Economics of mobile money and financial inclusion: Bank of Ghana at the forefront of regulations

A Washington based think tank, Centre for Financial Inclusion, describes financial inclusion as “a state in which (1) everybody has access to a full suite of financial services including; credit, savings, insurance, and payments (2) Provided with quality; convenient, affordable, suitable, dignifying and client protection (3) To everyone who can use financial services; with special attention to rural people, people with disabilities, women, and other often-excluded groups (4) Through a diverse and competitive marketplace; a range of providers, robust financial infrastructure and clear regulatory framework”. The 15-year United Nations’ 17 Sustainable Development Goals (SDGs) prominently features universal financial inclusion attainment ambitions for all countries.

Mobile Money (MM) is a timely technology that promises to be the key anchor towards attaining financial inclusion around the world. As at 2014, there were 255 MM service providers in 89 countries across the world; according to the GSMA 2014 report. Ghana is one such country with four MM service providers, with mobile phone penetration reaching in excess of 115%. The World Bank Findex data mentions Ghana as one of 13 markets with mobile financial services (MFS) penetration above 10% in 2014. BMI Research, in its June 2015 report, indicated that according to the World Bank; “13% of adult Ghanaians report having access to a mobile account, as compared to the Sub Saharan Africa average of 11.5% in 2014”.

According to the 2015 Financial Inclusion Insights survey executed by InterMedia, whilst access to banking increased only marginally from 34% to 36% of Ghanaian adults, access to MM increased from nearly zero to 29% in the last five years. As at November 2015, the number of MM transactions per month in Ghana averaged 24 million individual counts, via 44,000 registered agents, with corresponding cash value of GHs3.4 billion in transaction value.

Banking, Money Multiplier and the Economy

In economic terms “Broad Money” refers to the amount of money held in currency and bank deposits by households and companies within an economy. In a 2014 article published by Michael McLeay, and two others, of the Bank of England’s Monetary Analysis Directorate, they indicated that 97% of broad money in the United Kingdom is held in the form of deposits with banks, rather than currency in the hands of the public. Obviously, the case in Ghana is a far cry from where it should be in the modern world.

With so many currency bills in public circulation, Ghana misses out on the advantage of the multiplier effect of money. The multiplier effect of money and its benefits to an economy is simply the logic that money is better traded when it is held as deposits in bank accounts rather than as currency bills in the hands of the public. Largely, money in bank deposits, after regulatory reserves are secured, are traded as loans and advances to businesses; to pay suppliers and to bridge operational expense shortfalls, and also to individuals; to finance household expenditure.

Whichever activity the bank loan is deployed to, it stimulates consumption; increasing revenue for local producers who in turn increase production and increase employment thereof. When loan is disbursed by a bank, the loan (money) finds itself changing hands from one person/entity to another.

The gains of that money (loan) to the economy are much enhanced where the money changes hands within the banking system than where it settles transactions as physical currency bills. In simple terms, where the money (loan) is used as payment to the credit of a third party’s account in another bank, this particular money (loan) becomes new money (fresh deposit) in the banking system.

Where transactions remain settled within the banking system, the money goes through multipliers of new money creation and that circle continues. This is the process by which economies increase their money supply and its attendant effect on reduced lending rates. The contrast is where the public hoards more money in currency bills thereby reducing bank reserves and the supply of money. However, it is noted that the multiplier effect of money manifests better within an economy where the banks are willing to lend their deposit liabilities than to trade in exorbitant government bonds and treasury bills; crowding out industry in the process. To this far, it is obvious the case for money’s multiplier in Ghana is poor; the resultant effect on the economy is obvious as more money circulates outside the banking system and the banks’ attitude towards lending remain unchanged. This brings into very sharp focus the potential role Mobile Money plays in the Ghanaian financial services sector as remedy.

Mobile Money and Money Creation in the Economy

As it is presently, Mobile Network Operators (MNO) provide MM services. By registering for MM services, the user acquires an e-account (MM wallet) that is immediately accessible via a mobile phone. Deposits into the MM wallet become electronic cash domiciled on a mobile phone; with monetary value that is transferable to the credit of another account, transmittable for the payment of goods and services at a merchant point, or redeemable for cash at an agent point, an ATM or at a bank teller. The MM wallet is in reality a bank account with customer transaction interface on a mobile phone, which is settled with a traditional bank, but with transaction history data held with an MNO.

In real terms, MM services mirror the practice of traditional banking; albeit in a virtual form. In traditional banking, banks keep a General Ledger (GL) Cash Account that settles all currency inflows and outflows by customers such that at all times the bank’s GL Cash account balance equals physical currency bills in its vaults (including cash-in-hand at teller tills and ATMs). With MM services, the service provider’s application software accommodates back-end virtual bins (vaults) from which e-money movements (MM deposits and withdrawals) are settled; the net balance at any point in time being the e-currency bills in the operator’s e-vault. The total e-currency bills in the virtual vault at any point in time represent balances on all MM wallets (unique customer account balances) and the balance in the internal “unclaimed suspense account” (Cash-to-Cash “C2C” token IDs yet to be paid out).

MM service providers in turn operate escrow (trustee) accounts with traditional commercial banks where the net balance (of issued e-currency) in the service provider’s virtual vault is settled for liquid assets (currency bill) of equal value in the commercial bank. Ultimately, at any point of reconciliation, the bank balance in the trustee bank account of the MM service provider must equal the net e-currency balance in the virtual vault of the MM service provider; which is the total MM wallet balances of customers of the MM service provider. In effect, every pesewa on the MM wallet of an MNO customer is a deposit with a commercial bank which is ultimately traded as loans to industry and households.

The new BoG Guidelines

To further enhance the benefits of MM to the financial ecosystem, the Central Bank of Ghana (BoG) introduced new regulations to govern electronic money transactions and also MM agent services. The new directives encompass all e-money activities including; MM, magnetic debit and credit cards and internet based money.

The Bank of Ghana on July 6, 2015, served notice to revoke its Guidelines for Branchless Banking – Notice No. BG/GOV/SEC/2008/21 – to be replaced by two different Guidelines. The two new regulatory Guidelines are dubbed “Guidelines for E-Money Issuers in Ghana” and the “Agent Guidelines”.

The crux of the E-Money issuers Guidelines is for all non-banking institutions in the business of mobile financial services to, by January 6, 2016; apply to be licensed as Dedicated Electronic Money Issuer (DEMI) institutions. This regulation requires all MNOs to register new companies, appropriately incorporated in Ghana, to assume responsibility for their Mobile Money operations as separate legal entities from their core business of voice and data communication services.

The Guidelines proceed to identify clearly laid out objectives which include; promotion of financial inclusion initiatives by extending financial services beyond traditional branch-based channels, limiting electronic money issuance only to duly licensed  financial institutions regulated under the Banking Act, 2004 (Act 673), and also to ensure adequate transparency, fair treatment, and effective recourse for e-money customers. With these objectives, very far reaching directives have been issued by the Guidelines to bring about uniformity in e-money transactions and hence making room for easier enforcement of regulation by the BoG. These will bring about very notable changes in the operations of Mobile Money services going forward.

The Guidelines will introduce three tier risk-based Know Your Customer (KYC) documentation processes with progressively higher capped daily and monthly account balance limits and correspondingly more stringent KYC requirements at each tier of MM account opening. Another significant fiat issued by the BoG is for DEMIs to pay interest on balances in MM wallets. The Guidelines proceed to enhance proof of identification to cash out money from an agent (over-the-counter) depending on amount involved. Also, the document captures consumer protection rights and provides specific directives in the case of insolvency of DEMI or bank partner. DEMIs will be required to provide insurance cover on customer wallet balances under the upcoming deposit insurance protection policies for banks. Finally, the Guidelines proceed with clear directives on how dormant MM accounts should be handled.

Moving onto the Agent Guidelines, it seeks to regulate the activities of agents of both traditional banks and DEMIs. In its preamble, this Guidelines assert to; “…promote the use of agents as a channel for delivery of financial services and specify necessary safeguards and controls to mitigate the associated risks and ensure consumer protection safeguards”. The Guidelines proceed to lay out further objectives in addition to those stated in the e-money Guidelines including; providing a single and coherent framework for agents, and also to ensure compliance with the Anti-Money Laundering Act, 2008 (Act 749).

With reference to its objectives, the Guidelines stipulate several directives towards achieving success. Some of the key interventions will include; introduction of “Agent Network Managers” who may be sourced by Principals to carry out responsibilities ranging from recruitment, training, compliance monitoring, liquidity management, and general support. The Guidelines also make room for another layer of service providers known as “Master Agents” who may sign an overarching agreement with a principal to contract and manage agents that provide banking or e-money services to customers on behalf of said principal.

The Guidelines proceed to indicate other notable interventions. There will be new requirements on principals to submit clearly documented policies on Agent Due Diligence, including GPS coordinates of agents and master-agents’ physical location, prior to their enrolment. Customer Due Diligence is captured also as subject of regulation as agents of DEMIs may be permitted to adopt laid down KYC procedures to open e-money accounts on behalf of Principals. However, the Guidelines are explicit that agents will not be permitted to undertake any form of appraisal or underwriting of credit and insurance applications on behalf of their principals.

The Guidelines also move to articulate clearly BoG’s oversight on the entire e-money ecosystem including; timelines for various periodic activity (transaction data) reporting with adequate populated information in identifiable formats to the BoG. It stipulates corresponding sanctions applicable relative to omissions and commissions by any stakeholder in the entire value chain.

Expected Developments in Ghana’s MM eco-system

The future of MM in Ghana is set to become even more relevant to the economy relative to these regulatory changes. The first significant early shifts in the industry will come in the form of administrative structures and reconfiguration of the setup of MNOs. As of January 6, 2016, MNOs should cede their MM businesses away from their core business of voice and data telecommunication services. It is expected that the MM businesses of all MNOs will take the legal form of separately registered subsidiary businesses.

Looking further into the future, it is certain, however, that MM operations will become much more enhanced with dedicated attention and leadership; owing to independent Management and Board structures rather than being run as a department of MNOs. Rather than being clothed under the success of MNO businesses, the various MM registered companies (DEMIs) are able to right size each other at par and compete more directly on equal measure as financial institutions. Shareholders and investors, in turn, will become better placed to assess the performance of DEMIs as they report independent financial results.

As new yardsticks evolve in the form of performance scorecard metrics, Management of DEMIs will become more competitive in driving customer service excellence, product development and business partnerships; ultimately to gain market share.  Increased competition, coupled with increased penetration of smart phone usage in Ghana, is predicted to result in DEMIs developing MM apps to enhance customer experience on their application interfaces.

With the advent of DEMIs, enough time and resources will be dedicated to developing interoperability protocols between the various providers where MM users on one network can transfer money to another person on a different network. Deeper cross-border partnerships as well will be developed with MM operators in other countries for direct MM transfers between operators in Ghana and other countries. Interoperability between traditional bank accounts and MM wallets will become entrenched; where funds can be easily moved from MM wallets directly into bank accounts and vice versa.

As these developments unfold to further deepen and consolidate the Ghanaian financial ecosystem, many other innovations can be expected. It will not be unreasonable to expect MNOs and their partner DEMIs to simulate subscriber data into financial algorithms to churn financial prediction models. DEMIs and their parent companies must be able to analyze how call credit and data usage patterns, airtime upload date patterns, call durations and destinations, subscriber bio-data, type of mobile device in use and many other variables can be used to build predictive financial models. These models will then be packaged and deployed to various uses; banks and insurers to differentiate pricing during credit scoring and insurance risk underwriting and also marketing institutions and corporates for targeted marketing initiatives.  Other users of these algorithms may include; central and local governments for policy planning initiatives, other corporate institutions for product development, and also researchers in the international community.

In other developments, it is safe to expect Credit Reference data in Bureaus to be populated with data from DEMIs. Security services will collaborate more technically with DEMIs for financial crime investigations. Tax Revenue Authorities will develop collaborations with MNOs and DEMIs for informal sector income data for tax estimation purposes and MM services for tax collection. Receipts from issued government and corporate bonds will be collected via MM and government payments will increasingly be distributed via MM. Apart from BoG, other financial services sector regulators – NIC, SEC, NPRA, and also the NCA – will not have the luxury of not working closely with DEMIs as players under their regulation will continually seek collaborations with DEMIs.

One such development in the very near future could be Mobile Money Pensions. The Pensions Act (766) 2008 stipulates a three tier pensions regulation where the third-tier scheme is voluntary and makes room for the informal sector to contribute to personal pension schemes. Regrettably, the informal sector has largely been excluded from participating in pension schemes because the industry has not been able to develop niche products that are convenient and easy to be adopted by the informal sector. Mobile Money Pensions holds the panacea to underperformance in this area of pensions.

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By: Sosthenes Konutsey

The writer is the Head of Corporate Business, Old Mutual Ghana.

He is a long standing player in the financial services industry – Banking, Insurance and Pensions – and an advocate for Financial Inclusion.

Email: sos2581@yahoo.com