The following is a guest post we’re pleased to share by A. Michael Tarazi, Senior Policy Specialist at CGAP.

As regulators confront the challenges of regulating branchless banking, protecting the consumer is often their primary concern. And for good reason. Branchless banking is a new service targeting the least sophisticated customers and introducing new actors such as mobile network operators and retail agents into a sector formerly reserved for well capitalized and regulated commercial banks. As a result, there can be an understandable tendency to err on the side of caution.

But compliance with regulations comes at a cost – and that cost is ultimately passed on to the consumer. Over-regulation therefore could threaten the emergence of viable business models, ultimately denying the customer any financial service at all. In other words, in an effort to protect poor consumers, over-zealous regulators effectively punish them.

The challenge therefore is to balance consumer protection regulation with financial inclusion. The good news here is that branchless banking, to the extent it still focuses primarily on mobile transfer of low-value funds, has a number of built-in protections that suggest that expensive consumer protection measures may not be as necessary as one might think. In the case of mobile banking consumer protection regulation, less could very well be more.

For example, mobile banking transactions are real-time – a customer is immediately notified of activity on her account with updated account balances that only a legitimate transaction can produce. This real-time nature of mobile financial transactions allows a customer to know immediately whether the product works and whether the retail agent in question is trustworthy. Real time transactions empower consumers to protect themselves against fraudulent agents much more than any regulation could. Take the case of the retailer who claims to be an agent only to abscond with customer funds. Some regulators have considered requiring posting of expensive, difficult to replicate certificates or maintenance of publicly available agent lists or databases against which consumers must verify authenticity of any given agent. But real time notification will expose fraudulent behavior rather quickly.

Another example of a protection built into branchless banking is the national consumer base. Branchless banking transactions are often multi-party and span different parts of the country. For example, unlike a microloan with only a lender and a borrower in a limited region, the person to person mobile transfer involves the service provider as well as a sender and a recipient in two different locations. This national consumer base greatly facilitates word-of-mouth endorsement and criticism of any branchless banking scheme, and consequently protects consumers far more efficiently than any regulation requiring the posting of a consumer hotline number. This is not to suggest that such posting a hotline number is not advisable – it is. The point is simply for regulators to understand most customers would probably take more comfort in the endorsement of their friends and family than they would in the knowledge of a hotline (which may or may not be effective anyway).

Another consumer protection built into branchless banking is the low value of the typical transaction -which ultimately limits consumer exposure. Compare this to the microcredit sector where customers can take on huge (and multiple) debts and risk repossession of collateral. For microcredit, it makes sense to have clear regulations outlining price transparency of complex interest rate calculations as well as effective recourse mechanisms. In branchless banking however, the low amounts involved suggest customers are unlikely to spend time, energy and even more money pursuing a claim – they are far more likely to avoid a particular agent or avoid the service altogether. And the ability to walk away is the ultimate consumer protection.