26 legal issues in mobile money transactions

26 Legal Issues in Mobile Money Transactions Submitted to Uganda Law Reform Commission on December, 2014 By Ojijo (Ojijo, The Author, is a public speaker and consultant in financial literacy, collective investment schemes (investment clubs and saccos), and business financial projections; lawyer and guest lecturer in financial services law, law firm management, and ICT law; author of 36 books; Rotarian, Inua Kijana Fellow; Poet Pianist; and owner, www.luopedia.com, www.lawpronto.com, www.allpublicspeakers.com, www.ajuoga.com, www.bankitgroup.com, www.parara.com, and www.achibela.com. Email: ojijo@lawpronto.com Mobile:+256776100059) Presented to Uganda Law Reform Commission Ministry of Justice & Constitutional Affairs, Kampala, Uganda Memorandum by: Ojijo Pascal, Principal Partner, LawPronto Limited, info@lawpronto.com/ www.lawpronto.com Tirupati Mazima Mall, Kabalagala, Kampala, Uganda Abstract Table Of Contents What is mobile money?............................................................................................ 3 Players Involved In The Mobile Money Ecosystem ............................................ 3 Competition ............................................................................................................... 3 Technology Interoperability.................................................................................... 4 Agent Commissions ................................................................................................. 4 Transaction Fees ........................................................................................................ 4 Master Agents/Aggregators ................................................................................... 4 Profitability & E-Money Transactions ................................................................... 4 Consumer Awareness and Support ....................................................................... 5 Mobile Money Services ............................................................................................ 5 Service Fees ................................................................................................................ 6 Access Channels ........................................................................................................ 6 Security ....................................................................................................................... 7 Customer Support .................................................................................................... 7 Registration ................................................................................................................ 8 Transaction Limits .................................................................................................... 8 Agent Networks ........................................................................................................ 8 Regulation (law & Policy)........................................................................................ 9 User Security Issues ................................................................................................ 12 Handling Deposits .................................................................................................. 12 Cross-Border Transfers & Foreign Currency Control ....................................... 14 Product Description ............................................................................................... 14 BankIt Virtual Accounts ........................................................................................ 14 Technical Operation ............................................................................................... 15 Money Transfer/ BankIt Float Account .............................................................. 15 Implementation Matrix .......................................................................................... 15 WHAT IS MOBILE MONEY? Mobile money is the money stored using the SIM (Subscriber Identity Module) in a mobile phone as an identifier as opposed to an account number in conventional banking. Notational equivalent is in value issued by an entity (an MNO in this case) and is kept in a value account on the SIM within the mobile phone that is also used to transmit transfer or payment instructions, while corresponding cash value is safely in a bank. The balance on the value account can be accessed via the mobile phone, which is also used to transmit instant transfer or payment instructions. PLAYERS INVOLVED IN THE MOBILE MONEY ECOSYSTEM A typical mobile money platform involves several players and stakeholders who play different roles or derive diverse benefits from the whole ecosystem. These include: (a) Mobile Network Operator (MNO): These provide the mobile infrastructure and customer base that is already using its communication services. An MNO ensures compliance with telecommunication regulations and policy within the country. (b) Financial Institution: These institutions have infrastructure that enables the exchange of money between different parties. Since they are regulated and licensed, they are clear points of oversight and regulatory compliance with national financial regulations and policy. The banks role is to provide physical custody of cash. (c) Regulatory Institutions: These vary across different sectors. The key regulators include Central Banks for the financial sector and telecommunication regulators for the communications sector. They key issues regulated are data security, consumer protection, money laundering, interoperability of technologies, anti-competition practices, and crimes within the sector. (d) Agents: These are people, automatic teller machines (ATMs), and branches that facilitates cash-in (converting cash into mobile money) and cash-out (issuing cash on demand) to afford convertibility between mobile money and cash. MNOs have developed extensive agent networks to sell airtime and other products while those of the banks tend to be limited to urban or highly populated areas. Agents earn commission on various transactions carried out by mobile money users. (e) Merchants and Retailers: These accept mobile money payments in exchange for different products and services. They help increase demand for mobile money by offering more avenues through which users can spend their mobile money. In return, they can minimise the need to handle cash. (f) Deposit Taking Business: These are businesses that utilize mobile money as a means to deliver their services, i.e. MFIs, insurance providers, financial institutions, as well as large-scale disbursers and bill issuers. (g) Equipment manufacturers and platform providers include a wide array of stakeholders like mobile phone makers, network equipment vendors as well as application providers. These benefit from the increased sale of end-user devices like mobile phones, equipment to handle increased network capacity and fees or subscriptions respectively. (h) Mobile Money Users: These are normally subscribers to an MNO’s other services. Users derive benefits by getting cheaper and more efficient means of transferring or paying money to other people or businesses within the network. Users can also be non subscribers, who send money to subscribers. COMPETITION Mobile transactions raise competition issues mainly in the area of sharing of agents, as well as sharing masts, and telecommunication infrastructure. Whereas the law of contract is premised on freedom to contract, the law of competition is also premised on non restrictive practices, which though entered into under freedom to contract, are against public policy by limiting access to economic opportunities, in order to bring better services to the consumers. TECHNOLOGY INTEROPERABILITY Mobile money platforms can be linked to various platforms for efficiency: Mobile Money and Bank Accounts: A user can link their mobile money account to a bank account in a deposit taking institution. ¯ Investment Accounts: A user can also link their mobile money account to an investment account with an insurance company, or investment company. ¯ ATM Connectivity: A user can also use the automated teller machines to withdraw or deposit money from or to their mobile money account or bank account, respectively. ¯ Bill Payments: Mobile money accounts can also be linked to other bill taking institutions, like pay television, electricity suppliers, revenue collection services, water and sewerage services, etc. AGENT COMMISSIONS Agent commissions are fixed or left to agent and are automatically deducted by the system from a user account at the time of transaction. MNO reconciles and pays the agent at a later date. MNOs prefer paying agents their commission in one lump sum at the end of the month using the mobile money platform. Agents are likely to value a bigger lump sum compared to many frequent but smaller payments. TRANSACTION FEES Each agent collects the transaction fees at the point of transaction and does not have to wait to be paid later by the MNO. Similar to case above, transaction fees are also to be paid either monthly, or collected at the point of operation. MASTER AGENTS/AGGREGATORS Poor liquidity of agents is one of the biggest challenges faced by mobile money platforms in East Africa. Users frequently complain that when they visit an agent to cash-out, agents many times have no or an insufficient amount of cash to meet their transaction requirement. The challenge partly stems from the fact that it is difficult to predict when users will come and the volumes of transactions they will need to perform. As agent networks grow, so does the liquidity problem. To address the challenge, some MNOs have turned to “Master agents” or aggregators to help manage the liquidity of a number of agents under them. This system is akin to the airtime distribution model as well as working with banks and other institutions that normally have extra cash to dispense like petrol stations and supermarkets. The catch is that this tends to introduce more costs and complicates the structure of commissions. PROFITABILITY & E-MONEY TRANSACTIONS For mobile money platforms to become profitable more quickly, they need to increase the number of “electronic-only” transactions as quickly as possible. MNOs are busy creating relationships with institutions and merchants that extend their ecosystems and offer users more opportunities to use their mobile money directly. This would mean that users have more options to receive (cash-in money directly into their wallets, for example, if one’s salary is paid via mobile money) and spend their mobile money. At the same time, this might imply less need for cashin or cash-out, making the agent network that was so critical to achieving mass scale redundant. While this is probably a long way off, it underscores the need for small mobile sector enterprises to be able to adapt and explore other opportunities as mobile money ecosystems evolve. CONSUMER AWARENESS AND SUPPORT Awareness and trust of MNO brands are excellent thanks to extensive marketing efforts and a good service delivery record related to conventional MNO services, particularly voice. Mobile money support has also benefited from the fact that users already know how to use a mobile phone and have prior experience loading airtime through different channels (e.g. voice, SMS, USSD, etc.). Many times, a user asks a friend or family member for guidance on how to use a particular function Common user complaints include reports of agents running out of cash, sending money to the wrong number (wrong transfers), network downtime that interrupts the functioning of mobile money platforms and cases of fraud. Wrong transfers are dealt with differently on various mobile money platforms. Some will reverse the transaction, but only if the funds have not yet been withdrawn by the wrong recipient. Most MNOs encourage the sender to get in touch with the wrong recipient directly and try to sort it out. In cases where funds have been withdrawn or both sender and receiver are unable to resolve the issue, the sender is typically advised to contact the police. Cyber crime is a growing problem across EAC thanks to improving Internet connectivity and not much imagination is needed to see the potential risks inherent in mobile money. MNOs provide hotlines that can be used to report issues or complaints, especially related to wrong transfers. But the course of action becomes less clear if the user has a problem with the MNO and the parties fail to resolve their differences. Conventionally, the communications regulator has made it clear that customers can file complaints related to voice and data service issues. When it comes to mobile money issues, however, it is not clear whether these should be referred to the communications or the financial regulator across EAC. MOBILE MONEY SERVICES Mobile money services can be broadly categorized into three groups: (a) M-transfers: where money is transferred from one user to another, normally without an accompanying exchange of goods or services. These are also referred to as Person-to-Person (P2P) transfers and may be domestic or international. (b) M-payments: where money is exchanged between two users with an accompanying exchange of goods or services. These can include buying airtime, paying for utility bills (water, electricity, pay tv, etc), salaries, etc. (c) M-financial services: where mobile money may be linked to a bank account to provide the user with a whole range of transactions (savings, credits) that they would ordinarily access at a bank branch. In other cases, users can access novel financial-related services like insurance, loan repayments, linking mobile money account to bank account, linking mobile money account to ATM cards for cardless withdrawals, micro-finance, etc. via their mobile phone. (d) Hybrid services: Some transactions span different service categories. For example, a user can access his or her bank account and transfer money to another bank account holder or mobile money wallet without an accompanying exchange of goods or services. This entails both m-transfers and m-financial services. Currently, mobile money transactions can be local (within the jurisdiction of one country) or international (across different national borders). International money transfers by Western Union in partnership with M-PESA are an example of the latter. SERVICE FEES The mobile money agents represent a critical component of the mobile money ecosystem. They provide an interface through which users cash-in (convert cash into mobile money) or cash-out (convert mobile money into cash) allowing convertibility between mobile money and cash. All MNOs offer cash-in services for free. Amount UGX Sending Money UGX Withdrawing Money UGX To registered User To non-registered User By registered User By non-registered User 5 000—30 000 800 1,600 700 0 30 001—60 000 800 2 000 1 000 0 60 001—125 000 800 3 700 1 600 0 125 001—250 000 800 7 200 3 000 0 250 001—500 000 800 10 000 5 000 0 500 001—1 000 000 800 19 000 9 000 0 The fees is corresponds to 5 per cent of the transaction amount. It is more expensive to send money to a non-registered user than to a registered one, so as to encourage registration. For registered users, the total m-transfer fee is split into a sending and a withdrawal component and shared between the sender and the receiver, making it appear cheaper to both parties. For m-transfers to non-registered users, the cost is borne entirely by the sender. The pricing mechanism seems set up to encourage registered users to make more transfers amongst themselves (and presumably find another reason to stay with the provider) as opposed to non-registered users. m-payments fees are marginally lower compared to m-transfers to compete with banks that normally charge a flat fee to collect payments like school fees. ACCESS CHANNELS Most mobile money platforms in EAC region offer users a menu item on their SIM. Through this menu, users can accomplish a range of transactions by issuing commands to the platform. Different platforms apply different methods to deliver these commands to the servers via a number of channels, which may include: (a) SMS Commands sent to a short code (e.g. EcoKash). For example: [PIN code] SEND [amount to send] [recipient phone number] to short code 444 to send money to another user. While SMS use is pervasive, a user has to recall the right keywords and sequence to accomplish a given transaction. This can be frustrating when users forget or mistype keywords or if they get the sequence wrong. (b) USSD—Other platforms (e.g. M-PESA and Zpesa in The United Republic of Tanzania, MSente in Uganda) initiate a session between the mobile phone and the server during which is guided through a series of steps to accomplish a transaction. USSD is faster in that, unlike SMS, a user does not have to create a message. It is also more responsive in the sense that data are delivered and responses obtained in real-time. (c) SIM Toolkit (STK)—This approach is supported by most platforms (e.g. MPESA, Orange Money in Kenya and MTN MobileMoney). STK helps break down the transaction into a series of logical steps that can be followed to accomplish the transaction. STK then re-assembles the different steps into a complex statement that is sent to the server via SMS as in the above example. Besides SMS, STK can also use USSD as a data carrier, but it is dependent on the STK implementation on the particular handset. (d) Versatile Channels: Some MNOs are compatible with a variety of different access channel ends—Voice, WAP (Internet), SMS, USSD as well as the commonly used STK. This makes the mobile money platform with the most versatile user interface, helping to broaden how users can interact with the service. SECURITY From a security perspective, if data sent via either USSD or SMS are not encrypted, a transaction is vulnerable to interception. Given that USSD is session based and the server helps manage the steps, once a USSD session terminates, no data is left on the phone. Conversely, with STK, the SIM helps to manage the steps and creates an SMS sent to the server. SMS is transaction-based and SMS data are stored on the phone, creating vulnerability if the SMS is not deleted and the phone ends up in the wrong hands. All systems rely on the use of a Personal Identification Number (PIN) for transaction authentication. Currently, there is no specific protection in the event that a user’s mobile phone is stolen and used by fraudsters able to figure out the user PIN. Just like with ATM cards and banks, a user’s best bet is to report a stolen mobile phone or SIM as soon as possible so that all mobile money transactions are blocked. When using mobile money services, all transactions are tied to the SIM (and thereby the mobile phone number). Some MNOs supports the use of nicknames in the place of the mobile number so that customers are able to pay you by sending money to a nickname instead of a number. Besides privacy and security, nicknames can be similar to a business name, making them more memorable for customers, especially if they have to pay remotely. CUSTOMER SUPPORT Although MNO websites typically have answers to frequently asked questions, an average mobile money user in EAC does not have ready access to the Internet. Agents ask users to call the general customer service line or visit an MNO service centre, where the queues are normally long. MNOs can also set up a dedicated customer service line, asking users to call the same for mobile money related queries. REGISTRATION For someone to be able to use mobile money for the first time, they need to complete two processes— registration and account activation. MNOs need to register mobile money users to comply with Know Your Customer (KYC) requirements from financial regulators. A user needs to appear in person at an agent or MNO service centre to complete the registration process. This involves completing a form and presenting some type of identification to the agent, who then makes a copy of the ID document. Because there are no universal or national IDs across EAC, except in Kenya, MNOs have agreed with financial regulators to accept a range of ID documents for the registration process. Currently across EAC, MNOs can accept: (a) A voter’s card, (b) A driver’s license; (c) A valid passport; (d) A local village council letter or certificate; (e) A company or employer issued ID; (f) A Government issued ID; (g) A tax certificate; (h) A national ID. (i) Reference Identification (where a family member, employer or a friend with a permitted ID document can vouch for your identity during registration.) Phone-based registration allows an agent to submit new user data quickly. TRANSACTION LIMITS Certain thresholds that apply to transactions on different systems may also be restrictive for business operations and these may include: (a) Minimum or maximum amounts that can be used in a single transaction; (b) Maximum daily transaction value (either as a result of one or multiple transactions); (c) Maximum monthly transaction value (either as a result of one or multiple transactions); (d) Maximum mobile money account balance (amount user can keep in their mobile money wallet). Most transaction thresholds have been approved by central banks at the behest of MNOs. The current limits to transactions averagely between USD. 500 in Uganda to USD. 1000 in Kenya. AGENT NETWORKS Critical to the success of any mobile money service is the agent network (of people, ATMs, branches) that provides an interface through cash-in and cashout functions. The average agency network in East Africa is one agent per 450 registered customers. For aspiring small mobile sector enterprises, a prospective mobile money agent needs as a minimum 1) a legally registered business that should have been operational in the last six months, 2) a permanent physical address as well as 3) some cash to invest as float. Such stringent requirements limit participation of many small businesses that could have otherwise benefited from such an opportunity. BankIt will use both current businesses, as well as BankIt Bikers, the youngsters on motor bikes and bicycles, to operate within markets, streets, and villages, carrying the point of sale/dispensers, and phones and cash, with them. REGULATION (LAW & POLICY) Mobile money transactions present regulatory challenges to ensure maximum development benefits. First, mobile money traverses previously distinct and independent areas of regulation (most notably, the telecommunications and financial banking sectors) and often involves multiple ministries and Government agencies, thus adding to the complexity of oversight needed. Secondly, there is a lot of dynamism with disparate, changing technologies and business models as MNOs and other parties explore emerging opportunities with the potential to change the financial landscape. It is therefore imperative that regional and national authorities identify and address the gaps and potential overlaps between their existing regulatory tools and mobile money infrastructures. Function Components Exchange Between Cash And Mobile Money Who can issue mobile money? Appointing and managing agents Anti-Money Laundering (AML)/Combating the Financing of Terrorism(CFT) Transparency Exchange rates Storage of both mobile money and cash Consumer protection Access control Privacy issues Platform integrity Transfer of money between different parties Platform integrity Privacy issues Transaction limits Competition Cross-border transfers Investment of net balances Diversification of investments Eligibility of banks Safety of deposits Interest earned E-Commerce legislation Electronic commerce (e-commerce) refers to the purchase or sale of physical or virtual goods or services through electronic transaction and payment systems. Such transactions may be conducted through the Internet or via wireless networks such as those used in mobile phone technology. The scope of ecommerce laws and regulations is potentially wide, and includes among other things e-transactions and e-payments, consumer protection stretching to rules regarding cross-border dispute settlements. Mobile money transactions, which involve the electronic transfer of funds and electronic payment for vendor goods and services as well as related processes, fall within this scope. Mobile money developments are thus affected by applicable legal frameworks for e-commerce (cyberlaws). Consumer Protection Consumer protection laws belong to different legislative areas such as competition, telecommunications and banking, and cover a range of specific processes like protection against fraud and the transparent flow of information. Privacy and Data Protection Privacy and data protection concerns are distinct issues that arise in e-commerce transactions. They are linked to consumer protection policies within ecommerce and telecommunications, as well as certain practices in financial regulation. Telecommunications Broadly defined, telecommunications regulation covers radio and television broadcasting, as well as the more distinct forms of communication through fixed line telephony, mobile telephony, and the Internet. Telecommunication users have an interest in fair network access and transparent disclosure of costs and fees. Important aspects of telecommunications regulation that are worth considering in relation to mobile money include transparency in licensing procedures, interoperability/interconnection between telecommunication networks, resource allocation (e.g., with regard to frequencies, numbers, and rights of way), and competitive safeguards. Another important concept is the need for technical cooperation at international, regional, and sub-regional levels. Financial Regulation Financial regulation in general aims to maintain the integrity of the financial system through oversight, reporting, and enforcement mechanisms. Specific goals of such regulation include the prevention of market manipulation and investor fraud, provider competence assurance, consumer protection, and maintaining investor confidence in the financial system as a whole. The expansion of mobile money has revealed a number of gaps in specific functions such as who may be authorised to issue e-money, appoint agents, perform Know Your Customer (KYC) measures or take deposits within a given country. Four regulatory issues are the issuing of mobile money, transaction limits (both of these currently fall under the primary oversight of central banks), agency banking, and anti-money laundering (AML). E-Money Central banks issue and manage national currency (cash), and banks and financial institutions are licensed by the central banks to issue and manage different forms of e-money. Although MNOs are not licensed banks and thus do not fall under the direct authority of central banks, they are required to partner with an established bank. The partner bank’s activities are already regulated under existing legislation. The bank holds the actual cash deposits against which mobile money is issued. Thus, this arrangement extends existing financial regulation to mobile money by proxy since current regulations do not grant the central banks an explicit mandate over non-bank or financial institutions that deal in emoney. The legislation goes stipulates basic requirements that an emoney issuer has to meet, including capital requirements. Licensed banks are permitted to license small e-money issuers with lower capital requirements and account thresholds. Agent Liquidity Management Agent liquidity management is a partly related challenge facing mobile money in EAC. Although this is not strictly a regulatory concern, regulatory implementations may have an impact on the issue. Mobile money users complain that agents usually have insufficient cash to meet their transaction requirements. The challenge partly stems from the fact that an agent must visit an MNO service centre or a branch of a partner bank to purchase e-value. This is inconvenient in terms of time since it is difficult to predict when users will come and the volumes of transactions they will need to perform or in terms of distance in most rural areas. M-PESA in Kenya has adopted an agent model, where a super-agent (or master-agent) acts as an intermediary or wholesaler of e-value to subagents under them for cash. Managing the liquidity of sub-agents might also involve extending them e-value on credit, as part of the function of the superagent. The Regulations provide for wholesale cash merchants to serve regular cash merchants. MNOs in Kenya, Uganda and Tanzania have adopted this model for their mobile money platforms. Agency Banking Banks have lobbied for agency banking legislation to extend their reach without necessarily investing in expensive branches that are now in place. Banks can now recruit either cash merchants (similar to mobile money agents) or bank agents. Bank agents cannot be exclusive, under agency banking guidelines, and cash agents or cash merchants are also non exclusive in some countries. Competition Law Competition law is aimed at the preservation and promotion of free market competition and consumer welfare protection in regulated industries. In order to achieve these goals, competition law generally prohibits anticompetitive agreements and the abuse of dominance by monopolistic businesses, and restricts anti-competitive practices such as predatory pricing, price discrimination, tie-in-sales, and bundling. Competition law also has an impact on mergers and acquisitions, as well as unreasonable restraints on competition. Key issues include the need for a competition authority, de-exclusivity of agents, and the need for a tribunal to enforce authorities and regulatory issues. Anti Money Laundering (AML) and Counter-Financing of Terrorism (CFT) ‘Money laundering’ refers to the methods through which illegally sourced funds are hidden and reprocessed before being re-introduced into the financial system. The laundering process aims to make it difficult for authorities to trace the movement and proceeds of illegal funds and connect them to the original criminal activity. AML regulations serve to combat such conversion of illegal monies, and to play an important role in national, regional, and international security and crime prevention frameworks. There is a direct connection between Anti Money Laundering (AML) and Counter-Financing of Terrorism (CFT), since laundered funds are often linked with terrorist organisations and activities. Regulations that affect one area therefore often influence the other as well. Money laundering is most commonly associated with financial and banking sector activity. Since mobile money is increasingly used as a form of money transfer and is linked to finance and banking as well as the non-financial telecommunications sector, it poses a risk that AML regulations must address. AML regulation has two main aims: First, to prevent money laundering activities; and secondly, to have an adequate enforcement mechanism in place should such activities be detected. Prevention is promoted through due diligence and reporting requirements on the part of industry and supervision and sanctions from regulators. Enforcement is achieved through a system that establishes the legal basis for what actions satisfy the threshold for investigation into money laundering and why this is a crime, how to investigate such actions, how to prosecute such actions, as well as how affected funds will be treated post-investigation, prosecution and conviction. USER SECURITY ISSUES Mobile money markets give rise to a number of vulnerabilities that affect end-users. Users are faced with issues pertaining to account safety and authentication, the need for documentation and platform integrity issues. Authentication To use mobile money, consumers are given an opportunity to define a 4-character Personal Identification Number (PIN) to authorise different transactions. The PIN and an identification document form the basis for authentication during cash-out. Because the SIM card and PIN are all that is required for other transactions, there is no protection when a consumer loses his/her mobile phone to fraudsters able to figure out their PIN. MNOs across EAC provide advice and hotlines for consumers to report a stolen mobile phone, encouraging them to report such incidents as soon as possible so that all mobile money transactions are blocked. Mobile phones have a unique International Mobile Equipment Identity (IMEI) number that could be used as part of the authentication process, but it is of limited value in the case of a stolen or lost phone. Documentation needs When exchanging between cash and mobile money at an agent’s location, it is important for mobile money users to get some proof of their transactions. Currently, the documentation of records across mobile money platforms is mostly electronic; SMS is the primary mode of communication to update consumers about the state of their account, and to confirm cashin/ out transactions. For a user, potential delays in SMS transmissions can be a basis for anxiety about mobile money, and can thus affect customer confidence. To address this issue, larger agents like Simba Telecom in Uganda (MTN MobileMoney) now complement confirmatory SMS with a hard-copy paper receipt as an additional proof of transaction details. While this practice may add overhead costs to the system, it provides a tangible record to the customer and boosts user confidence in mobile money. A benefit to the agents themselves is that this paper trail may make it easier for them to satisfy potential future regulatory reporting and audit requirements. Hence, agents and operators may find the adoption of such a documentation system worthwhile. Platform integrity The mobile money environment is susceptible to different types of frauds and security threats. Procedures need to be adopted to ensure the integrity of the mobile money platform to effectively keep consumers’ mobile money safe. With the exception of Iko Pesa in Kenya, systems for mobile money platforms in EAC reside with the MNOs. Such monetary records tend to be much more sensitive than communication records and, as such, MNOs need to institute appropriate documentation procedures and access control methods across their platforms. A challenge is to ensure platform integrity so that agents and consumers can safely perform transactions without fear of fraud. Integrity covers the people (employed across the mobile money chain), the systems as well as the data. Technology can play a critical role in ensuring integrity, and this is where regulatory collaboration between central banks and communications regulators in EAC becomes paramount. HANDLING DEPOSITS Investment of net balances MNOs are required by central banks to keep the net deposits of their mobile money platforms with partner banks. Consequently, they are not directly vulnerable to the risks associated with investing such money. Currently, there are no specific regulations across EAC stipulating how big a mobile money platform can grow, essentially opening up a number of questions. Could mobile money deposits grow too large and put customer funds at risk because of the risk of partner bank failure? What kinds of investments should a partner bank make to minimise the exposure of mobile money deposits? Is conventional deposit insurance sufficient to cover such large accounts? What should happen to the interest generated by such deposits if any? Diversification of deposits across banks There are no specific regulations stipulating how big mobile money deposits in one partner bank need to be before an MNO has to diversify deposits across multiple banks. However, Central Banks in Kenya and Tanzania have already granted MNOs permission to work with multiple banks. While deposits from mobile money are still relatively small within EAC (with the exception of M-PESA in Kenya), Central banks should begin to think about and possibly harmonise criteria that can help guide them in diversifying mobile money deposits across multiple banks. The Central Bank of Kenya has reserved the right to mandate an e-money issuer to diversify its deposits across more than one bank. In addition, diversification could also be extended to the kind of investments that partner banks can make with such deposits as a way to minimise risk, given the high number of mobile money users that could potentially be affected by poor investments. Although diversification is meant to spread the risk across banks, reducing their individual exposure, it also means that the MNO has to maintain multiple bank relationships. Effectively, a partner banks can delay implementation of proposals perceived as competition to existing bank products. Safety of deposits Anecdotal evidence suggests that some users have started to rely on mobile money as a savings vehicle. Saving in this case relates to the length of time that users keep e-money in their mobile money wallet. Should there be a requirement that the MNO/bank partner insure these savings deposits? The reputation risks for partner banks arising from mismanagement of mobile money platforms or the collapse of an MNO are limited due to the fact that all mobile money platforms are branded and associated primarily with the MNO. Deposits from mobile money far exceed deposit amounts covered by conventional deposit insurance across EAC. The challenge is that such an account is an aggregation of many small deposits and would in the event of bank failure affect a large number of people, influencing perception and confidence in the national financial system. Central banks should therefore put in place measures to minimise the potential impact of the collapse of a mobile money platform on the national payments system arising from failures on the part of an MNO or partner bank. Handling of interest on deposits Mobile money deposits were not initially expected to generate much interest based on the dynamic nature of transactions and the small amounts involved. In the case of M-PESA, however, deposits have grown to generate interest to the tune of US dollars 7.5 million. The Central Bank of Kenya initially required that Safaricom donate accrued interest to charity and later explored ways of using it to reduce the cost of services to users of M-PESA. In its Draft E-money regulation, the Central Bank has given emoney issuers the discretion to use resulting interest as they seem fit. In the rest of EAC, there are currently no clear guidelines from regulators as to what MNOs can do with the accrued interest derived from such deposits. Conversely, should MNOs be required to pay interest on mobile money deposits? The Kenyan Draft Emoney regulation explicitly forbids mobile money platforms paying interest or “other monetary incentives or rewards” to account holders, clearly stipulating that mobile money is not a savings or other investment vehicle. M-Kesho and Iko-Pesa circumvent this requirement by allowing for the transfer of mobile money from the mobile phone wallet into an actual bank account, thus providing the possibility of earning interest. Meanwhile, given the transitory nature of the transfers, mandating that interest earned on deposits in the partner bank go back to users could be complicated. CROSS-BORDER TRANSFERS & FOREIGN CURRENCY CONTROL Individuals who trade across the region use means like long distance buses or foreign exchange bureaux to pay for goods that are later sent back by bus. Other traders forward money to their destination to avoid travelling with cash for security reasons. Currently, some agents perform informal cross-border mobile money transfers between Uganda and Kenya. Additionally, Western Union has already integrated its system with a number of mobile money platforms in EAC to permit international remittances to be converted and credited directly into a user’s mobile money account. The movement is currently one-way, that is from Western Union into mobile money and not vice versa. That such transfers are already happening is indicative of a need, and there is little doubt that crossborder mobile money transfers could help to promote regional trade within EAC. An important concern is that informal transfer systems such as those facilitated by M-PESA agents are not sanctioned by either regulators or MNOs. They could therefore be considered illegal ways to bypass national foreign exchange regimes. Foreign currency control regulation itself is currently not harmonised across EAC. Foreign exchange repatriations are permitted in all countries except Burundi, but under a variety of conditions. For example, to repatriate more than U Sh 50 million in Uganda, a tax clearance certificate from the Uganda Revenue Authority is needed. In Kenya, banks must report foreign currency transactions above US dollars 10,000. Although the amounts involved in mobile money are still very small compared to those that attract scrutiny across EAC, as such cross-border transfers increase, regional coordination becomes ever more important. Well-executed, cross-border transfers across EAC could provide a significant benefit for regional trade and remittances by lowering transaction costs. PRODUCT DESCRIPTION The BankItTM Mobile Money Transfer is a software application allowing for the deposit of money to a virtual account of a user, and withdrawal of money from a users account. The deposit of money converts cash amount into equivalent e-money, or mobile money, whereas the withdrawal of money converts e-money into cash money. Both transactions are charged a transaction fee, which is used to pay for services, as well as agents commissions/fees. BankIt will license, register, and train its agents on how to run the system, using both stationary agents, as well as mobile BankIt Bikers, who will be moving on bicycles and motor bikes. BANKIT VIRTUAL ACCOUNTS Through BankIt Mobiel Money accounts, clients can store money in their virtual accounts, with equivalent cash amount kept at the BankIt float account in partner financial institutions. TECHNICAL OPERATION The registered user, an account holder with a bank, uses either SMS, or USSD, to send money to a users phone number, or nick name. MONEY TRANSFER/ BANKIT FLOAT ACCOUNT In order for the sent/deposited e-money to have an equivalent physical value in the users bank account, BankIt shall maintain a float account with the partner institution, which shall be funded through direct crediting by BankIt, or an overnight lending facility by the partner institution or third party, or an overdraft facility, again, by either the partner institution, or third party financier. The costs and details shall be arranged as need arises. The agents will go to the partner financial institutions, or BankIt offices, to load their accounts with emoney, or can ask for e-money credits. IMPLEMENTATION MATRIX Once the contract agreement of partnership is signed, the following procedures will be implemented to the final installation, integration, and operationalisation of the BankIt software system. Activity detail Timeline Set Up Obtaining finance 1 month Recruiting human resource, Purchasing it infrastructure Setting up both offline, and premise database centre Testing systems SET UP OF BANKS Installing software Integrating with bank system Testing 1 month