-based KYC rules
Ideally the AML law provides room for simplified CDD
The question of how simplificationwill look like strongly depends on quality of ID system
Pakistan as example that pricingcan also play important role
Typical steps
required to get there
13
Consumer protection
regulation in DFS14Sumon Yusuf, 2013 CGAP Photo Contest
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
What do we want to see and how do we get there?
Consumer protection rules specific to the provision of digital financial services
This could be part of a broad FCP regime or something specific for agents / e-money / digital credit etc.
Appropriate consumer protection regulation Broad authority in
law (increasingly under stand-alone FCP law)
Rules tailored to the specific consumerprotection risks in DFS
Typical steps
required to get there
16
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 under-
standing of local
market
• Draw on deep
expertise and global
knowledge of basic
enablers
17
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
شكرا ً
Thank You
19
It is important to draw clear lines between payment,
e-money, and deposit
Payment Electronic money Deposit
Definition
Who can issue?
Prudential
requirements
Deposit insurance
Transfer between two parties; Time
restricted (e.g. within T+3)
Special type of repayable funds with transaction
focus
“Repayable funds”, intermediation
Payment Service Providers
E-Money Institutions; regulated financial
institutions
Regulated financial
institutions
Low Medium High
NA In most cases not Typically yes
Fund safeguarding and fund isolation
are two key regulatory provisions
Fund safeguarding
Maintain liquid assets equivalent to e-float
Restrictions on use of funds
Diversification of e-float fund holdings
Fund isolation
Ownership of funds
Trust account/escrow account
Issuer failure: hierarchy of claims
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
“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
Source: Banxico Circular 2019/95 as modified by Circular 14/2011
Level 1 Level 2(1,114 USD)
Level 3(3,715 USD)
Level 4Traditional bankaccount (no limit)
Max amount in monthlytransactions
US$ 280 + max balance of US$ 370
US$1,110 US$3,700 No limit
Customer information required to open account
NoneBasic Information(Name, Address,
Gender)Full customer information required
Documentation N.A. No paper copy requiredPaper copy
required
Customer present at opening
No
No (but bank has theoption to request
it)
Yes Yes
Access pointOnly debit card.
No mobileMobile, card, bank
transferMobile, card, bank
transfersThe same plus
cheques
Tiered account structureThe example of Mexico
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Using biometrically verified SIMs for account openingThe case of Pakistan
439 665 929 1,060
1,447 1,761
2,112 2,399
2,643 2,966
3,475 3,832
4,238 4,713
5,415
7,538
10,881
13,192
15,322
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Branchless Banking Accounts
(in thousands)