The Role of Government in Supporting Mobile Financial Services

This blog was originally posted on the CGAP Microfinance Blog as part of a blog series looking at the role public funders can play in branchless banking.

How can governments effectively support mobile financial services (MFS) expansion? Over the past ten years, the U.S. government (USG) has provided both direct and indirect support for MFS program development. Here are some examples of how the USG has acted as an indirect catalyst to support program development and implementation.

USAID has worked closely with and through its host-country counterparts, missions, and implementing partners to establish the legal, regulatory, and political infrastructure upon which two successful branchless banking programs were established: the MABS program in the Philippines, and the MIDAS program in Colombia.

The Philippines’ MABS Rural Banking Program: The Microenterprise Access to Banking Services (MABS) program is a longstanding USAID-supported initiative designed to accelerate national economic transformation and increased financial inclusion by encouraging the Philippines’ rural banking industry to expand access to microfinance services, particularly in rural areas. To do so, the MABS Program assists a network of partner rural banks in the Philippines to expand the provision of financial services to microenterprises, small farmers, and low-income households by providing microfinance technical assistance and training. In turn, the banks develop and improve financial services – loans, deposits, money transfer services – designed for microenterprises, small farmers, and low-income households.

MABS assists rural banks in the development and introduction of innovative products, including mobile financial services. To date, more than 90 MABS-supported rural banks now manage approximately 250,000 micro-loan borrowers with a total outstanding micro-loan portfolio of more than PhP2 billion (US$46.6 million) and approximately 1.5 million micro-savings accounts amounting to more than PhP 2 billion (US$47.4 million). These banks have also registered more than 250,000 mobile phone banking clients and have processed more than PhP 12 billion (US$250 million) in mobile banking transactions.

The following are some reasons for the program’s ongoing success:

• Test and Learn: Pilot testing before full roll-out of any new product was an early design feature of the MABS Program. Program designers considered this especially important when dealing with new and innovative products such as mobile phone banking, which was a relatively unknown global phenomenon in 2004.  This early pilot testing led to better informed products, risks that can be better controlled and minimized, and partners—including the rural banks, the mobile network operators, and the regulator—exhibiting more of a willingness and ability to support the program goals and objectives.
• Engage the regulators early and intensively: From the onset, the MABS Program had a successful and collaborative relationship with the Philippines’ Central Bank (BSP) in the area of promoting financial inclusion and microfinance. Under the MABS Program, USAID worked closely with BSP to help support regulators’ efforts to train their officers and staff to get a better understanding of the unique characteristics of microfinance and the unique requirements for regulating microfinance operations.
• A committed regulator: The BSP itself has evolved into a champion of electronic money and mobile phone banking services, and has become a key advocate for and leader in the development of risk-based regulation to enable this evolving financial channel. Some of the BSP’s key strategies are:
  • Developing and enacting proportionate regulation for lower-risk transactions. For the lower value e-money transactions, KYC requirements are less restrictive, but they still fall within the compliance range of Financial Action Task Force (FATF) guidelines.
  • Allowing the market to innovate while following closely behind, developing appropriate regulations, and enabling regulation as necessary.
  • Investing in the training of Central Bank staff in information technology (IT) regulation. The BSP has established a core IT group within the bank examination team. Coupling increased IT knowledge with banking supervision expertise, this team is able to respond more effectively to requests for approval of new IT products and services, including mobile phone banking services.

Colombia’s branchless banking program, MIDAS: The MIDAS branchless banking initiative was initially built upon a government-led conditional cash transfer program intended to deliver social welfare payments more quickly and efficiently to rural recipients. This was a particular challenge since providing the cash transfers through conventional means was difficult and costly due to the mountainous topography of the Colombian countryside. From 2007 to 2010, the number of non-correspondent rural banks increased from zero recipients to 9698; the number of banks with non-bank correspondent windows increased to 11; the number of municipalities with financial presence increased by 70% (from 793 in 2006 to 1096 four years later); the percentage of covered municipalities increased by approximately 72% to 99.7%; and the volume of monthly branchless banking transactions reached $250 million. The number of monthly transactions reached about 1.5 mn, and the volume of transactions more than quadrupled over the four-year period. The non-bank correspondents are located mainly in marginalized areas of the urban centers and not in the rural sector

What accounted for this rapid success? Those closely involved in the development of the MIDAS program attribute much of its success to the careful manner in which USAID facilitated and supported their Colombian counterparts rather than leading directly in the development of direct program objectives. From 2006-2007, USAID worked with various government authorities to determine what role the public sector could most effectively play in promoting sustainable service expansion, and how financial inclusion goals could be promoted in a prudentially sound manner.

Colombian counterparts determined that the key public sector role would have three key components: first, to promulgate critical regulatory reforms which promote sustainable financial service access in isolated areas; second, to avoid the establishment of additional public sector financial service providers which dampened incentives to disseminate best practices and expansion of commercial service networks in isolated rural areas; and finally, to support cost-effective dissemination of financial inclusion-related best practice strategies and standards.

MIDAS’ ongoing success builds upon the following design features and objectives:

• USAID provides advisory support to the Colombian central bank to promote an understanding of, and commitment to the program on the part of commercial banks.
• USAID works with the Government to promote an understanding of, and to build support for key regulatory reforms required to promote branchless banking and to expand services access.
• USAID works with partner financial institutions to incorporate branchless banking within their broader MIDAS-supported financial inclusion strategies.
• USAID played the role of facilitator by bringing together key elements from political, regulatory, and other sectors which would ultimately be responsible for the full implementation of any branchless banking programming.

How might the successful features found within both the MABS and MIDAS programs be further distilled to develop a core set of “guiding principles” for Government mobile financial services program development and support? In these two examples in which Government played the role of indirect catalyst, key elements of success included the inclusion of pilot testing at the front end of any programming; engaging the regulators early in the program design stages and letting them take the lead in determining what would and, more importantly what would not work in their regulatory environment; and incorporating strong information technology components with the capacity for regular updating into core banking supervision activities.