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Say goodbye to the branch — the future for banking is upwardly mobile

In developing and developed countries alike, mobile banking is making its mark. Flick\BankSimple

In developed countries such as the United States, United Kingdom and Australia, mobile banking — describing the use of mobile phones to make financial transactions — is transforming banking from a physical (requiring visits to a bank branch) to non-physical activity.

Visits to banks to deposit cheques, and cheques more generally, appear to be disappearing. A recent report from The Economist cited a finding from JP Morgan that over the past year in the United States, customers deposited 10 million cheques by taking pictures of them rather than visiting a branch. In the Netherlands, only half of all bank customers have stepped inside a branch in the past year.

iPods are making a difference by enabling customers to access internet banking through mobile technology. This process is new, but already well-pronounced in Australia. In the first two months of its existence, Westpac’s iPad banking app has been downloaded onto 58,000 devices and used in 137,000 transactions worth $125 million. Payments analyst Edgar Dunn & Co predicts there could be 250 million mobile banking transactions each year in Australia by 2015. This uptake has been so prompt that at last week’s Finsia’s Annual Financial Services Conference, leaders from a number of major Australian banks commented that technological developments — particularly mobile banking services — would eventually do away with physical banking altogether.

Interestingly, the early introduction of mobile banking has meant that much formal retail banking activity in many developing countries such as Kenya and the Philippines has tended to be non-physical in nature. In developed countries, banks generally relied on their branch networks and, more recently internet banking, to serve their customers.

This option has often not been available to banks operating in developing countries. Building bank branches in many developing countries is expensive, dangerous (particularly in countries in which corruption and violence are rampant), and often unprofitable given that transaction sizes are often very small (sometimes as small as $3-5). Internet banking is often not feasible due to a lack of reliable computer access for customers. As a result, many large populations in developing countries were considered “unbankable”, and so did not have access to formal banking services at all.

This situation has changed in recent years as the price of phones has decreased substantially, so enabling large numbers of the “unbanked” to buy them. For example, Africa’s mobile phone population grew from eight million in 1998 to over 120 million in 2007. By 2006 there were more phones and related services sold every day in Africa than in all of North America. This rapid growth has continued since this initial take-off, and the *BBC *has reported that there are now around 700 million mobile phone users in Africa. This growth in the use of mobile phone use has extended to some of the least developed countries on earth. For example, the mobile phone population in Afghanistan expanded from 20,000 in 2001 to 1.3 million in 2006, and a report produced by the USAID-funded Afghanistan Media Development and Empowerment Project in 2012 put this figure at around 17.1 million.

Many banks began to use mobile phones to reach these large unbanked populations and so many of the world’s largest mobile banking markets now exist in developing rather than developed countries. By the end of 2011, over 140 mobile money ventures operated globally, most of which were situated in developing countries. In a World Bank paper written by Michael Klein and Colin Mayer, it was reported that 45 mobile banking schemes existed in Africa, 25 in Asia and the Pacific, and 12 in Latin America.

As a result, developing countries pioneered several aspects of mobile banking that may, in some form, be copied by developed countries. The first is the use of agents. For example, in Brazil and India, banks use agents in villages, equipped with mobile phones and card readers. Customers can make small deposits, withdrawals and money transfers through these agents instead of visiting bank branches which has greatly expanded the size of the retail banking market. M-Pesa in Kenya is the most famous example, and similar systems have been deployed in Bangladesh, Uganda, Nigeria and the Philippines.

Second, non-banks have begun to enter the market to provide mobile money (e-money issuers) and compete with banks. The World Bank reports that currently e-money issuers exist in Afghanistan, Indonesia, Kenya, Malaysia, the Philippines, Rwanda, Sierra Leone and Sri Lanka. These e-money issuers are often dynamic and innovative, capable of expanding their business practices to squeeze market control from banks. For example, M-Pesa has combined with Western Union to let people in 45 countries send money directly to M-Pesa’s users in Kenya, so taking a sizeable share of the remittance industry, valued by the World Bank to be $US483 billion in 2011. Banks in developing countries have already learned to reinvigorate their activities to compete with e-money issuers, and some have been successful. For example, between 2008-2011, India’s ICICI bank undertook internal reforms, enabling it to increase its share of the remittance market by over 50%.

At this stage, many of the features of mobile banking markets in developed countries are different to developing countries. Most obviously, in developed countries, banks tend to dominate the mobile banking market rather than e-money issuers. However, this may be changing as a variety of institutions that resemble e-money issuers begin to provide mobile banking services. For example, PayPal has established a mobile wallet that can be used to pay for online purchases on a computer, and has begun to provide bank-like features such as loans. Google is designing a similar wallet. As a result, mobile banking markets in developed countries may start to encounter some of the regulatory issues faced in developing countries. Several may be particularly relevant.

The first is the limit to which electronic money should be permitted to operate. Electronic money is a form of credit to be exchanged between customers, and so is not money per se. However, in some countries, it has become a virtual currency that operates outside of the regular banking system. For example, over the course of its existence (2007-212), M-PESA has supplanted traditional banking in Kenya. Now the annual number of payments conducted through M-PESA accounts for almost 58% of the number of electronic payments in Kenya. The regulatory issue here is the extent to which electronic money, as a currency, should be permitted to operate outside of the formal banking system.

The second is the regulation of e-money issuers, many of which are growing and diversifying into fields such as savings and insurance. For example, GCash services in the Philippines allows a wide range of payments, covering domestic and international remittances, utilities payments, interest and amortisation on loans, insurance premiums, school tuition, micro tax payments and business registration, airline tickets, and online purchases. The question here is if e-money issuers are permitted to provide such a range of services, what regulatory infrastructure should have oversight of them?

The third is the regulation of customers’ funds. In most schemes issued by e-money issuers, customers pay cash in exchange for electronic money, which is then kept on trust for the customer to be later reimbursed when necessary. Trusts law has yet to be applied to these particular types of schemes and so it is unclear what obligations will be placed on the e-money issuer, as trustee, when dealing with such funds.

The fourth is fraud. In May 2012, it was revealed that staff members of a mobile money provider called Telco MTN Uganda stole around US$3.5 million of customers’ funds. The Rwandan Telecom regulator, Rwanda Utilities Regulatory Authority, has also reported incidents of fraud, particularly when a person steals a PIN of a client and uses it to transfer money to their phones. These events have prompted many regulators and e-money issuers to consider ways to minimise fraud. For example, on 23 August 2012, Safaricom in Kenya announced that it would partner with a UK-based firm, Neural Technologies to implement a fraud control solution that will further safeguard its M-PESA platform.

It is clear that mobile banking will change the face of banking. As this form of banking develops, banks and regulators in developed countries may wish to study some of the experiences of developing countries. These countries may have mobile banking markets that may be older and more sophisticated than those that exist in developed countries, so providing some guideposts on regulatory issues and how to deal with them.

A version of this story first appeared on the *UNSW Centre for Law, Markets and Regulation portal. *

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