Bank-led or operator-led? Sometimes, it’s in the eye of the beholder

Posted: January 24th, 2011  |   viewed: (1,731)  |   Comments: ( 0 )  |  Topic: Blog Post, MNO - Bank Relationships  |  

Share: By Neil Davidson

Banks and operators  have come together in a wide variety of configurations in order to offer Mapping and Effectively Structuring Operator-Bank Relationships to Offer Mobile Money for the Unbanked” we found that the vast majority of mobile money for the unbanked services are operated in large part by mobile operators, who contract with banks to carry out particular functions, like float holding.

After float holding, operators are most likely to turn to banks to handle license acquisition, regulatory engagement, and compliance. This is because in many jurisdictions, mobile operators are not allowed by their central bank to acquire a payments or e-money license themselves. Instead, they ask a bank to secure the relevant regulatory approvals, and then operate under that approval. It makes sense to turn to a bank to take on this role, since banks already have a banking license, a relationship with the regulator, and an existing compliance function.

But here’s the confusing part….

From a commercial perspective, the bank in this example can be thought of a supplier of regulatory functions (engagement, license acquisition, and compliance) to the mobile operator. But from a regulator’s perspective, the image is reversed: he is likely to view the bank in this situation as the party which has outsourced a set of operational activities required for running a mobile money service to the operator. And he’s likely to think of the service as “bank-led”, even if, from a commercial perspective, it’s the operator that’s performing most of the activities in the mobile money value chain, making business decisions, and taking the financial risk of offering mobile money.

This arrangement is quite common. But that doesn’t mean it’s particularly well liked, by operators, banks, or even regulators.

- At least one operator we spoke to has found its aspirations to extend the functionality of its mobile money service foiled by the bank holding its payments licence; the bank, fearing that the new functionality (bulk payments) would encroach on one of its existing business lines, declined to propose the new functionality to the regulator.

- Banks are not accustomed to performing license acquisition, regulatory engagement, and compliance for a service that will be operated by another entity; when a bank acquires a banking license, it generally intends to conduct core banking operations itself. This is not the case when a bank secures a license so that another company (the operator) can offer customers a mobile money service, and this arrangement can cause strains. For example, banks are justifiably nervous about putting their reputation with their regulator on the line by extending their regulatory umbrella to include a mobile operator, one which may not have the same perspective on and processes for enforcing an anti-money laundering policy.

- Regulators can be left without a clear understanding of risks entailed in a mobile money service if they lack direct oversight of its operations, which can sometimes occur when the service is, practically speaking, run by a mobile operator and not the license holder.

These problems are eliminated in jurisdictions where mobile operators are eligible for direct licensing by regulators—not as banks, but as payment service providers or e-money issuers. In these countries, the same entity that owns the service from a commercial perspective holds the license to operate from the relevant financial authority.