Want to Boost Financial Inclusion? Pay Interest on Mobile Money
As most people in the global development space know, e-money (or mobile money) is electronically stored value that can be sent and received via mobile phones. Owners of e-money can use it to pay bills or remit money to relatives. Governments can make welfare payments into these e-money accounts with a greatly reduced risk of “leakage” compared with traditional means such as cash handouts by government agents. E-money has been the principal means of increasing access to financial services in many developing countries.
Yet in too many countries, mobile money account numbers are high and usage rates low. Most accounts in many countries are used only to receive government payments that are then quickly withdrawn as cash. This doesn’t lead to the development of a vibrant digital financial ecosystem that truly supports financial inclusion. In a recent paper, we explore one way to tackle this problem, which is to encourage the payment of interest on e-money.
Backed by cash
Though many aren’t aware of the back-end processes this involves, the electronic money sent and received by customers represents actual currency on deposit, often in trust, with a commercial bank. These funds guard against customers losing their money in the event of provider insolvency. Many financial regulators find the issue of whether to permit the payment of interest on this e‑money troubling, because they worry that the payment of interest may mislead customers into thinking e-money accounts are bank accounts when, typically, e-money doesn’t attract deposit insurance protection and e-money providers are not subject to prudential regulation.
Yet paying interest does not make e-money equivalent to a bank deposit because, at least under U.K. and U.S. law, interest payments are not a defining feature of a bank deposit. The payment of interest may be a custom, but it is not a legal requirement in most countries, and not a feature of all bank accounts. Furthermore, allowing interest payments does not increase risks when, as is common, e-money providers are required to hold funds equal to the amount of e-money issued on trust with a prudentially regulated bank, or are allowed to invest the funds only in very limited low-risk options such as government bonds – options explored here. Such restrictions on how providers can use the funds underlying e-money are acceptable as providers don’t intermediate the funds as banks do, and they certainly don’t want to be regulated like banks. Lastly, market conduct regulation can ensure adequate disclosure to e-money customers such that these customers are aware of the risks of e-money. Our analysis demonstrates how regulators have far more policy options than they typically appreciate in this regard.
DFS needs interest to grow
Prohibiting, or failing to encourage, the payment of interest on e-money is retarding the growth of many DFS ecosystems. Enabling providers to earn and use the interest earned on the funds underlying the e-money will contribute toward promoting financial inclusion.
Let’s take the example of Tanzania, one of the few countries to permit the payment of interest to e-money customers. The first interest payment of Tanzania’s Tigo Pesa was $8.7 million in September 2014, which represented some 3.5 years of income earned at an average of about 8 percent per annum, at a time when the average deposit interest rate in Tanzania in 2014 was around 9.86 percent. Such returns to customers have the potential to change the usage rates of e-money products.
When customers don’t receive interest on their e-money accounts, they have considerably less incentive to save money in their accounts. This effect is compounded when customers are charged fees for cash-in and/or cash-out transactions. Simply put, when usage of non‑interest-bearing accounts attracts fees, no matter how minimal, customers will be discouraged from storing funds electronically and often will choose to keep their money as cash. When customers of M‑Pesa (mobile money’s poster child from Kenya) were asked what additional services they would like, the most frequent response was to earn interest. Interest payments, even on small balances, can act as an effective incentive to enrol and retain users by providing low-income customers with an opportunity to earn a return on the little amount of money they have.
Even if financial regulators remain reluctant to allow customers to be paid the interest earned by mobile money providers on their e-money directly, there are other ways providers can use the interest revenue from e-money to benefit their customers, such as by using the interest income to reduce fees charged for cash-in, cash-out or other transactions. The interest revenue should be freed in these ways to promote the frequent and sustained use of e‑money products, as such usage is a critical feature of successful digital financial ecosystems. Channelling the benefits of interest revenue to customers will benefit them economically and promote the entire digital financial ecosystem.
Ross P. Buckley is the King & Wood Mallesons chair of international financial law, faculty of law, University of New South Wales Sydney. Louise Malady is a senior research fellow, faculty of law, University of New South Wales Sydney. Cheng-Yun Tsang is an assistant professor, college of law, National Chengchi University, Taipei, and former research fellow faculty of law, University of New South Wales, Sydney.