Restricted - Confidential Information

© GSMA 2009

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Andrew ZerzanRegulatory Projects Director

E-Money: What it means for Mobile Money

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Quote from a Regulator

E-money is an important way to increase

financial inclusion. Customer funds need to be safe. We have made this

happen with MNOs in our country.

”“

- East African Central Banker

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Overview

Defining e-money How e-money actually works in mobile money Why is it so popular amongst MNOs? Regulation – what regulators want to see

– Funds protection– Financial system stability– Crime prevention

5 Questions to ask yourself for regulatory engagement

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What is e-money?

Gift cards, gift certificates, pre-paid cards Electronic form of cash – different than airtime 1:1 relationship e-money to cash stored

– Different than a bank account – bank deposits become loans

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How e-money actually works in mobile

Bank(holds pooled account)

MNO(e-money issuer)

Agent

Customer

e-money e-money

e-money

Cash Cash

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How e-money actually works in mobile – agent side

1. Agent puts cash in pooled bank account

2. Bank tells MNO of

agent deposit so e-money system is always equal to amount in the bank.

3. MNO credits the agent’s m-wallet

Bank(holds pooled account)

MNO(manages e-money)

Agent

2. Info sharing

3. e-mo

ney

1. Cash

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How e-money actually works in mobile - customer

1. Customer hands cash to an agent

2. Agent tells provider to transfer equivalent amount of e-money to customer

3. Provider credits customer m-wallet

MNO(e-money issuer)

Agent

Customer

e-money

e-money

1. Cash

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Why is it so popular among MNOs?

E-m

oney

E-money

E-money

E-money

MNO maintains ownership of the customer relationship. – Direct management of customer accounts and

activities– Simplifies customer experience, no need for

customer to be lost for support or resolutions Can enable direct license to give MNO better footing

in the relationship with the partner bank Has greater potential to reduce regulatory burden

– Avoids costly a bank license– Helps avoid regulatory compliance “baggage” that often

arises when a partner bank’s license is used

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What regulators want to see

Still, there are responsibilities for e-money issuers Three core issues MNOs must tackle:

Protection of customer funds

The financial system’s stability measures

Processes that prevent crimes like money laundering

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Customers’ Funds Protection

Regulators’ Views Biggest concern in most countries is

protection of customer money

Concern that MNOs will “borrow” customers’ money

Concern that creditors of the MNO would access customer funds in case of MNO bankruptcy

Solutions Separate accounts for customer

pooled funds than other business

In many successful markets, MNOs have created a separate legal entity to “hold” the funds

Make the pooled account a Trust Account so it is ring-fenced from any use but the e-money system

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Financial System Stability

Regulators’ Views Concentration risk concerns

One MM customer with too big of a withdrawal: localised liquidity crisis?

If the pooled account is huge, a bank could be too reliant on it as a base.

– A large exodus of’ cash in a short period could crash the bank – U.S. financial crisis!

Solutions Limit customer account size

– Reduces exposure the activity of a single customer

Split pooled account as it grows to multiple banks

– Ensures no bank is overly exposed to the MM system

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Crime Prevention

Regulators’ View System could be used by criminals

– Drug dealers will take their profits into the financial system, move them to hide illicit origins

– Terrorist funding will move around to complicate the trace back to the original donor

Laws require providers take measures to reduce their risk exposure

.

Solutions Put up controls to make criminal

abuse more burdensome – KYC, limits, etc.

Have systems in place to monitor, detect and report suspicions

E-money is often lower risk so may justify lower reduced measures

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Questions to Ask Yourself

MNOs should have taken the following actions no matter what market:1) The pooled account’s legal standing.

– Ring fence the pooled account so it is separate from other business.

2) Protection of customer funds– Ensure the pooled customer funds are protected against MNO’s creditors’ claims

3) Customer account size– Limit customer account size to reduce concentration (and criminal) risk

4) Pooled account size– Split pooled account when it’s big so it does not pose a systemic risk to the bank

5) Crime controls– Make processes (anti-money laundering, KYC, monitoring, limits, etc)

proportionate to the actual risk faced

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Q&A

GSMA Tool: E:Money a Guide for MNOs now in draft for your comment. Will be available on MMU Blog website www.mmublog.org later this month

Thank youAndrew Zerzan

azerzan@gsm.org

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Q&A

Unanswered questions?Send them to:

e-mail

mmu@gsm.org

SMS+60123211275

(include your name)

or