Diane Mullenex and Anne-Sophie Mouren of Ichay & Mullenex Associés explain the evolution of the mobile payment market across Africa and the need for better regulation and harmonisation of rules to strengthen its growth.
Would mobile payment (m-payment) be the greatest opportunity for emerging countries to develop their economy? Africa is currently described as the world champion of mobile transactions, which is a real social revolution, on many levels, for some African countries – especially those in East Africa. However, according to the latest studies, some improvements are strongly needed, especially in terms of regulation as well as matters of interoperability and harmonisation.
FIRST THINGS FIRST: M-PAYMENT, WHAT ABOUT IT?
The mobile payment works by storing a consumer’s credit or debit card within the SIM card and employing the near-field communication (NFC) technology or sending money by text message.
The near-field communication (NFC) allows data to be exchanged between devices via short-range, high-frequency wireless communication technology by combining the interface of a smartcard and reader into a single device. NFC devices are also compatible with existing contactless infrastructure.
M-payment can be used for various processes, including paying for goods or services, paying bills (electricity, water, etc), receiving a salary, P2P transfers (ie, money transferred from one customer to another) or even subscribing to insurance or credit policies. These money transfers can be either national or international.
Many actors are involved in the m-payment market other than the mobile network operators, the mobile infrastructure providers and the banks (or any other type of financial institution). Various actors participate in the m-payment market, especially agent networks ensuring the conversion from real money to virtual money, retailers using m-payment services to sell their products, or any other businesses able to benefit from this type of money transfer. In addition, regulatory authorities such as central banks and telecommunication or even competition regulators should be deeply concerned by the issues that m-payments create.
Different types of m-payment products are provided by mobile operators. On the one hand, we are offered mobile-oriented solutions where the operator keeps control of the entire value chain by creating and managing payment accounts. On the other hand, bank-oriented offers require cooperation between the mobile operators and the banks to provide solutions where the bank remains responsible for the creation and management of the accounts while the operator is in charge of data transfer.
AND IN AFRICA?
The Global System for Mobile Communications Association (GSMA) represents the interest of mobile operators all over the world and is supported by the Bill & Melinda Gates Foundation, the MasterCard Foundation and the Omidyar Network to run the Mobile Money for the Unbanked (MMU) programme.
On 23 October 2012, the GSMA issued its annual report on Mobile Money for the Unbanked in which it stated that in Africa, the number of GSM mobile connections has doubled since 2008. The report underlines the need for progress to help the growth of the mobile ecosystem, including drafting efficient regulations and increasing investments.
Africa leads the mobile payment market with no less than 130 mobile payment systems launched this year. While 80 per cent of the African population does not own a bank account, 80 per cent of the worldwide m-payment transactions originate in East Africa. Thus, Africa remains the foremost continent in the world in the use of mobile payment solutions – with Europe and the Americas lagging somewhat behind.
It appears that m-payment is a great solution to the absence of banks or financial institutions in many areas of Africa. As there are over 735 million SIM cards being used in Africa, mobile money could simply replace banking services.
This year, the United Nations issued a comparative study on the existing mobile money platforms and regulations in the East African community – more precisely in countries such as Burundi, Kenya, Rwanda, Tanzania and Uganda.
According to a 2012 study carried out by the United Nations Conference on Trade and Development (UNCTAD), “Mobile Money for business development in the East African Community”, in East African countries, the dominant mobile money service is the m-transfer, especially for domestic transfers.
UNCTAD explains that the people migrating to urban areas use m-payment services to send money to their extended families living in rural regions as it appears to be a much more reliable method to transfer money than their traditional methods.
If it appears that, for now, m-payment solutions are rather used on a small businesses scale, there is potential to widen its scope of action to much greater businesses, such as for savings or insurance.
THE KENYAN EXPERIENCE
When it comes to m-payment, it is impossible not to mention Kenya, the m-payment pioneer in Africa. According to UNCTAD figures from 2011, Kenya – with only four mobile network operators – accounted for more than 17 million mobile money subscriptions, representing a ratio of mobile money subscriptions to mobile subscriptions of 71.3 per cent.
M-PESA, the biggest mobile phone banking service in Kenya, operated by Safaricom, is used as a model for other actors outside Kenya. M-PESA started operating in 2007, and according to the GSMA there were €2.8 billion worth of money transfers made under the M-PESA system. In March 2012, the payment platform had around 15 million active clients and accounted for €523 million transferred every month.
The Central Bank allows Safaricom to provide M-PESA as a “parallel payments system”, as long as the customer’s funds are deposited in a regulated financial institution. In addition, the Central Bank of Kenya has imposed a limit to transaction sizes to ensure their compliance with the anti-money laundering criteria.
The International Monetary Fund made findings based on case studies dated 16 April 2012, which recommended that the Kenyan “legal framework needs to be enhanced, including by incorporating M-PESA operations as part of the National Payments Systems”. It also underlined the great need for updating the security systems.
Still, UNCTAD underlines that other East African M-payment actors are learning from M-PESA’s experience: central banks in other East African countries do learn from the Kenyan Central Bank’s experience working with M-PESA to implement their national regulation over m-payment. It is recognised that the public authorities are trying to make great efforts to ensure more security for these types of money transfers, but many regulatory issues remain unsettled.
M-PAYMENT REGULATORY ISSUES
Even though mobile payment markets are quite well developed in Africa, it appears that these markets are still in great need of regulatory improvement.
Regarding e-money, banks are granted licences by the central banks to issue such a form of money, but mobile operators in East Africa are required to partner with only established banks. Again, Kenya goes a step further with a draft E-Money Regulation under which no entity other than licensed banks, with the Central Bank of Kenya’s approval, can issue e-money. UNCTAD suggests that other East Africa jurisdiction adopt the same approach.
On another level, m-payment users encounter many different types of issues while using this system of payment, such as phone hacking, wrong transfers, risks of fraud, especially with the development of cyber criminality, etc. These types of issues deeply need to be governed by a solid and clear legal framework on a domestic and international level.
In terms of e-commerce regulation, the East African Community was assisted by UNCTAD to build a harmonised framework for cyber laws in the concerned countries. In 2010, the Council of Ministers on Transport, Communications and Meteorology adopted the East African Community Legal Framework for Cyber Laws Phase I, governing e-transactions, e-signatures, data protection and cybercrime, and the implementation of the legal framework is ongoing.
One of the main difficulties encountered in East Africa relates to a lack of harmonisation and interoperability at the regulatory level. For instance, in case of a wrong transfer it is unclear which regulator – whether the financial or the telecommunications regulator – should be responsible for, and have the power to address, this type of issue.
In addition, UNCTAD raises other difficulties which should not be neglected in the future, such as the cross-border authority: in the case of international wrong transfers, customers need to know which jurisdiction would govern their claims.
Altogether, a great deal of work needs to be done in the drafting of new laws, also ensuring a limited overlap between the different authorities and infrastructure. Mobile money transactions require investments from a number of regulators including the competition, financial and telecommunications regulators, but also all the regulators involved in the protection of individual rights. The consumer protection as well as data protection laws should represent a great deal of the regulation of m-payment. As an example, UNCTAD underlines that the regulations applicable to the banks to protect their user’s privacy do not apply to the telecommunications operators and therefore mobile payment customers can only rely on the good faith of their operator with regards to the use of their personal data.
If the Kenyan Central Bank made efforts to improve the regulation applicable to m-payment, especially with the issue of a new draft Regulation for the Provision of Electronic Retail Transfers and the draft E-Money Regulation, equivalent laws which do not yet exist in other East African countries may be created.
There are many challenges ahead for the M-payment actors, especially to ensure the safety of their services for end-users (for example authentication of payment, etc) and also to fight efficiently against the great risk of money laundering that m-payment creates.
Let us see how this amazingly profitable market will evolve in the future and keep an eye on the future regulatory evolution to come.