Why no rules for money transfers?

Commercial banks have long dominated the financial sector. Only in recent times have other intermediaries emerged to rival them.

The oligopolistic position of banks has been so strong that many rode roughshod over customers. Beginning in the late 1990s, many even withdrew from marginal (mainly rural) areas, leaving much of the population without banking services.

This has changed: Banks are now not only falling over themselves to court the same customers they had jerked overboard (mostly small retail customers), but they are also getting to terms with new innovations. The cost of banking had gone beyond what most of the retail customers could afford, hence the attractiveness of new and cheaper products and services.

One of the emerging innovations that seems to be rattling banks is money transfer by phone, a service offered by Safaricom as M-Pesa and, to a lesser extent, by Zain (formerly Celtel) as Sokotele. This innovation seems to be revolutionising some aspects of banking. Technology is being deployed in a clever way to deal with a real problem that affects millions — the lack of access to banking services (by way of infrastructure or cost).

Indeed, Vodaphone (one of the principal shareholders in Safaricom) has used M-Pesa as a launch experience for similar services in other countries where it is present — even in far-flung areas as Afghanistan.

Regulation

What these services have brought to the surface is the deficiency in the legal and regulatory framework governing them. While mobile service providers are regulated by the Communications Act, the transfer services they offer are financial in nature, and ideally, should be regulated under the banking laws.

This is a point The Standard first made in an exclusive report in October 2006, revealing Safaricom’s plans to launch M-Pesa six months later. At the time, Information and Communication PS Bitange Ndemo said the Central Bank of Kenya was working on the necessary regulations.

Last year, CBK Governor Njuguna Ndung’u said that regulating the money transfer service was one of the bank’s priorities. The CBK was to formulate regulations to reduce potential risks to users. So far, not much has been reported.

Facing tight competition from M-Pesa, banks are now focusing on its lack of regulation. They now want CBK to define rules for mobile phone money transfer services. This indicates their growing fears on the impact the mobile phone industry, the fastest growing sector in Africa, has had on financial services.

The fact that more than Sh500 million was transacted within a few months of M-Pesa commencing the service tells of the huge potential that lies untapped.

It also brings to the fore the gap between emerging 21st century technology, represented by the mobile phone sector, and the slow, laboured and expensive (to the consumer) banking system.

Banks clearly feel that mobile phone operators are taking advantage of a legal vacuum to reap benefits from the sector without much hindrance, while they (banks) continue to labour under tight guidelines spelt out by the Banking Act.

And given the high cost of their services, banks are clearly at a disadvantage. Mobile phone money transfer services have a clear edge, because they cost overwhelmingly less thanks to shared overheads, and deliver funds over great distances in real time at very low cost.

 

Cost-Effective

Banks’ argument for more regulation of money transfer services is sound. However, they should also take a look at their operations and seek ways and means to make their services user friendly and cost-effective.

Relying on the regulator to rein in competition, without themselves doing something to enhance their competitiveness may be a short term solution. Indeed, looking at the way new banks like Equity have revolutionised the sector, should be a pointer that there is a lot of room for improvement.