REGULATING E-MONEY IN GHANA: WATCH AND MONITOR THE TELECOMMUNICATION AND IT COMPANIES
Introduction
The technological landscape has become so innovative and breaking traditional barriers that the possibility of undertaking a transaction that hitherto was not possible looks amazing and innovative and we all get drawn into the, “WOW factor”. Questioning some of these possibilities makes you feel you are old fashioned and do not understand Information Technology (IT) issues so you keep quiet. Just like science, there are so many scientific possibilities but the question is; are they ethical or to what extent do they eventually put the human race at risk?
As in science the possibilities of IT must be regulated where such innovations have the tendency to only boost the ego of the technologist as having created something innovative to make money as against the social and economic impact of the general public.
Electronic Money (E-Money), might take different forms which depending on its impact on the economy may require different regulatory tools. I think the emergence of e-money on the Ghanaian market is good news for the development of both e-commerce and e-government but it must be regulated. Is the economic implication of loading an ezwich card from a bank with cash the same as loading from a retail shop say Koala?. I do not think so. Is the economic implication of the mobile money (from telecommunication companies) that is loaded on the phone to be used to purchase services or products from the issuer, the same as loading value on the phone with cash paid to the telecommunication provider which is then used to purchase products and services other than that provided by the telecommunication provider? Again I do not think so.
My intention with this article is to raise questions for the economist, regulators and the discerning Ghanaian to be thinking about these e-money like transactions. As long I can get just one regulator, one economist to say “this makes sense let us monitor it”; then my job is done. If this has already been considered then it is indeed good news and glad to add to public awareness. If I have gotten it all wrong then that is also okay by me because I would have helped diffuse similar thoughts in the minds of people who have not been that bold or had the opportunity to speak their mind for fear of being deemed academically or conceptually blind.
What is E-Money
It is basically a monetary value stored in an electronic medium or device (card, electronic equipment, phone or software based), issued on receipt of funds, which represents a claim on the issuer and accepted as means of payment by others for transactions not related to the products or services of the issuer.
This therefore excludes rechargeable cards such as phone unit top ups and electricity unit top ups since the value stored is directly used for the product or services of the issuer. Where for example the phone cards can be loaded to purchase a downloadable ringtone from another service provider other than the issuer then we may be moving into e-money unless of course there is be a clear trilateral relationship between the user, mobile operator and merchant where the mobile operator is liable for the actual transfer of funds to the merchant.
Ezwich as E-Money
I might be mistaken and thinking rudimentarily but can the economist let me know what the situation is when I give GH¢5.00 to the waakye seller who has a Point of Sale (POS) terminal or equipment and she loads the cash on my ezwich card. Does the waakye seller have access to the GH¢5.00 whilst I also have access to the value on my card?. Can we both use the funds as we deem fit? Is there any inflationary tendency here?
Now from what we know of what e-money is, can the value on my ezwitch card pass as e-money? If yes, should the regulator of issuance of money be concerned? What should happen to the waakye seller’s GH¢5.00 cash. Is such a transaction likely to have an impact on the demand and supply of liquidity? What about monetary policy? I remember learning in economics (Econs without Tears) that the speed at which money changes hands has some impact on inflation. If that is true imagine the speed at which e-money can change hands?
Ezwich as Store of Value
The model where the ezwich is loaded from bank deposits does not create the same implications as that of the waakye seller’s example. Once a deposit account is debited and an electronic value placed on the ezwich card, what is available for use is only what is on the card. I see it as a transfer of store of value from the deposit account to the card. No new money by way of e-money has been created but money has just changed its form by way of a withdrawal from a deposit account into an electronic form.
The model where one walks into the bank and pays cash to be loaded onto an ezwich card does not also create the same implications as that of the waakye seller’s example. In this case the value available to be used for purchases is that on the card but the bank will then make a deposit to the central bank. The caution here is that in my opinion this should not form part of the bank’s deposits but must be separated since the bank in this transaction is holding the funds in trust but not by way of debtor/creditor relationship. The funds are redeemable and should the banks be allowed use it as they deem fit? This needs to be regulated. At best it can be allowed to be used in the calculation of capital adequacy to the benefit of banks that are deploying and diffusing the technology so they lend more of their own deposits. Also the system, through the central bank should be able to track and reduce the holdings of cash against ezwich funds of say bank A and to increase that of bank B if the e-money moves from a bank A customer to a Bank B customer. At a point the ezwich funds (e-money) will crystallise into cash and should be paid by the bank that is holding the physical cash.
The models described above do not create new money as in the case of the waakye seller.
Mobil Money as E-Money
The model where the value on my phone is not only meant to make calls but to purchase services or products from third parties with no recourse by the merchant to the actual cash held by the telecommunication provider must be monitored. Even if there is recourse, the float period between when the merchant makes a claim on the telecommunication provider must be regulated. What happens if A transfers e-money value to B and be transfers to C and so on but no claim is actually made on the cash with the telecommunication provider? Has supply of money increased? Should the economist and regulator be concerned?
Mobil Money as Store of Value
The closest I can think of in Ghana at the moment is the ability to transfer units from your phone to another person on the same network to use. International telecommunication networks may even allow the transfer of value internationally. Someone in London for example can arrange to top up your credit in Ghana. If a relative sends me ten pounds through Western Union and I use it to purchase phone units, I guess the ten pounds is counted as part of the country’s inward remittance statistics. Now if that same relative tops up my phone credit from London, how does the economist intend to book this? Is it inward remittance? May be not if it stays in the form of units to make calls. What if I am able to use this ten pounds credit to purchase goods and services other than services from the telecommunication provider? Has e-money been created? Again I am wondering what the economist or regulator thinks.
In the case where I get an sms text or some form of notification on my phone that someone has remitted me some funds to be collected in cash from a particular place (bank or office of the telecommunication provider) a pure remittance service is being undertaken and there is actually no value stored on the phone. This also requires regulation.
Business Implication of Mobil E-Money Transactions
Is it possible that the telecommunication provider (issuer) who collects cash to issue e-money has access to free funds for working capital or investments? Is it likely that the issuer who would ordinarily have gone to the bank to borrow would now not do so? Would this have any impact on the interest income of banks?
Of course the cash collected by the issuer would have to be credited to a bank account so the banks would say what they lose by way of income they gain by way of cheap deposits which they can use to lend. As mentioned earlier, these deposits are redeemable funds so are they really part of the bank’s deposits for lending? Should such funds be held in special accounts (escrow) for the telecommunication providers which though not earning interest can be offset against the calculation of interest on an overdraft account? For example if the issuer has utilized GH¢20 of an overdraft facility but has in escrow GH¢15 then interest calculation will be on GH¢5. The banks can also open special accounts (escrow) with the central bank for such deposits that can be counted as part of reserves thereby releasing actual deposits for lending.
E-money is a critical payment system in the development of e-commerce and e-government and depending on the business model adopted by way of regulation it would help all parties. The regulation should be flexible enough to keep parties interested and innovative whilst boosting public trust and confidence in the use of such payment system. It can be a win-win-win situation if all stakeholders agree on a comprehensive impact analysis both individually as businesses and regulators and collectively as a country.
Risk Issues
- Operational risk
This may arise as a result of the telecommunication providers’ inadequate or failed people, internal processes and systems or from external events. These risks can be caused by fraud, business interruptions, system failures, poor service delivery or product failure, lack of requisite staff with the understanding of e-money and in a broad sense e-banking related services; failed or inadequate process management of the business; availability, stability, security and integrity of the system. There is the tendency for such operational risks to crystallise into either reputational or legal risks.
The major concern however is the with respect to e-money counterfeiting by way of falsifying e-money balances or creating e-money without being backed by cash. These are real and regulators must make sure they are satisfied with the robustness of operational risk management systems that the issuers put in place to identify, assess, control or mitigate such risks. If the business of banks that issue e-money are to be subjected to operational risk charge on their capital as per Basel II accord what happens to the telecommunication providers who may be performing quasi-retail banking or payment services? Should there be a level playing field?
It is technically possible to load e-money in other foreign currencies that can easily be transferred to any part of the world. Can I technically receive e-money in dollars from a relative in the USA on my phone to purchase products and services locally? Is it technically possible to load Cedis on my phone in Ghana but can use to purchase products and services in Naira when I travel to Nigeria? Very cool and innovative but should the regulator be concerned to make sure it is okay and understands the ramifications of such transactions? Can someone fraudulently undertake such offshore transfers within the same international network?
- Reputational risk
Where there is an operational failure with the business of a particular issuer in the telecommunication sector, is it possible to have a systemic impact on the financial system as a whole with respect to the negative opinion on the issuance and use of e-money? Again should the regulator be concerned?
- Liquidity risk
This may arise if the issuer is unable to meet its obligation of redemption as and when demand is made or in a timely manner without incurring unacceptable losses. This may further lead to reputational and legal risks and will systemically impact on other issuers who may not be having liquidity problems. Should non-bank issuers of e-money be subjected to acceptable liquidity ratios as banks?
Regulatory Tools
E-money business must by all means be encouraged but monitored and regulated since it has the potential to cause a systemic damage to the financial system should it go wrong in the hands of institutions that do not have the same risk management and highly regulated procedures for their operations. There must also be a common playing field for all issuers and the following regulatory tools may be helpful:
- Additional Capital Requirement for Non-Bank E-money Institutions
For banks, I believe the risks with the issuing of e-money would have been incorporated into their business risk model which is very much regulated by the central bank. Should the telecommunication providers who issue e-money made to increase their capital for such purpose? In my opinion I think they should, to be able to absolve the additional operational risk the innovation brings. Also the issuance of e-money should not be allowed to exceed a percentage of the issuer’s capital
- Separation of Funds
As discussed earlier, in my opinion there should be separation of funds depending on the business model or mix of models being applied by the issuer. Some models may not allow the funds to be used as part of working capital by the telecommunication providers or deposits for credit creation by the banks. The funds by way of float even if invested should be in liquid assets. On the other hand I guess if the bankers of the telecommunication provider can issue a guarantee to the regulator to cover the issuance of the e-money then funds may be used as deposits by the bank or working capital by the issuer.
There is no doubt that e-money business is susceptible to money laundering and terrorism financing. Banks are already heavily subjected to anti money laundering and terrorist financing rules. Should the telecommunication providers or other issuers be exempted? I do not think so. They must all put in place policies to combat such acts. Having said that, regulators must be careful not to take way completely the anonymity with cash holding which must be translated to some extent to e-money to facilitate its diffusion. Limits could be set for which “Know your customer” regulations may be exempted but there is still the need to be wary of the “snowball effect” of loading a lot of exempted e-monies by an individual. What about using counterfeit money to load e-money and then encashing it again into good cash.
- Prudential Returns/On-Site Examination
Periodic returns on the operations of issuers by the regulator and risk based on site examination as done with banks may have to be conducted with the telecommunication providers who issue e-money.
Conclusion
It has been estimated that more than 4 billion handsets are in use worldwide and tree-quarters of them in developing countries. The Economist reports that in Africa, four in 10 people now have mobile phones and this is a huge market for telecommunication providers. It therefore makes sense to leverage on this to provide all sorts of mobile banking related services. In Kenya for example M-PESA a mobile money product was initially used to send money to families in the rural areas but gradually moved into being used to pay for other things and it looks innovatively good. Yes it is being done in Kenya, South Africa, the Philippines and other developing countries but we need to monitor the inherent new operational risk it possess to continuously identify, assess, control and mitigate them.
There are of course several business models under which mobile operators can undertake payment systems. The business model adopted by the telecommunication provider is really what may determine whether new money by way of e-money is being created and for which a close regulatory monitoring is needed. A model may initially start as non e-money but may gradually get sophisticated with flavors of e-money. This must be watched so we do not create regulatory havens for these providers. My advice to the telecommunication providers is put in place a form of industry self regulation taking cognisance of some of the best practices in the highly regulated markets especially the EU so that when an e-money regulation is finally put in place in the future, which eventually will, they would already be compliant and it would not have a disruptive impact on their operations. Of course they could decide to cash in now as long as the regulator is behind, lobby and prolong the coming into force of any such regulatory instrument.
The caution to the regulator is also to tamper regulation with flexibility to enable the payment system for e-commerce, m-commerce and e-government to be adequately developed. Keep an eagle eye, watch and monitor the morphology of the models and the developments in the mobile telecommunication sector and move in when they are going overboard.
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