Consumer Protection a Key Issue for Branchless Banking

Mar 2009
Washington, United States, March, 05 2009 - In recent years, a host of developing countries have issued regulations governing mobile transactions, e-money, and other aspects of branchless banking to aid in securely extending financial services to more citizens. Yet as adoption skyrockets for services ranging from smartcard-enabled agent networks to mobile phone payment systems, regulators continue to face challenges in ensuring adequate consumer protection, particularly for new users of financial services.

Challenges are intensified by the fact that many services have been widely available for only a short while. As a result, there are no “off-the-shelf” regulatory frameworks that can successfully mitigate risks and address problems in complex and far-reaching branchless banking systems. Nor is there a rich trove of historical data to use in shaping policy.

Today, regulators around the globe are watching the sharp growth of branchless banking networks and are struggling with many of the same questions: Should there be specific consumer-oriented regulatory measures? Should minimum operational requirements be reviewed, to avoid excessive risk-taking by providers and clients?

Additionally, regulators are concerned about accountability in branchless banking, which differs from traditional banking, where the provider has clear responsibility for the services rendered to the customer by its branch staff. Branchless banking, by adding a third party (or several parties) between the client and the provider, has the potential to invalidate, or at least disturb, this assumption if adequate regulatory provisions are not in place.

Consumer protection issues, regulatory approaches, and outcomes vary markedly between countries. Further insight into emerging issues and potential solutions may be provided by examining consumer protection issues and regulatory approaches in countries where branchless banking is flourishing, such as Brazil, India, Kenya, Peru, the Philippines, South Africa, Russia, and Colombia.

One common issue is that technological innovations may create problems for customers, such as forgotten passwords, illegible receipts, and malfunctioning keypads. All these seem minor headaches if recourse and customer service are easy, fast, and cheap. Unfortunately, that is not always the case. In Russia, for example, customer service is scarce to nonexistent for users of a network of over 100,000 automated payment terminals. And in Kenya, the operator of the fast-growing M-Pesa mobile transaction platform does not bear liability for actions of agents providing that service.

In other locales, including Brazil and Peru, providers have significantly improved responsiveness to complaints by hiring a large workforce to respond to them. In Brazil, this move was further reinforced by a legal provision limiting the waiting time in call centers. Regulators have also taken steps to protect consumers from excessive service fees. In India, for example, agents are prohibited from charging extra fees from customers, so transacting through an agent must cost the same or be cheaper than transacting in a bank branch.

Branchless banking may also open new opportunities for old fraudulent tricks. Brazil and Peru reported some cases of retailers who, without being agents of a financial institution, would act as such with the purpose of charging fees from bill payments or simply disappearing with clients’ money. Since these retailers were not agents of any bank, banks assumed no responsibility for loss of funds and other inconvenience caused to customers.

Legitimate agents can also defraud customers and providers. A few cases, such as insurance frauds, were reported in Brazil and Peru. In such cases, providers assumed total responsibility for the costs. Additionally, agents may also interfere in product suitability by manipulating the borrower toward a certain provider or type of loan or service that renders higher fees.

There are also cases of agents hiding their status of mere intermediary of a financial services provider or not specifying to which bank or banks for which they work. Colombia and Bolivia also recently reported cases of card-based pyramid schemes in which nonbanks fraudulently offered prepaid accounts with alluring interest rates.

As branchless banking adoption grows, regulators are also likely to see new consumer safety issues arise, as an increasingly complex financial system gives rise to more sophisticated frauds. While there’s no one-size-fits-all solution to protect against current and future branchless banking problems, to date regulators have done best focusing on implementing basic rules that protect consumers, define regulatory and supervisory powers, and limit risk-taking by providers.

The first step is to establish a definition, in laws and regulations, of activities that are subject to licensing, regulation, and supervision by the financial authority. At a minimum, regulators should address existing loopholes and give authority to monitor the market, banks, and nonbanks as well as enforce consumer protection rules.

Providers of branchless banking must also be required to offer clear disclosures of prices and service offerings, as well as to ensure fair treatment of all customers, and observe agent qualification, data privacy, and security rules.

Perhaps most important, as branchless banking cuts across diverse regulatory domains and industries, enforcement will work only if there is coordination among different supervisory agencies. Regulators should keep in mind that regulatory effectiveness depends not only on the content of regulations, it primarily depends on the consistency of supervision and enforcement.

Source : CGAP

Research Analysis Tools

The fund indexes, institution benchmarks and other market information displayed here are all Symbiotics designed analysis tools, created in-house by our analysts and experts. Symbiotics has one of the oldest track records in microfinance investment analysis dating back to the late 1990s; its indexes and benchmarks have been regularly used as markers by investors, asset managers, financial institutions and practitioners. These, as well as several other research products, are available through the Research Account. Click on the link below to find out more.

Learn More