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Monday, September 13, 2010

Regulating Branchless Banking to Massively Expand Financial Access

By Ignacio Mas

Editor's note: Two weeks ago, we published a two-part series authored by Guest Blogger Ignacio Mas, focused on the potential of electronic payments in the developing world. You can read his previous NextBillion articles here and here. Today, CGAP's Microfinance and Technology blog publishes an article, also authored by Ignacio, highlights what, in his view, are the priorities for the development of branchless banking. This article addresses his recent work on branchless banking regulations.

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Technology, and in particular the spread of real-time mobile communications networks, permits financial service providers to delegate 'last mile' cash management and customer servicing functions to third-party retail outlets. By making basic deposit, withdrawal, and payment functions available securely through retail shops that exist in every village and neighborhood, there is an opportunity to dramatically increase the physical footprint of financial service providers and to transform the basic economics of low-balance savings.

In a paper co-authored with my colleagues Claire Alexandre and Daniel Radcliffe, we highlight several ways in which typical banking regulations need to be adapted to these new possibilities of banking beyond bank branches. Let me here mention a few key thoughts.

First, retail outlets acting as cash merchants on behalf of banks need not create financial risk for either the customer or the bank as long as the system operates on a purely prepaid basis, i.e. if all customer transactions are undertaken against the store's own account and transactions are authorized in real time by the bank. In this case there is not much reason for regulators to have to prescribe which stores can and cannot be cash merchants, much less to authorize them individually.

Second, there need to be tiered Know Your Customer (KYC) requirements, which allow for immediate opening of small-sized, entry-level accounts at authorized retail (non-bank) outlets. Let's not put up all the barriers upfront for customers who are new to banking. As customers develop bigger and broader financial needs, they can be asked to perform progressively tougher KYC tests.

Third, there should be a class of e-money or 'narrow bank' licenses that allows non-banks (such as mobile operators) to operate money transfer and store-of-value services, under strict investment and capital structure rules. All public monies they raise would need to be backed 100% by assets in prudentially regulated bank, so in effect all schemes must be ultimately bank-based.

Fourth, since it is still early days in the development of branchless service models globally, regulation should focus on enabling commercial experimentation with a range of new models while ensuring that basic, commonplace banking risks are addressed. Regulations should not prescribe business models, technology choices or pricing structures.

One final thought: despite the 'branchless banking' label, regulations still need to be friendly towards continued penetration of branches in the territory. While retail outlets may handle the bulk of cash transactions on behalf of the bank's poorer customers, these outlets will still need somewhere to go to in order to deposit excess cash and access liquidity. In the new cash ecosystem, retail outlets handle the 'last mile,' but banks still do the 'long-haul.' Bank branches will thus retain a role as cash distribution nerve centers in support of the bank's non-bank retail outlets located in their catchment area.

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