New regulatory change in South Africa affects mobile money

Posted: August 14th, 2009  |   viewed: (1,308)  |   Comments: ( 3 )  |  Topic: Blog Post  |  

Share: By Marina Solin

UPDATED

On 1 July 2009 a new amendment to the Regulation of Interception of Communications and Provision of Communication-related Information Act, 2002 (RICA) came into effect. RICA is intended to assist law enforcement agencies with the tracing of criminals where mobile phones are used to commit major crimes.

The new RICA provisions prohibit mobile network operators from activating a new SIM card unless they have captured the customer’s identity. This includes the person’s cellular phone number, full names and surname, identity number and an address (preferably a residential address). The personal information of the customer must also be verified by means of a current (green bar-coded) national identity document, a temporary identity certificate, a valid passport or a travel document. The operator is also required to retain a certified photocopy of the relevant identity document.

Mobile network operators such as CellC, MTN and Vodacom have to comply with these provisions since 1 July 2009 whenever a new mobile phone number is activated. However, the measures also extend to all existing customers. These customers have 18 months from 1st July 2009 to register both their prepaid and contract SIM cards in accordance with the new provisions. SIM cards of subscribers that fail to comply with RICA within the specified time period will be disconnected from their networks until they are registered.

General Consequences
Customers in South Africa could buy a prepaid mobile phone without the need to register. 86% of mobile subscribers in South Africa have such a prepaid phone. RICA’s new requirements bring the considerable task of registering the existing 86% of prepaid customers and the requirement to capture customer identity and proof of address. This has already resulted in a drastic reduction in the number of new customer registrations for mobile services in South Africa.

In addition, concerns have been raised in the press regarding the efficacy of the new provisions in fighting crime, the levels of cooperation that could be expected from customers, and the possible abuse of personal data in identity fraud.

Consequences for mobile money for the Unbanked
South Africa has been creative and innovative in balancing financial inclusion and crime combating. It softened the negative impact of its money laundering laws on financial inclusion by creating proportionate exemptions for low-value mobile money services.

This means that a customer in South Africa can register for a mobile banking service by opening their bank account with their mobile phone. According to Guidance Note 6 (known as ‘Circular 6′ on mobile banking) and FICA Exemption 17, there is no need to go to a bank branch initially if the customer has a valid South African identity number and if transaction limits are observed. The customer can therefore start using the mobile banking service by transacting small amounts without going to a bank branch to provide an address. This approach is proportionate to risk, because the identification requirements become more onerous as the transaction sizes increase. If the customer wants to transact higher amounts, a full identification and proof of address has to be provided in person either at the mobile operator or abank representative (depending on the amounts transacted).

The new RICA rules are undermining some of the space that these exemptions created for mobile money services. RICA re-introduced some of the classic financial inclusion barriers by linking the heavy identification requirements of RICA to the right to use a mobile phone. Whilst customers have reduced identification requirements for low-risk mobile banking services, they now have to undergo the more rigorous RICA procedures to be able to use a mobile phone. This negates the benefits of Guidance Note 6 and Exemption 17.

Clients will, for example, face geographical barriers because they will need to visit agents of operators in person where they will be required to produce the required documents. Many will probably find it inconvenient or expensive to meet the requirements while other users may lack the required documentation. Those who lack identity documents are often socially and financially vulnerable. A significant number of South Africans will therefore be unable to access mobile communication services and therefore also mobile money services.

All the above difficulties will exclude many South Africans from mobile communication services, not because they are criminals, but because they have a hard time obtaining the relevant official identity document. This will impact their ability to use mobile phones as a communication tool. Many low-income South Africans conduct their trade and business via their mobile phones. In addition to the social impact of losing their mobile connection, it will also impact on their ability to continue to earn their income as builders, painters, plumbers, etc .

The exclusion will potentially impact third-party service providers as well. The RICA provisions can potentially close down one of their primary means of staying in contact with a client via the mobile phone. In particular this could lead to greater defaults (in loans, utility bills, etc) as such a client is no longer reminded of, or chased for, outstanding payments.

Conclusion
It is too early to predict with certainty the outcome of the new RICA requirement on mobile money in South Africa. However, it is likely that the new barriers will prove too high for some current and potential users. It is, however, possible that users will go to great lengths to meet the new requirements because mobile phone connectivity is so important in their lives.

Once the hurdle RICA presents has been surmounted, there may even be a positive impact for mobile money services. If the identification processes of RICA are robust enough and provide sufficient proof of the identity of the user of a SIM card, it may justify lesser money laundering controls in respect of mobile money services rendered via that SIM card. Those who meet the new requirements may then benefit from a further relaxation of the money laundering laws relating to mobile phone banking.

South Africa therefore provides an interesting case study that merits close attention as it unfolds over the next few years. 

Notes:

South African Reserve Bank, (2008), Guidance Note 6/2008 Issued in terms of Section 6(5) of the Banks Act, 1990: Cell-phone Banking, South African Reserve Bank, Pretoria (previously issued as Bank Circular 6 of 2006.) and FICA (South Africa) FIC Exemption 17 and guidance notes; available via www.fic.gov.za

Louis de Koker’s letter to the Select Committee on Security and Constitutional Affairs on 31 October 2007.