Regulating and Overseeing Mobile Payments: A Payment Systems Perpsective Bangkok, 2008 Jose Antonio Garcia The World Bank

Regulating and Overseeing Mobile Payments: A Payment Systems Perpsective Bangkok, 2008 Jose Antonio Garcia The World Bank

Contents 1. Payment Systems activities at the World Bank 2. Mobile payments from a payment systems perspective 3. Mobile Payments, Retail Payment Systems and the Payment System Oversight Function 4. Mobile Payments and Remittances: the Payment Systems Oversight Perspective

Bringing the Payment Systems Perspective: the World Bank s Payment Systems Development Group

The Payment System Development Group is at the center of an international network, whose main objective is supporting countries to reform Payments, Remittances and Securities Settlement Systems World Bank Payments Weeks, SIBOS, Regional events, International Conferences Develop Regional Initiatives Arab Payments Initiative Western Hemisphere Forum CIS Payments Initiative, SADC, others under preparation Economic research on broad range of payment system issues (also remittance payments), new technologies (mobile payments) Knowledge Dissemination Research and New Developments Payment Systems Development Group Central Banks and SCs Multilaterals and Standardsetters Major Stakeholders G-10 and non G-10 Central Banks and Securities Commissions CPSS, IMF, IFC, IOSCO, Regional Development Banks, other multilaterals SWIFT, card networks, CLS Bank, commercial banks, other financial institutions, payment system operators, vendors, at the global and domestic levels

Our Mission 1. Help develop sound and efficient payment, remittance and SS systems 2. Support Access to Finance Stocktaking & Policy Advice Implementation Support Vision & Strategy Legal Framework Large-Value Systems Retail Payment Systems Government Payments Remittances Securities Settlement Oversight & Cooperation Financing: WB loans-grants, fee-based and other TA, Regional Initiatives, FSAPs, support to FIRST-funded Initiatives, Others

Mobile Payments from a Payment Systems Perspective

Mobile payments as part of the retail payments segment of the National Payments System A wide range of payment instruments is essential for supporting customers needs in a market economy (both domestic and cross-border, e.g. remittances) A less than optimal supply of payment instruments may ultimately have an impact on economic development and growth The safe and efficient use of money as a medium of exchange in retail transactions is particularly important for the stability of the currency and a foundation of the trust people have in it

Mobile Payments as part of the retail payments segment of the National Payments System (cont.) The use of retail payment instruments differs around the world and is influenced by a variety of elements including cultural, historical, economic and legal factors However, some common trends may be observed Over the medium term some of the observed market developments may well alter traditional payment practices and contribute to increased efficiency and convenience in retail payment systems

Use of e-money, prepaid cards and stored-value cards (for year 2006) Number of Transactions Number of Transactions Country Country Transactions per capita Transactions per capita Austria 23,900,000 2.9 Lithuania 450,000 0.1 Azerbaijan 1,100 neg Luxembourg 2,810,000 6.1 Belgium 96,020,000 9.2 Malaysia 431,600,000 16.8 Chile 88,183,000 5.4 Netherlands 165,000,000 10.1 Croatia 28,665 neg Peru 290,888 neg Czech Republic 39,950,000 3.9 Russia 4,300,000 neg ECCU 65,497 0.1 San Marino 1,000 neg France 17,030,000 0.3 Singapore 1,691,023,464 384.9 Greece 100,000 0.0 Switzerland 19,000,000 2.6 Hong Kong 3,502,000,000 499.5 Tanzania 1,281,031 neg Italy 34,000,000 0.6 Thailand 23,640,000 0.4 Source: World Bank, Payment Systems Worldwide: A Snapshot. Outcomes of the Global Payment Systems Survey 2008, Washington, June 2008. Note: all other 120 countries that participated in the Global Payment Systems Survey reported as negligible the number of transactions with these payment instruments.

Mobile Payments, Retail Payment Systems and the Payment System Oversight Function

Retail Payment Systems and Payment System Oversight Retail payment services (including remittances) are often the first entry point of underserved and unserved segments into the financial sector The retail payment system sector is often characterized by sub-optimal equilibria: the potential demand of payment instruments is not always accommodated appropriately due to coordination or market failures, especially in emerging markets As a result, in an increasing number of countries more and more attention is devoted by authorities to the efficiency and efficacy of production, distribution and use of payment instruments (including cash) recently becoming one of the focuses of the Payment System Oversight Function

Volumes and cost savings for remittances & payment systems $160,000 $155,000 Billions $500 $- 2006 Emerging Market GDP = $11,527 BN $462 $222 $240 Remittances Total Payment Volume $154,196 $89,351 $64,845 Payment Systems Total Potential Payment Volume Notes: (i) Preliminary Figures. (ii) Estimates for Remittances based on IDB figures. (iii) Preliminary estimates on Payments Systems based on 2007 World Bank Global Payments Systems Survey. Estimates for retail payments systems only. Does not include value of Real Time Gross Settlements transactions. Cost per $100 lent or sent $25 $20 $15 $10 $5 $0 75% Remittances Least efficient system 90% Domestic Payments Most efficient system Total potential reduction in costs Appropriate Infrastructure helps reduce transaction costs Notes: Total potential reduction in costs is indicative of the broad range of potential cost reduction. Actual cost savings realized is contingent ultimately on the efficiency of the system. For remittances, costs are of sending remittances to remitter s home country. For domestic payments, costs are sending payments within a country.

What is Payment System Oversight? The payment system oversight function aims to ensure that the infrastructure and the market for payment services work smoothly, efficiently, and fairly to all participants and users minimize the risk of transmitting shocks across the economy pursue the level of technological and institutional development necessary to satisfy the payment needs of a growing and open economy Payment system oversight vs. banking supervision or other prudential supervision

Key Foundations of the Payment System Oversight Function Existence of Market Failures (externalities, information asymmetries, noncontestable markets) Coordination Failures Existence of Dominant Positions (potentially leading to abuse)

Extending Payment System Oversight to retail payment sytems and mobile payments/money According to the World Bank s Global Payment Systems Survey, 73 payment system overseers or 57% of the 128 central banks covered explicitly include retail payment systems in their oversight policies and activities Moreover, in addition to the traditional objectives of safety and efficiency, already 40 overseers have embraced formally broader oversight objectives such as consumer protection or avoiding collusive practices Therefore, in many countries mobile money is having or will have soon its regulatory debut with the payment system overseer

Technological Developments make the deployment of Payment System Oversight for retail payment systems increasingly important Virtual: less relevance of physical presence complicates surveillance, enforcement, crisis management via traditional methods and channels Cross border business: transcending physical, market, and jurisdictional boundaries Technological failures Industry transformation: more competition and innovation, but also more risk of experimental failures Confidence problems: unregulated institutions providing payment services

Targets of Oversight Activity Fair Access Risk Control Information Transparency Pricing System Reliability System Development

Instruments of Payment System Oversight Forms of action by overseer/authorities Monitoring? Dialogue? Catalyst/ facilitator? Regulation? Direct provision? Less interventionist More interventionist

Who should the Payment System Overseer be? Normally it is the central bank Knowledge of, and regulatory capacity for payment systems Its role in maintaining public confidence in money However, the oversight role is not exclusive of the central bank which should cooperate with other authorities (e.g., Banking Supervision and AML authorities, Securities Regulators, Anti-trust agencies) Need to manage trade-offs of public policy objectives and give clarity to the market Formal arrangements are preferable to avoid conflicts among regulators

Mobile Payments and Remittances: the Payment Systems Oversight Perspective

International standards for remittance services: the World Bank-CPSS General Principles GP 1: Transparency & consumer protection The market for remittance services should be transparent and have adequate consumer protection GP 2: Payment system infrastructure Improvements to payment system infrastructure that have the potential to increase the efficiency of remittance services should be encouraged GP 3: Legal & regulatory environment Remittance services should be supported by a sound, predictable, nondiscriminatory and proportionate legal and regulatory framework GP 4: Market structure and competition Competitive market conditions, including appropriate access to domestic payments infrastructure, should be fostered in the remittance industry GP 5: Governance & risk management Remittance services should be supported by appropriate governance and risk management practices.

Mobile Payments, Remittances and Oversight The Implementation of the General Principles is showing that they are a very valid framework for the overall retail payments system From an infrastructure perspective, a remittance is just another payment: crossborder, person-to-person payment of relatively low value Issues faced by remittance service providers and m-money providers are similar The GPs share the same targets of the Payment System Oversight Function Regulatory/Oversight initiatives around mobile payments could be inserted in this framework, also in light of their relevance for the remittance market

PPP Goals Thank you Jose Antonio Garcia Payment Systems Development Group The World Bank jgarciagarcialun@worldbank.org +1 (202) 473-2383