The Transformational Potential of M-Transactions

The report, Vodafone’s sixth policy paper, of which three focus on the social impact of mobile phones, details new, independent research by leading economists from Frontier Economics and Groupe d’Economie Mondiale as well as consultants to the World Bank.The suggested changes will have wide spread impact on both the economic development of countries and the financial security of millions of people currently without access to banking services.

Lack of access to banking services is currently forcing people to rely on a cash-based economy with little security, a more casual informal labour market and a lower tax base for governments. The report concludes that financial services are critical for economic development and inclusive financial services for the unbanked are essential for poverty reduction.

Over the last two years, pilot programmes in Africa and Asia have highlighted the potential for mobile phones to deliver basic financial services in developing countries. The report shows how these services provide the first real opportunity for many poorer people to get on to a formal “banking ladder” with benefits including reduced threat of crime, time saving and secure savings opportunities.

However, existing banking regulation is currently inappropriate for the growth of m-transaction schemes. Vodafone, Nokia and Nokia Siemens Networks are calling for regulators to ensure they do not restrict commercial experimentation or limit the schemes to sub-economical scale. Key suggested changes to regulation detail in the report include:

Review of deposit taking

Current regulation of deposit taking is shaped around the needs of banks and at present mobile systems are limited in the size of transaction they can undertake. Deposit taking regulation needs to allow new entry on a larger scale by m-transactions operators.

Access to the clearing system

As new entrants, m-transactions operators must be able to access the clearing system. Adaptation of ‘know your customer’ and anti-money laundering

‘Know your customer’ and anti-money laundering rules need to be adapted to conditions in developing markets where formal documentation and access to photocopiers is limited. The customer data held by mobile operators could, with appropriate safeguards, offer an alternative to existing forms of regulation.

Interoperability of m-transaction schemes

Interoperability of m-transactions schemes must be carefully considered to enable operators to benefit from network effects but ensure that the intensity of competition in new markets and need for innovation is not stifled.

The development of m-transactions is also expected to introduce significant improvements in financial services, such as easier and cheaper international payments especially for remittances home, or reduced risk in domestic payments by near real-time transfers.

Alan Harper, Director of Vodafone Group Strategy, “The case for mobile transactions has been well proven by recent pilots. In a country such as Kenya there are 400 bank branches, 600 ATMs and 10 million mobile phones. There is clearly the potential to bring access to finance for hundreds of thousands of individuals for the very first time. However, there is also an increasing need to ensure that current banking regulations do not undermine or limit this growing potential.”

Diane Coyle, author of the report, said: “A regulatory approach that tries to force m-transactions into the existing structure of retail banking regulation and financial supervision could impose high fixed costs and significant compliance problems. Any new framework needs to be risk based, sensitive to practical issues relating to underserved developing markets, and encourage experimentation and innovation.”

Antonio Torres, Business Development Director, Nokia said, “The growth of mobile phone usage in remote and rural parts of the world is creating many positive opportunities to widen access in an affordable way to other social and economic services. This report highlights the need for some fresh thinking and a new approach if the full potential of this new found mobility is to be achieved.”