Wednesday, May 23, 2012

Show Me The E-Money: Keeping it under control.

This is the first in a series of posts where the contributors, all involved in the creation of WING Cambodia, share their thoughts on the importance and challenges of e-money and liquidity management.

Mobile Money is sexy.  It uses technology in new and exciting ways, it reaches out to millions who were previously excluded, and it gives innovators a chance to build new networks from the ground up. But if you look behind the scenes, there’s a whole lot of boring-but-important stuff going on. Managing and reconciling your accounts isn’t sexy but is absolutely necessary for the success and growth of your business. 

 For most MNO-led or third party mobile money operators, some of the magic happens in their “pool account”. They have realized that individual bank accounts are difficult to open, expensive to maintain and integrating directly with bank systems is very tough. To get around these problems, they use a sleight-of-hand whereby they maintain one or more bank accounts to represent all the e-money in the system, and use their mobile money platform to maintain individual accounts or wallets for the mobile money customers. At any time, the total amount of money in the bank account(s) should equal the total amount of e-money in the mobile system.

Sounds simple, but making e-money work is tough and is one of the biggest risks faced by an operator. At first, there won’t be much change in the pool account and making the two match should be easy. The value will go up when an agent or master agent deposits money (converting real money to electronic money), and it will decrease when someone wants to do the opposite, usually a biller or a merchant who wants to receive their cash. When the average customer does a transaction, the pool doesn’t change.

As the network grows, so will the frequency and complexity of these deposits and withdrawals. There will be more and more agents, more and more merchants or billers, and possibly even other complications such as remittances or interbank transfers. If the operator ever plans to go beyond a simple P2P model and provide services to government or business, managing e-money will become a crucial part of the business. I have seen operators who started intending to create or remove e-money once a month end up having to do hundreds of transactions daily, each requiring a paper trail and senior management sign-off.

This complexity also brings risks. As the balances change more frequently, they become harder and harder to manage and reconcile. If the reconciliation process is poorly managed, it can hide internal frauds and losses. Internal staff who know that management aren’t paying close attention can create e-money out of thin air, potentially costing the operator millions in lost revenue as well as significant regulatory penalties.

The key to managing this risk is to make sure that the processes to manage the e-money pool are clear and have sufficient controls in place. Some key points to consider include;
  • Understanding: Do you understand all the accounts involved? Mobile money platform providers will often use their own terminology for the accounts involved in the process, and it is important that they are all understood. There should be no “hidden” accounts that have an unclear purpose and can be used to fund or hide frauds.
  • Segregation: Is there a true segregation of duties in the process? This includes not only the person who initiates a request from the person who executes or authorises it, but also the person who reconciles the accounts. If the person who initiates the request is also in charge of reconciliation, they can easily hide fraudulent requests. It is also important that the information input into the reconciliation process comes from an independent source. If one person is responsible for both execution and data extraction, they may be able to obscure transactions by manipulating the reports used for reconciliation.
  • Management Involvement: Management of bank accounts and e-money is too important to leave to junior staff. Senior management must have a good understanding of the process and should potentially be able to roll up their sleeves and get involved in the reconciliation process.
  • Escalation and resolution: If the reconciliation highlights errors or mismatches, it must be clear how to escalate these to senior management and how to resolve them. In many cases, a problem has been going on for months but the underlying cause has been hidden because no-one understood the implications of a failure to resolve the reconciliation.
  • Documented process: For the e-money processes to be truly effective, they must be formally documented in a clear and easy to follow format. This is particularly important as the business grows and the process and team will need to scale up to manage the increasing volume and complexity of transactions.
  • System capacity: Many e-money systems have evolved from top-up platforms or been written with an emphasis on throughput rather than integrity. They may lack the detailed transaction-level reporting and handling of cut-off times that is necessary to do bank account reconciliations. Banks typically freeze their accounts for a period each night to make this easier to manage: 24x7 mobile money operators have no such luxury.

For mobile money operators who are trying to break free of the shackles of banking that seem to complicate everything with difficult compliance requirements, the level of detail required to manage e-money risks might sound like bad news.  Commercial banks have dedicated teams to manage their inter-bank reconciliations, with obscure Latin names like “Nostro” and “Vostro”. Mobile money operators are naturally averse to introducing this sort of complication, but paying close attention to reconciliation processes in the early stages of your business will prevent losses as well as providing the opportunity to scale up and provide more and more services and opportunities for growth.

Michael Joyce is a consultant specialising in mobile money operations and risk management. 


  1. Very good points you make. Can you help me with specific fraud schemes that can occur in the various divisions of the operating model of mobile money organizations, both from an IT and other business process perspective, and from the retail agents, and other players in the model? Thanks, Joe -

  2. Well done for all your hard work in providing this high quality blog.Thanks for great information you write it very clean.Movil por dinero


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