84079 FINANCIAL INFRASTRUCTURE SERIES Payment systems policy and research FROM REMITTANCES TO M-PAYMENTS Understanding “Alternative” Means of Payment within the Common Framework of Retail Payments System Regulation October 2012 FINANCIAL INFRASTRUCTURE SERIES Payment systems policy and research FROM REMITTANCES TO M-PAYMENTS Understanding “Alternative” Means of Payment within the Common Framework of Retail Payments System Regulation October 2012 ©2012 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved. This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. Book cover and interior design by Michele de la Menardiere. FOREWoRD Retail payment systems play an important role in the smooth functioning of any economy, and thus any inef- ficiencies in the retail payments market can send negative effects cascading throughout the financial realm. The World Bank Global Payment Systems Survey 2010 has shown that inefficiencies persist in the payment systems of many middle-income and low-income countries, with cash continuing to be the most widely used instrument for small-value payments. A number of issues are responsible for this pattern, and the lack of a coherent, holistic strategy for the development of retail payment systems is among the most common. The lessons learned during more than a decade of World Bank Group technical assistance, along with the research findings of other international and national agencies, have been merged into a comprehensive package for the development and reform of the national retail payments system: 1. “Developing a comprehensive national retail payments strategy” aims to provide public authorities and market participants with detailed guidance on how to develop and implement a comprehensive, strategic retail payments reform. 2. “A practical guide for retail payments stocktaking” identifies a methodology for undertaking a detailed stock- taking of a country’s retail payments landscape. 3. “From remittances to m-payments: Understanding ‘alternative’ means of payment within the common frame- work of retail payments system regulation” explores the development of a normative framework to underpin an efficient retail payments industry, including the so-called innovative payment mechanisms. 4. “Innovations in retail payments worldwide: A snapshot: Outcomes of the global survey on innovations in re- tail payments instruments and methods 2010” presents the results of the first World Bank survey among central banks that collected information on innovative retail payment products and programs. The authors of this paper are Massimo Cirasino (Manager, Financial Infrastructure and Remittances, The World Bank) and Mariachiara Malaguti (Professor of International Law at La Cattolica University of Rome and Senior Legal Advisor, Financial Infrastructure and Remittances, The World Bank). I am grateful to other members of the team for their support. This paper has benefited from the comments of a number of World Bank Group colleagues, national central banks and other national and international institutions, as well as private sector entities. We are grateful to those colleagues for providing their valuable insights. Janamitra Devan Vice President & Head of Network Financial and Private Sector Development The World Bank & International Financial Corporation TABLE OF CONTENTS I. CONSIDERATIONS SURROUNDING THE PROVISION OF “ALTERNATIVE” MEANS OF PAYMENT 1 1. Different instruments, common concerns, 1 1.1 The “payments system” approach, 1 1.2 Categorization of m-payments schemes, 2 1.3 The main emerging features, 4 1.3.1 Relevance of account holding, 5 1.3.2 Access to clearing and settlement, 5 1.3.3 The role of agents, 6 1.4 Drawing some parallels (also a matter of definitions), 7 II. TOWARDS COMMON PRINCIPLES 9 2. What does the EU Payment Services Directive teach?, 9 2.1 Common treatment of payment services, 9 2.2 Institutions providing payment services, 10 2.3 Behavioral and structural requirements, 12 2.4 Consequences on supervision and oversight, 13 3. The General Principles for International Remittances as a benchmark, 14 3.1 The 2007 WB-CPSS General Principles, 14 3.2 Relationship between the service provider and the user, 15 3.3 Infrastructure, 16 3.4 Governance and risk management, 16 III. A SINGLE REGULATORY FRAMEWORK 17 4. “Alternative” means of payment as part of the retail payments system, 17 4.1 Risk-based assumptions, 17 4.2 Efficiency, 18 4.3 Competition and market contestability, 18 4.4 Consumer protection, 19 4.5 Empowering the Overseer(s), 19 5 Section I CONSIDERATIONS SURROUNDING THE PROVISION OF “ALTERNATIVE” MEANS OF PAYMENT as if it were totally new and somehow apart from the 1. Different instruments, traditional ways of executing payments, which are, for common concerns the most part, led by the banking sector. 1.1 The “payments system” approach In practice, the current attention being given to m- I payments is not that different from concerns that n recent years, the payments industry has highly were apparent when remittance services first entered progressed in terms of types of instruments to the market. Indeed, the development of non-banking execute money transfers, use of new technolo- networks to provide cross-border remittances has gies, and articulation in the offer of payment been one of the most disruptive events of recent years, services. This has especially affected the retail sector, creating so much change in the payments industry giving rise to various studies and evaluations of new to lead regulators to start regarding the provision of developments from different perspectives. In particu- payment services as an autonomous activity, separate lar, payments by means of mobile phones are seen as (although often ancillary) to banking services. The so- the most promising instrument, especially in coun- cial function of remittances, especially cross-border tries with a high percentage of unbanked population, remittances, of facilitating repatriation of salaries of to widen the offerings for payment services and satisfy foreign workers became the major focal point of de- unaddressed needs. The fact that the device used is a bate, especially when it was clear that in some coun- mobile phone, which almost everyone possesses even tries revenues from these transfers would cover a high among the poorest, has also led many to view this new quota of domestic income. It further emerged that, channel as a means of defeating poverty and ensuring from a regulatory point of view, the provision of these inclusiveness. services requires a different focus because it is part of the retail payments industry. In practice, money remit- These important considerations, apart from either the tances mean no more than money transfers, which can technological or business perspectives of what is alter- be domestic or cross-border, and can be indifferently natively called “m-banking” or “m-payments,” are very executed through traditional (banking) or other chan- relevant and deserve careful consideration. However, nels. Such remittances might involve large or small they frequently lead to approaching this phenomenon operators, well-organized chains, or almost “informal” 1 2 FROM REMITTANCES TO M-PAYMENTS traders, and finally might be cleared and settled under All these progressive and interlinked developments a wide range of methods, each entailing differently risk lead to a main challenge for regulators, prior to any exposures to the parties of the transaction. specific policy decision on how to treat each and any of these instruments or means, i.e., what is effectively in- This same analytical framework and focus can be ap- novative in these instruments to the point of requiring plied to m-payments: the provisioning of these pay- different regulatory tools, and what, on the contrary, ments can go from the extreme of being provided by is just a specific implementation of existing schemes telecommunications operators without any direct in- already covered by the regulatory discourse on retail volvement of a bank, through being provided in strict payments.1 In fact, if it is undisputed that the industry cooperation with the banking sector, at least for clear- has now upgraded, offering new devices and new com- ing and settlement, up to situations where banks out- munication technologies as well as experiencing the source such services to a telecommunications operator entry of new non-financial actors, thus modifying the or even use the operator as nothing more than a com- shape of the market on the supply-side, this should not munication channel, with the service fully provided be taken as a need to depart from the basic principles by banks. Like remittance services, m-payments can (and the basic methods of evaluation) of regulation of be domestic or cross-border, and serve a wide range the retail payments sector. of different needs. Again, according to the different ways the service is organized, the legal schemes which This is the more true looking at recent trends, as mo- are adopted, the contractual allocation of risk, and the bile operators not only are offering new products, but clearing and settlement of transactions, m-payments also provide platforms with multiple applications. This might give rise to different risks and deserve differ- leads to convergence of existing products offerings into ent regulatory treatment, always against the common new channels and permits the offer of new products principles underlying the regulation of payment ser- through a wide range of business models and arrange- vices in the retail market. ments. If any, this is a clear confirmation that payments through mobiles can only be understood within the In fact, it should be kept in mind that most of these wider picture of regulation of retail payment instru- new means to make payments have simply linked to ments (including both “traditional” and “alternative” existing channels, interfacing with existing ATM or products) and not by artificially focusing on the nov- POS networks and working under the same patterns as elty of technology. cards, or mirroring schemes as that of e-money issuers, such as PayPal, by storing customers’ money in some electronic device. It goes without saying that even be- 1.2 Categorization of m-payments schemes fore money remittances came to the attention of policy makers and scholars, “e-money issuers” had been the A number of publications have described new-born scrutiny of similar concerns, although at that time countries’ experiences in payments, with a special concerns were mostly related to what was perceived focus on m-payments as potentially the best suited as the production of money, and the effects this could method to increase access to finance; it is therefore un- possibly have on monetary policy. E-money was yet an innovation in the industry leading to the potential 1 This is also the exercise undertaken in the recent contribution of M. Klein and C. Mayer, “Mobile Banking and Financial Inclusion. The Regulatory Lessons”, widening of the offer, not only in terms of instruments World Bank Policy Research Working Paper 5664, May 2011. The focus of these but also (and foremost) in terms of operators. authors is on different issues than those addressed in this paper. FROM REMITTANCES TO M-PAYMENTS 3 necessary to repeat this work.2 However, a timely le- • In other cases, the bank outsources a wider range gal and regulatory analysis of each of them should be of services to the mobile operator; customers of made in accordance with the pertinent domestic legal mobile operators are required to open accounts and regulatory framework. If, for the sake of further at the bank to be allowed to execute transfers by considerations, we can operate a sort of abstract cat- mobile phone. The mobile operator acts as an egorization (although some models have clearly pre- agent of the bank when facilitating the opening vailed in the market and some are the combination of of such accounts by collecting relevant informa- more than one), we can identify the following: tion and documentation and directly deals with the customer (who is originally its own custom- • Under some contractual schemes, banks pro- er). These new accounts, although being a new vide access to current accounts by way of mobile kind of account that often imposes thresholds in phones (or similar devices) in the same way as terms of operations to be transacted or funds to by Internet, payment cards, or ATMs (or a com- be deposited, are in fact opened at the bank and bination). Services may include execution of should in principle benefit of any existing legal payments towards third parties accounts. Aside protection for deposits. The accounts are in the from the bare case when telecom networks have name of the customer and establish a relation- no other involvement than providing a means ship between the bank and the customer, who of communication, it is possible that the bank also becomes a client of the bank. This is true would outsource part of the operational activi- even though the mobile operator acts as an in- ties to execute the transfers to the mobile opera- termediary between the bank and the customer, tor. In this case the bank keeps control over the and is the only entity that deals directly with service, to the point that it can be said that the the customer. This scheme is more complex and bank, and the bank only, is the relevant service permits a much more active role by the mobile provider.3 In this case, outsourcing might still operator. However, the latter does not perform imply a number of risks that need to be assessed any clearing or settlement activity, nor does it and consistently controlled, but the structure of possess any of the customer’s funds, since all the service does not strongly differ from execu- transactions occur at the bank level. The general tion of payments by other “traditional” means, structure may be further enriched by a system since no accounts other than the existing bank of agents permitting withdrawal and deposit accounts are open, nor does the mobile operator of money, but the bank requires such agents to possess any funds. open an account with the bank and formally be- comes an agent of the bank, even though, again, 2 See among the many T. Lyman, M. Pickens and D. Porteous, “Regulating the mobile operator is the only entity in direct Transformational Branchless Banking: Mobile Phones and Other Technology to contact with the customer. In this case, the ser- Increase Access to Finance”, CGAP Focus Note No 43 of January 2008; I. Mas and vice provider is the bank, although the outsourc- K. Kumar, “Banking on Mobiles: Why, How, for Whom?” CGAP Focus Note No 48 of June 2008; F. Eijkman, J. Kendall and I. Mas, “Bridging the Cash: the Retail ing of such a relevant part of the activities and End of M-PESA”, Journal of Saving and Development 2010. Regulatory consider- the establishment of an agent network requires a ations are included, in addition to some of the contributions already mentioned, in D. Dias and K. McKee, “Protecting Branchless Banking Consumers: Policy risk assessment and consequent monitoring. Objectives and Regulatory Options”, CGAP Focus Note 64, 2010 and in P. Makin, “Regulatory Issues around Mobile Banking”, OECD 2009. • In countries where the execution of payments is 3 For example, many operational services associated with payment cards and ATMs are also outsourced to specialized operators. not considered as an exclusive banking activity, Section I. Considerations Surrounding the Provision of “Alternative” Means of Payment 4 FROM REMITTANCES TO M-PAYMENTS the mobile operator might itself offer its custom- at its own “premises.” In this case, the banking ers the service of executing payments using the sector is potentially excluded, although the mo- same mechanisms that the client is used to for bile operator still needs to access the payments buying airtime. One way to clear such transac- system for final settlement. Under these circum- tions could be for the mobile operator to open stances, some additional regulatory concerns a pooling account with a bank where it deposits might arise from the fact that such issuance is the money received by its customers to execute considered the production of money. In this spe- payments. In this case the mobile operator does cific case, the service provider also clears and possess customers’ funds, executes the clearing settles operations. These considerations have and manages the pooling account under some caused a number of countries either to prohib- legal scheme such as trust. When the country it this activity on the part of non-banks, or to does not recognize legal schemes such as that of strictly regulate it, to the point that this situation a trust, the account is opened in the operator’s is rarely reproduced in reality. name under some other fiduciary mechanism, although in several cases the domestic legal system (especially in civil law countries) is not 1.3 The main emerging features equipped to fully regulate fiduciary relationships and the account is plainly open under the op- This attempt of categorization, which – as mentioned erator’s own name. Under this structure, the ser- above – does not intend to represent any concrete ex- vice provider is the mobile operator, which has isting scheme but is instead a tentative generalization a link with one or more banks or other financial coming from a number of varying experiences,4 should institutions to ensure clearing and settlement of help in identifying some of the relevant features of m- transactions. The bank might still undertake a payments that apply to regulatory issues that surround more active role if it accepts to insure or guar- such payments. Moreover, identifying such features antee customers or otherwise participate in the further helps in identifying similarities with other contractual relationship between the operator “alternative” means of payment to confirm the cor- and the client (becoming, therefore, a three- rectness of a general evaluation under common prin- party contract), especially in cases where the ciples and reconnect them to the traditional discourse domestic legal framework does not sufficiently on regulation of retail payments. This document has protect customers under a fiduciary relation- a particular focus on similarities with remittances ship between the customer and the mobile op- and, where relevant, with use of stored-value cards erator as the holder of pooling accounts. Agents (i.e., e-money), as these instruments are primarily as- can also be appointed under this scheme: in this sociated with the entry into the payments market of case, these shall, in principle, be agents of the non-financial institutions, although it does not mean mobile operator as service provider. • Finally, the mobile operator may directly charge clients’ money into the mobile or in some soft- ware, without opening any account at a bank, neither on the name of the customer(s) nor on 4 In several concrete cases some of these schemes are mixed and different its own name, but virtually opening an account channels provided. FROM REMITTANCES TO M-PAYMENTS 5 to underscore the wider array of business schemes, tances is that remittances neither require nor depend arrangements and satisfaction of market needs that on a stable relationship between the user and the pro- m-payments may offer. 5 vider of the service (although this may have a factual relevance). The user just walks into the store, deposits 1.3.1. Relevance of account holding cash and orders the transfer of money to a third per- son, who also does not need to have any stable rela- From the previous brief description it clearly appears tionship with the service provider (or its disbursing that the real issue when a service provider happens to agents). However, the service provider still possesses be a mobile operator, is how the money received for the customer’s funds and deposits those funds some- the transfer is treated: does the mobile operator open where in order to be able to execute the transaction, accounts in the name and behalf of the client(s) or these types of transactions can range from full man- does it keep accounts in its own name (pooling the agement of bank accounts open in the name of the re- money received). Issues of segregation or other forms mittance provider for the benefit of execution of cus- of protection of customers’ accounts arise, as well as tomers’ transfers up to the production of e-money.6 the parallel risk that any situation of insolvency of the service provider could affect the users. As a remark, the use of deposits and store value thus makes a difference in terms of risk and regulatory con- When transfers are executed only on existing or spe- cerns in respect of the provision of payment services as cifically opened bank accounts in the name of the the pure intermediation in the transfer of money. customer, such transfers would benefit from domestic legislation on protection of deposits and of the exist- 1.3.2. Access to clearing and settlement ing supervisory mechanisms of banking institutions. At the other extreme of possible scenarios, i.e., when These schemes also relate to the clearing and settle- these amount to production of e-money, the issuer ment of m-payments and remittances. Apart from the may be subject to specific capital requirements and relationship between the service provider and the user, operational restrictions. Instead, when the service pro- clearing and settlement schemes used by these opera- vider opens pooling accounts or even accounts in its tors may widely vary, but always within the known, own name without making any fiduciary link explic- “traditional” patterns of intrabank or interbank clear- it, requirements to guarantee traceability of funds by ing and settlement. Risks and remedies, in this case, each client and the solvability of the service provider have been widely studied by regulators and there is are necessary. the benefit of long experience with these well-under- stood methods. In this context, the essential difference These assessments, at least in terms of general param- would indeed not be between alternative and tradi- eters, align with those applied to remittance services: tional instruments, but between domestic and cross- the major difference between m-payments and remit- border transfers, since dealing with foreign currency and cross-border settlement presents peculiarities that 5 See in particular the following documents being published by the World Bank in the context of the “Retail Package” public consultation: “Developing a Compre- hensive National Retail Payments Strategy”, “A Practical Guide for Retail Payments Stocktaking”, and “Innovations in Retail Payments Worldwide: A Snapshot. Out- comes of the Global Survey on Innovations in Retail Payments Instruments and Methods 2010”. See also CPPS, 2012, “Innovations in Retail Payments”, Report of 6 The situations do not apply to remittances services provided directly by banks the Working Group on Innovations in Retail Payments, available at www.bis.org. or through credit card networks, since these are to “traditional” means of transfer. Section I. Considerations Surrounding the Provision of “Alternative” Means of Payment 6 FROM REMITTANCES TO M-PAYMENTS do not emerge in domestic situations. This same con- 1.3.3. The role of agents cept is also true for the now long tradition of regula- tory analysis of cross-border transfers. In order to operate efficiently, both m-payments and remittances need an articulated network of agents What can only be different in terms of clearing and (merchants, post offices, and the like), as an alterna- settlement is the potential immediacy of m-payments, tive, or more often in addition, to bank-owned branch- which would in theory imply real time settlement for es. Together with the nature and kind of accounts to be retail payments like these. However, this issue should opened to perform the service, this need seems to be not be misinterpreted: the fact that the payment might the most evident structural characteristic of both in- be immediate to the benefit of the receiver does not struments. Indeed, since a fully cashless system would automatically imply that this should also be immedi- not be realistic at the present time, people need access ately settled in the interbank network: banks can pro- to a wide number of locations where they can either vide credit to their customers or the service provider to deposit cash in order to have it transferred by mobile permit daily settlement of these transactions. phone or a remittance network, or withdraw it once re- ceived, as well as simply deposit and withdraw money Indeed, the major issue is access to clearing and settle- for their own needs. ment by non-financial service providers, where the issue of potential transfer of risk from the mobile op- One of the major elements of innovation in these erator to the system arises. This issue is far from new, channels as opposed to the traditional banking sector and has led to prolonged discussions on differentiation is the use of existing merchants or other services (such between direct and indirect participation in a pay- as post offices) that people already know and trust to ments system, collateralization, and access to central complete the chain of operations needed to execute the bank money. 7 service. Since these actors are not part of the banking sector (i.e., they are not branches subject to the exist- Incidentally, access to clearing and settlement also calls ing regulation on bank branches and derive benefit for the issue of interoperability: in the same way that from no specific protection), this structure does bear non-financial service providers would need ready ac- relevance from a regulatory point of view since it adds cess to clearing and settlement systems in order to be a number of complexities to the scheme, both to remit- able to provide their services, they may be equally re- tances as well as to m-payments.8 quired to ensure interoperability to permit a full use of their networks by users. This issue still creates a lively One of the major new complexities seems to be the li- debate, which however is by no means unknown to the quidity risk connected to the service. The agents must general regulatory discussion on payment systems and indeed always have sufficient cash on hand to permit follows analogous patterns. withdrawals, and when the customer requires trans- fer of money directly to or from the account of the 8 This issue is not totally new to the banking sector. For further references on this see I. Mas and H. Siedek, “Banking through Networks of Retail Agents”, CGAP Focus Note No 47 of May 2008; and M. Klein and C. Mayer, “Mobile 7 See for example, The World Bank, “Balancing Co-operation and Competition Banking and Financial Inclusion. The Regulatory Lessons”, World Bank Policy in Retail Payment Systems.” Study coordinated by Mario Guadamillas, Financial Research Working Paper 5664, May 2011. The Brazilian experience on banking Infrastructure Series, 2009. correspondents is of extreme interest to this end. FROM REMITTANCES TO M-PAYMENTS 7 agent (only for the purpose of executing the transfer), agement of bank accounts—proved to be inadequate the latter needs to ensure adequate coverage of funds. when non-bank operators entered the market. These Segregation of accounts for the purposes of the service newcomers were, on the one hand penalized because in respect to the agent’s own account is also an issue. of existing restrictions (including the aforementioned limitations of a lack of direct access to clearing and The issue of liquidity is also linked to security con- settlement), and on the other hand benefitted by the cerns, since granting availability of cash at the premis- possibility of operating without such stringent pru- es of these agents also means granting security against dential requirements as the ones applied to banks. The robbery or other crimes. Finally, these agents must be combination has been in some circumstances highly trusted by people using their services and consequent- detrimental to final users who both pay the cost of oli- ly need to be screened and duly trained. It must also be gopolies generated by the often-imposed cooperation remembered that anti-money laundering (AML) re- between banks and “new” services providers and bear quirements may be imposed on agents because of their the risk, in the case of remittances, of numerous small direct contact with the final customer, which in some operators turning to the black market to avoid bur- cases also includes the possibility of opening accounts densome regulations. Indeed, the industry’s inability for those customers. In such cases, additional require- (at least at first) to conceive of these operators as pro- ments are often imposed. Taken together, these issues viders of payment services of the same kind as banks, amount to protection of users of the service—the cus- although under different business schemes, has led to tomer—and observance of some minimum standards dangerous misconceptions, which do not individually of service. benefit either the “traditional” operators or the “new entrants,” but above all seriously damage final users, One final focal point for both the public and the pri- who lack adequate protection and pay the price of vate sector is competition within the market, specifi- closed markets. cally related to distribution agreements and exclusiv- ity. This issue would perfectly apply also to networks There are a basic few questions: a) which provider of of agents as those described for m-payments under the service bears the primary responsibility for the exactly the same parameters of access to the market, as service, independent from any form of cooperation well as – when relevant – exclusivity agreements with or outsourcing it may engage with other operators; b) banks or other financial institutions. where are the funds deposited/stored and are those funds that belong to final users adequately protected; c) does the storing of money outside of the banking 1.4 Drawing some parallels (also a matter of channel amount to production of money, and what definitions) regulatory concerns does this lead to; and d) how do non-financial agent networks affect the provision of As mentioned, if something new can be identified in payment services, including security concerns. All these “alternative” means of payment, it is that non- these issues can be reconnected one way or another to financial operators have entered the market and existing regulatory parameters. provided fierce competition to the banking sector. Regulation—which had traditionally focused on the This exercise should clarify the confusion surround- banking sector under the assumption that payment ing definitions of specific instruments: m-banking as services could only be an ancillary activity to the man- opposed to m-payments should in principle reflect Section I. Considerations Surrounding the Provision of “Alternative” Means of Payment 8 FROM REMITTANCES TO M-PAYMENTS whether the service is directly provided by a bank or by a non-financial institution (where this is of relevance), as stored-value devices should have the same meaning as pre-paid instruments or e-wallets, to represent the “storage” of money for some length of time previous to the effective execution of the transaction outside of the banking sector (the only entity in principle permitted to take deposits and open credit lines). Finally, “remit- tances” should specifically refer to all those transfers of money executed without the user accessing an account (which also pertains to stored-value instruments). These definitions express legal or regulatory concepts (or define regulatory or legal consequences) but can- not exactly represent any individual scheme as such. SECTION II TOWARDS COMMON PRINCIPLES 2. What does the EU Payment Commission just recently consulted on a Green Paper Services Directive teach? “Towards an integrated European market for card, in- ternet and mobile payments”, on the need for further 2.1 Common treatment of payment services actions.11 In spite of these undisputed shortcomings, T the PSD is an interesting instrument to take into con- he 2007 Payment Services Directive (PSD)9 sideration for the purposes of this paper, in the impos- has been an important normative attempt sibility to give account of the many solutions offered by to consistently regulate payment services domestic regulators. within a common set of principles, with, in fact, a special focus on retail payments. Indeed, For the purposes of this analysis it is first relevant that under this legal framework “payment services” en- when referring to a “payment account” the Directive compass cash deposits and withdrawals into/from an does not refer to bank accounts, but to an account account and the management of such account, execu- “held in the name of one or more payment service users tion of payment transactions from a payment account which is used for the execution of payment transactions” with or without coverage by a credit line, issuing and/ (Article 4.14). As a consequence, any entity authorized or acquiring of payment instruments, and money to provide payment services under the PSD can offer remittances. The Directive also explicitly includes accounts for the purposes of executing payment trans- “execution of payment transactions where the consent actions. This includes non-banks. of the payer to execute a payment transaction is given by means of any telecommunication, digital or IT device Secondly, payment services can also be provided with- and the payment is made to the telecommunication, IT out the opening of a payment account. Indeed, what system or network operator.”10 However, as mobile and distinguishes the provision of “money remittances” other innovative payments were still in their infancy from other kinds of payment services under the PSD at the time of the adoption of the law, the European is the lack of such account: “‘money remittance’ means a payment service where funds are received from a pay- 9 Directive 2007/64/EC of the European Parliament and of the Council of 13 er, without any payment accounts being created in the November 2007 on payment services in the internal market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC and repealing Directive 97/5/ EC, O.J. L 319 of 5 December 2007, p. 1. 11 Any changes needed, including on the Payment Services Directive, shall be 10 Article 4.3 of the PSD and Annex. announced soon. 9 10 FROM REMITTANCES TO M-PAYMENTS name of the payer or the payee, for the sole purpose of ing such goods or services by adding value to them in transferring a corresponding amount to a payee or to the form of access, distribution or search facilities, on another payment service provider acting on behalf of the the one side, and situations where the operator is just payee, and/or where such funds are received on behalf of an intermediary between the supplier and the buyer and made available to the payee” (Article 4.13).12 of goods or services produced by third parties, on the other. Whereas in this latter case the operator only Thus, all payment services are in principle regu- provides a payment service, in the first case its activ- lated alike, either when provided by means of a pay- ity is considered to be more complex and consequently ment account or without one, and irrespective of the is excluded from the scope of the Directive (Article channel used, either “traditional” or “technologically 3.1(l)).13 The exact scope of this exception, excluding innovative,” with or without the “interposition” of certain services from the Directive seems to raise com- a communication network directly interfacing with plex issues of interpretation, notably in the new envi- the customer. ronment of mobile payments. In addition, the PSD tolerates a privileged treat- When technical service providers are involved, which ment for operators having a turnover under certain provide technical services to payment service provid- amounts, irrespective of the kind of payment services ers so that these can provide payment services to their provided or the channels employed. This is different users, their technical activity is also not covered by the from what occurs in a number of countries outside the law, even if they would be telecommunication, IT or European Union where a distinction is made accord- network operators (Article 3(j): this latter case is out- ing to the kind of instrument. Under the PSD the only side the scope of the PSD because this activity does thing that counts is whether the operator can be con- not amount to a payment service. Indeed, they them- sidered a “small business.” In that case, a registration selves are at no point in possession of the funds to be mechanism is accepted instead of the general instru- transferred and do not enter in relationship with the ment of issuance of a license (Article 26). users directly. An additional specification is made when the activity of the telecommunication, IT, or network operators 2.2 Institutions providing payment services goes beyond a mere payment transaction as it facili- tates the purchase of digital goods or services (such as Once the PSD has fully defined what a payment ser- ring tones, music, or digital newspapers): in this case, vice is and what appear to be its main characters, the the European legislator traces a boundary between sit- PSD lists which institutions can provide such services: uations where the operator itself is involved in produc- banks (credit institutions according to Community 12 Whereas (7) of the PSD interestingly states: “Money remittance is a simple pay- 13 “The content of these goods or services may be produced either by a third ment service that is usually based on cash provided by a payer to a payment service party or by the operator, who may add intrinsic value to them in the form of ac- provider, which remits the corresponding amount, for example via communication cess, distribution or search facilities. In the latter case, where the goods or services network, to a payee or to another payment service provider acting on behalf of the are distributed by one of those operators, or, for technical reasons, by a third party, payee. In some Member States supermarkets, merchants and other retailers provide and where they can be used only through digital devices, such as mobile phones to the public a corresponding service enabling the payment of utility and other regu- or computers, that legal framework should not apply as the activity of the operator lar household bills. Those bill-paying services should be treated as money remittance goes beyond a mere payment transaction. However, it is appropriate for that legal as defined in this Directive, unless the competent authorities consider the activity to framework to apply to cases where the operator acts only as an intermediary who fall under another payment service listed in the Annex.” simply arranges for payment to be made to a third-party supplier” (whereas 6). FROM REMITTANCES TO M-PAYMENTS 11 language) as regulated by European directives; e-mon- ing and complex issues of interpretation of recent EU ey institutions, also regulated by European directives; regulation, and examining that boundary is outside and “Payment Institutions,” which represent a new cat- the scope of the present analysis. However, it is inter- egory established in the PSD itself:14 any entity which is esting to note that, while Directive 2000/46 basically not a credit institution or an e-money institution, will- mirrored the regulation of credit institutions in terms ing to provide payment services need to be licensed of prudential requirements, e-money institutions are according to the PSD, under a number of capital and currently treated less strict than credit institutions liquidity requirements, as well as the respect of some but stricter than payment institutions, in view of the conditions (Articles from 5 to 19).15 higher risks involved in issuing money compared to providing payment services. On other requirements, Telecommunication, IT, or network operators provid- however, the rules applicable to e-money institutions ing payment services can thus be licensed as a Payment follow closely the rules set out in the PSD, since the Institution, in the same way a remittances provider European legislator recognized that the two kinds of can. If payment accounts are opened at other than a institutions to a certain extent perform similar servic- bank premises (i.e., accounts held in the name of one es, and that the only evident reason to justify a differ- or more payment service users), these should have the ent treatment for e-money institutions is the fact that sole purpose of permitting the execution of payment by issuing value, they are meant to produce money and transactions, and should not be considered by any as a consequence monetary policy is relevant to them. means to be deposits.16 This would be possible without leading to production of money—that is to say with- In addition, Directive 2009/110 defines e-money as out the need to get a license as an e-money institution pre-paid stored value in exchange for funds and re- under the recently adopted Directive 2009/110, modi- gards these as general-purpose instruments (not limit- fying the previous Directive 2000/46 also as far as the ed to closed networks). The directive applies to money very definition of e-money institution is concerned.17 stored either on a payment device in the holder pos- session, or stored remotely at a server and managed The exact boundary between a payment institution by the holder through a specific account for electronic and an e-money institution is one of the most intrigu- money.18 Putting aside the almost insoluble issue of differentiation between a payment institution open- 14 In fact, Article 1 also includes post office giro institutions which are entitled ing a payment account on the name of a customer and under national law to provide payment services, the European Central Bank and providing custody services (which is permitted under national central banks and domestic public authorities, in these two later cases when they do not perform their public activities. Article 16 of the PSD, together with the concession of 15 See how “payment service providers” are defined under the 2007 WB-CPSS credit, although to a very limited extent) and an elec- General Principles: “Payment service providers” include both (i) entities that take deposits and allow transfers of funds to be made from those deposits (i.e. most banks tronic money institution storing, by definition, value and many non-bank deposit takers) and (ii) non-deposit-takers that transfer funds. on a device or in an account, it is evident that the intent The latter, in turn, can include (a) money transfer operators (where the service is based on “pay now” – for example, by cash or bank transfer from the payer to the money transfer operator), (b) those providing “prepaid” transfers (e.g. traveller’s cheques or prepaid cards) or (c) those providing transfers on the basis of “pay later” (e.g. credit cards).” 16 See Article 16 of the PSD. 18 Article 2.2: “‘electronic money’ means electronically, including magnetically, 17 Directive 2009/110/EC of the European Parliament and of the Council of 16 stored monetary value as represented by a claim on the issuer which is issued on September 2009 on the taking up, pursuit and Prudential supervision of the business receipt of funds for the purpose of making payment transactions as defined in point of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC 5 of Article 4 of Directive 2007/64/EC, and which is accepted by a natural or legal and repealing Directive 2000/46/EC, OJ L 267 of 10 October 2009, p. 7. person other than the electronic money issuer”. See also whereas (6) to (8). Section II. Towards Common Principles 12 FROM REMITTANCES TO M-PAYMENTS of European legislator is to conceptually separate be- outsourced (Article 17). On the one side, transpar- tween the production of money and execution of pay- ency criteria are established to ensure full information ment services. to payment services users on the role and qualities of the agent they interact with; on the other side, full re- Indeed, whereas (10) of Directive 2009/110 states: “It is sponsibility is allocated to the service provider for any recognised that electronic money institutions distribute action performed on its behalf by the entity to which electronic money, including by selling or reselling elec- the activity has been outsourced. For the sake of trans- tronic money products to the public, providing a means parency and general monitoring by competent author- of distributing electronic money to customers, or of re- ities, the latter must be informed of the identity and deeming electronic money on the request of customers qualities of agents and keep a registry with updated or of topping up customers’ electronic money products, information of each network. through natural or legal persons on their behalf, accord- ing to the requirements of their respective business mod- The payment institution is obliged to undertake full els. While electronic money institutions should not be responsibility for the actions of the entities to which a permitted to issue electronic money through agents, they service has been outsourced and have mechanisms and should none the less be permitted to provide the pay- controls to ensure that the entities perform adequately. ment services listed in the Annex to Directive 2007/64/ Outsourcing is not permitted when such outsourcing EC through agents, where the conditions in Article 17 of would materially impair the quality of “important op- that Directive are met”. erational functions,”20 such as the payment institution’s internal controls and the ability of the competent au- thorities to monitor the payment institution’s compli- 2.3 Behavioral and structural requirements ance with the obligations laid down by the Directive. In addition to initial and on-going capital require- The PSD then contains two full Titles that regulate be- ments, payment service providers must comply with havior requirements of payment services providers to- a number of requirements and conditions. First, they ward users, including transparency of terms and con- may obtain a license only if they are able to provide a ditions, charges for information, maximum execution valid business plan, satisfactory governance arrange- times, authorization and withdrawal of consent, limits ments, and internal control mechanisms (Article 5), in the use of the payment instrument, and mechanisms as well as mechanisms to safeguard funds received by to ensure refund and liability, as well as allocation of the payment service users at least when the payment burden of proof (Titles III and IV). institution also engages in other business activities (Article 9).19 Finally, it regulates access to payment systems by ser- vice providers, in order to guarantee that any opera- Moreover, the PSD specifically regulates the use of tor satisfying reasonable criteria of solvability can ac- agents, branches, and entities to which activities are cess the inter-bank network of services to efficiently 19 According to Article 9 of the PSD, users’ funds must not be commingled at 20 Article 17.7, third subparagraph: “… an operational function shall be regarded any time with the funds of any other user, or be otherwise insulated against the as important if a defect or failure in its performance would materially impair the claims of other creditors of the payment institution, or be covered by an insur- continuing compliance of a payment institution with the requirements of its authori- ance policy or other comparable guarantee, payable in the event that the payment sation requested under this Title or its other obligations under this Directive, or its institution is unable to meet its financial obligations. financial performance, or the soundness or the continuity of its payment services”. FROM REMITTANCES TO M-PAYMENTS 13 and safely execute payments (Article 28). It reiterates court complaint and redress procedures for the settle- what European case law has established under compe- ment of disputes, have consequently improved. These tition principles, i.e., that rules on access to payment have varied, naturally, with differing scope and shape systems must be objective, non-discriminatory, and according to domestic legislation and competencies, proportionate. Furthermore, it further limits payment and have been assigned to the central bank itself and systems autonomy to fix access rules involving service to other relevant bodies, such as the Ombudsman or providers to the extent that payment system operators the antitrust authority. do not inhibit access more than is necessary to safe- guard against specific risks, such as settlement, opera- The PSD has offered a new challenge for the regula- tional and business risk, and to protect the financial tion of payments: it no longer focuses only on systems and operational stability of the payments system. In (or possibly instruments), but rather on activities, and summary, protection from risk is the only justifiable has a well defined system of controls. Service providers reason for imposing access restrictions to payment sys- must be licensed, which may take place only after the tems (to clearing and settlement infrastructure) to the fulfillment of capital requirements, which are a typi- extent that payment service providers are concerned. cal prudential tool. Yet, capital requirements, in both Finally, restrictions on payment service providers or cases of Payment Institutions and Electronic Money payment services users cannot be imposed if such re- Institutions, are paralleled by on-going own funds strictions limit effective participation into other pay- requirements, to be calculated according to alterna- ment systems, if they discriminate between authorized tive methods, reducing the role of capital in favor of (or registered) service providers, and if they are based continuing means to satisfy obligations. In addition, a on the institutional status of the participant.21 license is subject to proof of compliance with manage- rial standards and to conditions on business schemes and structures. These requirements are clearly a com- 2.4 Consequences on supervision and bination of what traditionally pertains to supervision oversight and what traditionally pertains to oversight, however, the whole structure of monitoring by way of conces- Central banks have traditionally focused their atten- sion of a license and possibly its withdrawal in case the tion on wholesale systems, since these have been the future behavior of the service provider no longer satis- most relevant in terms of the stability of the markets, fies the original conditions, resembles a kind of con- and have developed over the years a number of prin- tinuous monitoring based on constant dialogue with ciples and standards for overseeing such systems. More the authority, that characterizes oversight. recently they have started to focus as well on retail pay- ment systems, where individual transactions are nor- Although capital requirements are compulsory, it mally of low value, but the systems might involve a would seem that the monitoring contemplated in the very large number of transactions. In so doing, central PSD is more focused on activities. And absolutely, it banks have begun to consider issues such as consumer is based on risk assessment that it is typical of over- protection, transparency and cost-effectiveness, and sight. Note that oversight in the case of retail services market competition. Oversight tools, including out-of- can also comprise customer protection, competition within the market, and risk management (as the 2007 WB-CPSS General Principles further discussed clearly 21 Payment systems designated under Directive 98/26/EC on settlement finality are excluded from the scope of this Article. show). In conclusion, the PSD has, for the first time, Section II. Towards Common Principles 14 FROM REMITTANCES TO M-PAYMENTS combined the tools of supervision and those of over- mented to widely offer such service must be adequately sight in an attempt to offer a consistent framework for managed and each part to the business scheme must regulating the payments market as a whole. be sound and not compromise the overall trust in the network and service (reputational risk also being of high relevance). 3. The General Principles for International Remittances Such articulation needs adequate legal and regulatory as a benchmark treatment: legal, since allocation of risks and respon- sibilities need to be correctly identifiable and legal 3.1 The 2007 WB-CPSS General Principles schemes must be fully enforceable; regulatory, since over- or under-regulation of the sector, as well as a At the beginning of 2007, the World Bank (WB) and discriminatory regulation among remittances provid- the Committee on Payment and Settlement Systems ers or against other payment services providers might (CPSS) completed a global regulatory study of (inter- negatively affect the correct expansion of remittance national) remittance services and adopted some gen- services and impair the satisfaction of an existing eral principles.22 These encompass transparency and market need. consumer protection, governance and risk manage- ment, the role of payment system infrastructure, legal Finally, the efficiency of remittance services depends and regulatory environment, and market structure and on there being a competitive business environment. In competition.23 the light of the high heterogeneity of operators present in the market, such environment needs to be fostered The main justifications for these principles rely on the and appropriate access to payment infrastructures fact that (international) remittances not only are retail be ensured. services, but especially address a poor and financially unsophisticated population, so that transparency and These general principles have been selected to guaran- consumer protection require special care; additionally tee markets for remittances that are contestable, trans- the infrastructure to support such services needs to parent, accessible and sound (point 6). Indeed, they be adjusted in order to properly address the specific arise from a concrete analysis of the various patterns needs of users, requiring—as explained previously—a of the service and the identification of its inherent fea- wide articulation of partners, from financial institu- tures: remittance services can be more or less complex; tions up to a network of agents, which can affect the yet, in all cases some kind of network, i.e., “connected safety and efficiency of the provision of the service. access points” seems to be necessary. These also need Although remittances do not likely involve systemic to be linked by common procedures to enable messag- risk (in the light of the small amounts usually trans- ing and settlement. Leaving aside what is called “uni- acted), the complex business scheme usually imple- lateral service” (i.e., remittances provided by global banks by way of their branches), others, including small providers, may either use “franchised services,” 22 WB-CPSS “General Principles for International Remittance Services”, BIS, January 2007. which are provided by large global money transfers 23 The General Principles have been endorsed as the main tool to achieve ambi- operators, or build up an autonomous contractual net- tious objectives of cost reduction for the provision of remittance services by the work, defined as “negotiated service” (point 10). This G8 and the G20. See also the work of the Global Remittances Working Group, chaired by the World Bank at http://go.worldbank.org/SS0MQSBFM0 addresses one of the point of the Report, which states FROM REMITTANCES TO M-PAYMENTS 15 that such networks could be ultimately considered as 3.2 Relationship between the service provider “remittance systems,” where a system is defined as an and the user organized whole made up of diverse but interrelated and interdependent parts (point 29). In addition, The relationship of both remittance service providers the capturing and disbursing processes involve the and of m-payments service providers with the user transfer of information as well as funds, whereas the deserves special care. Know-your-customer and anti- processing of the transaction requires messaging and money laundering requirements need to be satisfied, settlement. A variety of arrangements can be under- although international principles recognize that under taken to execute this phase; however, in many cases some circumstances less stringent parameters can be remittances are not settled individually. Liquidity ar- applied, in both cases due to the low individual value rangements can be agreed upon. of the transactions executed through such channels, rather than because of the structure of the service. In A concrete analysis of markets for remittances has the case of m-payments, moreover, a continuous re- shown shortcomings justifying the adoption of the lationship does exist with the user, since this is a cli- WB-CPSS General Principles. However, it is the gen- ent of the mobile operator, and some sort of control eral characteristics of such service that justifies why can consequently be operated through this existing the General Principles are formulated the way they are; relationship. in the same vein, m-payments also need a network. Although the method of connection is the mobile net- Special requirements might also be needed for trans- work itself, various access points are indeed necessary, parency of conditions and prices, where it yet seems which leads to the establishment of an articulated net- that conditions could be imposed in parallel to those work of agents and the provision of various alternative usually established by authorities in charge of consum- channels. Moreover, especially in the light of the device er protection in general. It appears clear that in regard used (apart from the implication of various “physical to remittances, the small individual values transacted access points”), users—who as in the case of remittanc- could not be charged at a fee that in percentage terms es might easily be financially unsophisticated people— would strongly affect the final cost of the transaction. need to be protected from misuse and risk, as well as Moreover, the pricing mechanisms should not inhibit provided with all relevant information. the use of the service. In this respect, domestic author- ities in charge, respectively, of telecommunication and To the same extent, the establishment of such an ar- financial services might need to cooperate, since trans- ticulated network and the possible use of various chan- parency and other conditions’ requirements should be nels require adequate governance, including clear de- applied consistently in the general context of commu- lineation of roles and responsibilities, as well as forms nication services provided by the mobile operator. of control by the partner better equipped for this purpose, for each branch of the service and of the Remittances users should also receive reasonable pro- functioning of communication networks. tection from operational failures and criminal abuse. Especially for m-payments, verification mechanisms should be ensured to avoid situations of erroneously entering numbers and codes and mismatching, loss of the device, or mischarging of fees. Section II. Towards Common Principles 16 FROM REMITTANCES TO M-PAYMENTS 3.3 Infrastructure 3.4 Governance and risk management Both for remittances and m-payment services, in- As a direct consequence of the shared features of e- frastructures are of the essence. In addition, in both payments and m-money governance and risk man- cases, such infrastructure strongly departs from the agement are of extreme importance in both cases, traditional organization of financial services, since and probably of particular relevance in instruments non-financial entities are involved. These entities most that depend on and arise from the use of technol- often provide other services of a non-financial nature; ogy. However, the reputational risk in the provision of are of small dimension, and are not organized under these services inherently bears a significant role: these corporate structures but provide services as individu- services are characterized by a large number of users als. In addition, in order to offer the service to a wide entering into low-value transactions, requiring a wide audience, numerous entities need to be involved, often diffusion among the population. For m-payments, this with non-homogeneous characters. All of this requires risk is connected to the quality of the general commu- both care in the agent-user relationship and adequate nication services provided by the operator, since the management and control by the service provider. user will be directed towards a specific operator not only because of its performances as a payment ser- As for the “internal” network, security and efficiency vices provider but also as a communication services of the communications network is also of the essence, provider. especially for m-payments where the character of (potential) immediacy bears a substantial relevance. Governance and risk management should therefore be Shortcomings, breakdowns, and other failures can se- carefully considered for m-payments, since shortcom- riously jeopardize the service and lead to the risk of ings in the provision of payment services could indeed losing track of transactions unless adequate recovery also affect the main services provided by the operator mechanisms are put in place. (as well as vice-versa). The speed of transfers usually entails a heavy reliance on technology. As a result, the In addition, in both clearing and settlement of trans- governance of entities in charge of ensuring techno- actions require regulation by competent authorities. logical and operational efficiency would deserve spe- Here the business models chosen are of relevance, cial care. since these influence (in fact, determine) the legal al- location of risk and qualify the exact involvement of Finally, the close link needed between the banking the banking sector. In the specific case of m-banking— sector and the telecommunication network in order as previously discussed—the issue of holding of ac- to provide the service requires coordination and clear counts and protection of users’ funds is of the utmost allocation of tasks and consequent individual respon- relevance in the evaluation of the risks involved in the sibilities. Both for remittances and m-payments, when business model chosen. the banking sector is involved, clear dependencies of the agency networks from one or the other entity should be clearly defined and the respective gover- nance tools established, in order to ensure that any form of outsourcing or use of other third parties does not compromise the sound provision of the service. SECTION III A SINGLE REGULATORY FRAMEWORK Abandoning a pure institutional approach, regulation 4. “Alternative” means of should be based on kinds of services provided and, payment as part of the most relevant, on the business scheme adopted. As al- retail payments system ready mentioned several times, it is indeed the busi- A ness scheme which will determine who the authority ll previous considerations confirm not will consider the service provider, which will therefore only that there are very good reasons to bear the main responsibility for the provision of the consider remittances and m-payments service. To this extent, it appears that what counts is services, if not under the same set of prin- not, as is often stated, which operator interacts with ciples then at least under the same set of general pa- the final user, but rather which of them possesses and rameters (these being the two major types of payment manages the users’ funds in order to execute the trans- services directly involving non-financial institutions), action, since this seems to be the very essence of the but also that these need to be primarily taken into con- service and the main source of risk. sideration under the wider approach of regulation of retail payments and evaluated for their inclusion into However, both outsourcing and agency schemes may this business sector. Incidentally, this approach would generate additional risks that need to be identified and inevitably lead to apply the same (risk-based) analysis evaluated. Although the service provider must be held also to “traditional” financial institutions when provid- responsible for the acts of its agents and of those opera- ing payment services. tors it outsourced part of its activities to, the regulator must be in a position to clearly identify these addi- tional sources of risk and have the power to intervene 4.1 Risk-based assumptions directly in how the arrangement between the entities should be shaped and with what conditions they must Remittance services and m-payments (as well as pre- comply in order to be allowed to perform the service. paid cards) are both components of the (retail) pay- ments system and should consequently be taken into The general criteria should however be that of risk: in- consideration under this approach for the kind of dividual sources of risk need to be identified and regu- risks they raise. lated accordingly, also considering that under certain circumstances it is not the single element in isolation 17 18 FROM REMITTANCES TO M-PAYMENTS that produces risk, but the combination of (often inter- infrastructures should be to permit final users to ben- dependent) factors. In addition, if transactions are of efit from it irrespective of either the institution used as low value and consequently do not bear risk by them- an intermediary or the chosen instrument of payment. selves, their potential large number and frequency may indeed require overall control. All of this relates to market structure and its con- testability, in a balance of considerations between competition and need for cooperation within the 4.2 Efficiency private sector. As part of the retail payment system, remittance ser- vices and m-payments services should contribute to 4.3 Competition and market contestability the overall effort to enhance the efficiency of the sec- tor. This means that one of the objectives of regulation Different regulatory treatment might lead to distor- should be to ensure that the benefits on any improve- tions on competition: regulatory constraints should ment in the retail payment space accrue to the end- be proportionate to effective risks and public policy users and the economy in general, without creating needs to ensure a level playing field for retail pay- un-justifiable rents in some part of the value chain. ment services in general. In the same vein, regulation should be non-discriminatory, avoiding either favor- The relationship with the final user and its protection ing or ignoring certain categories of service providers is of course of the essence. However, the payments in- over others. Regulation should also remove business frastructure is equally relevant for the proper opera- practices when they hamper competition severely. tion of the payments industry, and of main concern in particular for central banks. Indeed, if the assumption is correct that new entrants in the market improve both the range of services and In the first place, being part of the payments system also their quality, in order to make this assumption con- means being able to take part in such infrastructure— cretely true and allow the final users to fully benefit providing of course that there is compliance with the of such improvements, regulation must not lead to same requirements imposed upon all other operators. discrimination or favor the creation of dominant po- Access to systems may be limited for a number of valid sitions. In particular, since retail payments are of low reasons; however, such restrictions must be transpar- value, costs are a most relevant issue for their effi- ent, proportionate, and non-discriminatory. Since the ciency. Both discriminatory regulation and restrictive main reason for limiting access relies on risk, an ad- business practices do influence costs and consequently equate protection from risk according to the services strongly impair potential benefits by customers. provided as described in the previous chapter should reduce the urgency (although not the general neces- To this end, regulation must both be oriented by risk sity) of access restrictions to clearing and settlement. and try to regulate entities proportionate to the scope and dimension of their activities, and be adequate to In the second place, and somehow in parallel, in or- cope with possible restrictive business practices. The der to guarantee efficiency and full profit by end-users, regulatory approach should be technology-neutral and networks and system must ensure interoperability. only focus on the financial element of the service. Indeed, one of the major desirable features of payment FROM REMITTANCES TO M-PAYMENTS 19 In pursuit of this goal, central banks, as the primary 4.5 Empowering the Overseer(s) regulatory body in charge of monitoring, need to co- ordinate not only with antitrust authorities, but also The establishment of an effective oversight function with telecommunication authorities, since the inher- on payment systems and services is instrumental to ent involvement of telecom networks requires careful foster the adoption of electronic payments, including evaluation, such that their presence does not add op- mobile money. erational risk to the provision of the service. The adoption of a functional approach in the provision of payment services requires a parallel empowerment 4.4 Consumer protection of one or more authorities able to regulate and oversee the market. This is particularly important as, in some Retail payments raise the additional issue of consum- countries, the prevalence of an institutional approach er protection. Independently from the kind of com- in financial regulation24 might leave some services or mercial relationship between the service provider and their providers outside the realm of financial authori- the user of the service, either durable or occasional, ties. This circumstance might have lead some authori- rules on transparency and protection of customers ties to adopt a conservative approach and simply pre- must be implemented. vent some institutions from offering certain services rather than exposing the financial system to risks that In addition to regulatory policy focusing on the struc- were considered difficult to manage in that particular ture of the market and its infrastructure, the described legal and regulatory framework. In this regard, proper payment instruments require adequate protection of payment system oversight should be seen as an enabler users. In particular, in addition to transparency re- of innovation in the retail sector. quirements, know-your-customer guidelines, and ob- servance of AML regulation, the protection of users’ Overseeing a payment system means ensuring that the funds and their traceability are a must, as well as pro- infrastructural components and the markets for the tection from any risk arising from the use of electronic provision of payment services: means and the intermediation of non-financial agents. 1. Work smoothly, efficiently and fairly for all par- Indeed, once service providers are duly regulated ticipants and users. under a risk-based approach and a playing field is ensured in the market to guarantee competition and 2. Minimize and control the risk of transmitting competitiveness, all other needs for protection can be shocks through the economy via the reverbera- addressed under a general understanding of consumer tion across the payment system of failures by in- protection and an adequate consideration of the role dividual participants to settle obligations. of agents. 3. Pursue the level of technological and institution- al development necessary to satisfy the payment needs of a growing and open economy. 24 Institutional approach in this context refers to regulating the institutions that perform a certain economic activity rather than the activity itself. Section III. A Single Regulatory Framework 20 FROM REMITTANCES TO M-PAYMENTS The role of primary payment system overseer in par- ticular on retail payments is typically played by the central bank. Appropriate cooperative arrangements need to be in place with other relevant authorities (e.g., banking and financial supervisors, anti-trust authori- ties, Ministries of finance and the economy, etc.) and with the market itself. 25 25 See B. Bossone and M. Cirasino, “The Oversight of the Payment Systems: A Framework for the Development and Governance of Payment Systems in Emerg- ing Economies”, July 2001, The World Bank and CEMLA. The PSDG is prepar- ing a paper on the practical challenges economies encounter in establishing the payment system oversight function. The paper is expected to be released in early 2013.