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Regulating Transformational Branchless Banking Mobile phones and other technology to increase access to finance This article is based on assessments of policy and regulation in seven countries - South Africa, Kenya, the Philippines, India, Pakistan, Russia and Brazil - where regulation of branchless banking targeted at the unbanked poor is still not fully formulated. While there are many differences between these various countries, policy makers and regulators are facing common challenges in drawing up regulations that allow both innovation and the safe expansion of branchless banking. The authors describe the current regulatory regime in each region and conclude by providing recommendations in respect of both content and process.

Regulating Transformational Branchless Banking:

Mobile phones and other technology to increase access to finance

by Tim Lyman, Senior Policy Adviser, CGAP, Mark Pickens, Microfinance Analyst, CGAP and David Porteous, Director, Bankable Frontier Associates

When a cover story last year in The Economist forecast provocatively the ‘end of the cash era’, some in developing and transition countries were thinking ‘not yet, for us at least’. Surely the high-tech electronic substitutes for cash described in the issue as taking Japan by storm would take quite a while to reach poorer countries. And yet, the transformation from cash to electronic value, stored and conveyed by mobile phones, is hitting developing countries too. 1 In Kenya, the M-PESA mobile wallet service offered by Safaricom attracted one million registered users in 10 months (in a country where fewer than four million people have bank accounts). And in the Philippines, the country’s two mobile network operators offer the functional equivalent of small-scale transaction banking to an estimated 5.5 million customers.

Transformational branchless banking extends to customers who would not be reached profitably with traditional branchbased financial services.

In a fast increasing number, policy makers and regulators in other developing and transition countries are embracing ‘transformational branchless banking’- the use of information and communication technologies (ICTs) and non-bank retail channels to reduce costs of delivering financial services to clients beyond the reach of traditional banking. Much of the current buzz is around mobile phones. But other branchless banking approaches are gaining traction as well. In Brazil, banks have established more than 95,000 banking ‘correspondents’-local merchants, post offices, and lottery dealers equipped with card-swipe and barcode-reading point-of-sale (POS) terminals. These correspondents provide access to financial services in the 1,600 Brazilian municipalities (one quarter) that lacked any financial service outlets seven years ago. From Afghanistan to Zambia, policy makers and regulators find themselves facing the question of how to approach regulating this new and fast-developing space at the convergence of technology and financial services. Regulation will go far in determining not only whether branchless banking is legally permitted, but also which models of branchless banking are economically feasible and how far they will go in reaching previously unserved or underserved poor people.

The questions surrounding regulation of branchless banking specifically targeting the unbanked poor have only recently begun to receive comprehensive and systematic attention. The research on which this article is based sought to expand our evidentiary base. To this end, during the first half of 2007, we visited seven countries where policy makers and regulators find themselves on the frontlines of policy making about regulation of branchless banking targeted at the unbanked poor: in Africa, South Africa and Kenya; in Asia, the Philippines, India, and Pakistan; in Europe/Central Asia, Russia; and in Latin America, Brazil. Despite the many obvious dissimilarities among these countries and their situations, policy makers and regulators in the countries studied share a common challenge: how to formulate proportionate regulatory policy that gives space for innovation and permits branchless banking to scale up safely.

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