Wednesday, September 29, 2010

The End of Banking

Imagine the protagonist of It's a Wonderful Life with no tellers' windows at which to hand out cash during the Depression. Imagine the children of Mary Poppins having no sanctuary with stuffy bowler-hatted bankers to disrupt. Imagine the anti-heroes of Dog Day Afternoon with no place in which to make a last stand.

It might not take much imagining soon, as we begin to think about the end of banking.

South Africa's Leon Perlman's talk about "Aspects of Legal and Regulatory Issues in Mobile Financial Services in the Developing World" provided a comprehensive overview of the current economic landscape in which mobile money or e-money or stored value functions. Perlman also was serving as a representative of WASPA or the Wireless Applications Service Provider's Association in sketching out the financial frameworks and state infrastructure that might be needed if the end of banking should arrive.

Perlman began by leading the audience through the alphabet soup of WAP, SMS, and USSD transactions for which the * and # keys come into play. In talking about "the unbanked" or "the underbanked," he admitted that his focus should be realistically more on payments than savings. Such payments could include POS or point-of-sale purchases, MFI payments to microfinance institutions, remittances, and low-value micro payments. He also argued that the issues were fundamentally about transactions not banking. As he put it simply, "about a billion people don’t have a bank account but do have a mobile phone."

Perlman explained why mobile operators "want a piece of the action" and how MNOs were eager to enter the MFS market, given the fact that minutes were merely commodities now, and the offering of financial services could be a new way to ensure customers' loyalties. He also discussed some of the more futuristic practices with mobile money technologies that were now being tried in Europe, such as NFC or "near field communication" proximity payment methods. However, for Perlman, answering basic definitional questions was far more important than prototyping new gadgets.

When talking about "stored value," Perlman suggested that the first question may be "is it a deposit or not?" He claimed that we know how to license banks and how to license mobile network operators, but we don't understand what happens in the space in which these businesses overlap. In grappling with the legal characteristics of prepaid "money," Perlman asked about the proportionality of regulation and the need for regulatory coordination between supra/national government departments and for sensible policy for the treatment of cash in/out agents.

In trying to answer the most basic question, "Is it money?," Perlman pointed to a fundamental controversy about how money is defined and the competing philosophical schools behind the different premises that shape possible definitions. He argued that there were many possible repercussions from how money was defined from consumer protection law to money laundering enforcement to family understanding of contracts about how "money."

In the heart of his talk, he distinguished between 1) the "Common law definition of money," which was an "orthodox" economic position dating back to Aristotle and fully formalized by F.A. Mann, which presents money as GAME or a "generally accepted means of exchange" and 2) a "New(ish) definition of money" derived from Keynes and the Austrian School. In the latter definition, money was conceived in terms of debt when imagining it as a unit of account, a store of value, a means of exchange. Perlman argued that this so-called "claim school of money" was a much more appropriate way to think about contemporary mobile money.

In arguing for "enabling branchless banking," Perlman expressed his own concerns about "systemic risk" after global collapse. He also argued for a focus on services that will rapidly attract a critical mass and attention to the role of agents.

Perlman also tried to explain the regulatory nightmare that mobile money raises. Is it banking supervision and/or payment supervision and/or telecoms supervision? He strongly argued that other countries should avoid the "regulatory mistakes of the European Union" and their "definitional errors in 2000" that would have forced all airtime purses to register as banks. Even if he acknowledged a need for oversight when it came to cost of access to services disclosures and SIM Card registration, he was leery of overregulation that would exclude the unbanked and underbanked. He also made a strong argument for "proportional regulation" in which KYC (or "Know Your Customer") rules could be addressed sensibly, although he granted that questions of taxation, agency commissions, and Forex rules would remain complicated.

Although "interoperability" is often seen as a technical problem, Perlman tried to unpack it as a regulatory one. He argued that "walled gardens" and "islands of excellence" might be difficult to avoid, as regulators faced the challenge of reducing costs and growing markets without penalizing early innovators.

He closed with a number of national case studies, including one of the best known implementations in Kenya with M-PESA. He contrasted the Kenya case with India's unsuccessful bank-only model and the efforts of MNO Barti Airtel to get beyond the "semi-closed wallet" paradigm around goods and services that limits financial transactions. Perlman asserted that attention to such regulation at country-specific level was critical.

Bill Maurer closed the day's session by talking about how Perlman's talk could illuminate his own interests in the "hacking of infrastructure" and "legal and regulatory workarounds," used much like the claw to get electricity off the grid that is deployed in many places around the world.

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