Friday, April 25, 2014

Indonesian regulations favour the Four biggest banks

Since my post of last week, I have obtained a better copy of the new e-money regulations in Indonesia.  It's still an Unofficial Translation and is pending an accompanying Circular Letter which has yet to be released, but it does add more clarity on the uncertain regulatory environment for financial inclusion.

You can download them here or send me an email. 

The new category of “Digital Financial Services” (LKD) is specifically designed for financial inclusion. However, it appears to be identical to other e-money licenses except that it allows Book 4 banks to appoint individual agents. These could be individuals or non-legal business entities such as grocery stores, retail merchants and (phone) credit sellers. Having access to these points will be a serious leg-up to any of the Book 4 banks who are interested in extending their services.  However, this new concept of LKD won’t do anything to benefit the telcos or smaller banks who are seeking to capitalize on their e-money licenses and existing distribution networks; they will still have to rely on companies or institutions with a formal legal entity to act as Cash In / Cash Out agents.

On the KYC front, there is some increased clarity. It is clear that the issuer has responsibility for opening the account, so they will need to dedicate some back-office staff for account approvals. However, it is also clear that the agents are capable of conducting the initial registration and data entry. The account records will need to be in compliance with AML and CTF laws, but according the the accompanying explanation this should, “At least cover name, address, date of birth and other data as stated in the proof of the identity of the holder.” E-money can be either unregistered or registered, so it should be fairly easy for issuers to design a tiered KYC process.

Regarding G2P, there is also mixed news.  These regulations do specify that e-money and LKD can be used for the disbursement of social payments. However, the Ministry of Finance has an outstanding regulation (PMK 81) that specifies these payments must be made through either banks or the Post Office. Again, this will leave telcos out in the cold as they would be unable to deliver these G2P payments unless there is more regulatory reform.

Michael Joyce is a policy advisor working with the Government of Indonesia on mobile money and financial inclusion. He has been working on mobile money in Asia for six years, specialising in risk, regulation and operations. The views on this blog are his own and do not represent the views of the Government of Indonesia or constitute legal advice.

Saturday, April 19, 2014

Had enough of mobile money hype? Look at Cambodia and renew your faith.

I will start this blog post by declaring my bias. I was the founding managing director of WING Cambodia and spent close to three wonderful years living and working in that beautiful and mesmerizing country. I also spent seven years working in mobile money, and have observed business models in Kenya, South Africa, Indonesia, Bangladesh, Pakistan, India and China, in addition to numerous other countries. I have recently moved back into the mainstream financial services world, so now have the benefit of looking at mobile money from a distance. An article was recently published on the growth of mobile money in Asia and sadly there was no mention of WING in Cambodia, despite in being one of the first mobile money operations in Asia and globally, hence I felt compelled to write this blog.

I recently joked with a group of industry friends that ‘2014 was going to be the year of mobile money’. The reason why this was a joke is that we have been saying the same thing for the last five years! Our cynicism is driven by the fact that the success of mobile money has been incredibly hyped. The reality is that there are very few successful mobile money operations in the world, and most media and attention focuses on the same three every time; M-Pesa in Kenya, Easy Paisa in Pakistan, and bKash in Bangladesh, with a liberal sprinkling of MTN in Africa. Without undermining the success of those operations, isn’t it time that other successes be celebrated, particularly in an industry with such little success? So recognizing my innate bias, I challenge the mobile money world to take a closer look at what is happening in Cambodia. Initial owners ANZ started WING in early 2008, and a small and dedicated team managed to build and launch the business within nine months. The first couple of years were tough, with middling interest by the owners, and the normal development time it takes for a payment business to build scale. ANZ divested WING in 2011, and it would not be an understatement to say that the business has gone from strength to strength since that time.

WING broke even as a business in 2013, and reports that it will have its first profitable year in 2014. Whilst a longer period then the original business case estimated, five years to profitability is a reasonable outcome considering the margins on transactions and the need to build sufficient payment volume. Payment volume in 2013 was a whopping US$1.5 billion in a country where GDP is approximately US$14 billion. Contrast this with Easy Paisa in Pakistan who reported payment volume of US$1.4 billion in 2012 after launching at a similar time to WING. The GDP of Pakistan in 2012 was $225.1 billion or 16 times that of Cambodia! So WING is now profitable and has achieved significant payment volume in a relatively small country. Fantastic stuff. However the really interesting development in Cambodia for me as an emerging market payments professional is what WING is now leveraging given its mass.

The core business of WING is similar to that of Visa or MasterCard, with one exception. Visa is a four party model where they bring together the customer, the merchant, the issuer and the acquirer. In the WING model, they are both the issuer and the acquirer, and therefore maintain their own merchant network and issue accounts to customers. Like Visa however, WING is using its volume in Cambodia to leverage into new products. Visa devotes a lot of time and investment to products outside its core in order to maintain its value proposition in a world of challengers. Information products, digital wallets and corporate propositions all provide Visa with an improved ability to drive transactions to the core.

WING appears to be following a similar strategy. As payment volume increases exponentially, WING is finding new ways for customers to transact, and like Visa recognizes that these new products will drive transactions to the core. Here is an example of some of the new products that WING has launched over the last couple of years:
  • eCommerce transactions with PIN authentication on the mobile
  • A joint WING & FTB Bank Visa prepaid card, topped up using a WING account
  • Loan repayments at a variety of microfinance institutions
  • Bill payments at almost all major billers in Cambodia including electricity and water
  • Integration with online games platform including Facebook to allow in-game purchases
  • Payroll and disbursement services

WING is focused on both its core service of transferring money safely and cheaply, but is also leveraging its capabilities by providing an increasingly sophisticated suite of services for Cambodians in urban and rural locations. Coupled with its impressive growth I would challenge the mobile money industry to turn its attention to the success of WING. With its many political and economic challenges Cambodia needs positive media attention and how better to do so then by focusing on how a local company is changing the financial services landscape for the better.

-       Brad Jones

Brad Jones was Managing Director of WING Cambodia from late 2007 until mid-2010. He then worked at Visa on their emerging markets mobile strategy in Africa, Middle East and Asia before spending a year consulting to IFC and a number of other clients. He now works in a transformation and growth role for a bank in Singapore.

Thursday, April 17, 2014

New e-money regulations in Indonesia.

Bank Indonesia yesterday announced the release of long-awaited new rules on electronic money  . Since the termination of the Branchless Banking pilots in 2013, and the subsequent shift in regulatory authority to the newly formed Financial Services Authority (OJK), banks and telcos alike have been waiting for news on how they can use e-money and alternative financial services to reach the huge population of financially excluded in Indonesia.

Although the new rules don’t cover the extension of bank accounts through agents, they do provide much-needed clarity and consolidation of existing e-money regulations. E-money has been growing in Indonesia, but so far the majority of transactions are of closed-loop card-based transactions, especially for public transport and toll roads. The extension of financial services to rural and underserved populations has not yet eventuated, largely due to onerous requirements on the ability to cash-out or withdraw funds.
The new regulations have a multi-tier approach to appointing agents for cashing out.  There is good news for the Book 4 banks (BNI, Mandiri, BRI, BCA) in that they can appoint individuals as agents to provide a wide variety of services for e-money. The news is not so good for other e-money issuers, including smaller banks and telcos, in that their agents must be incorporated legal entities.  This will prove frustrating in a country where the majority of businesses lack formal registration, especially as these small businesses have proven to be the best agents in other markets.
However, other components of the regulation are more progressive. Agent exclusivity is forbidden, which is seen as an important step in working towards an interoperable and universally accessible system. Service providers will also be able to determine their own fees, although BI has retained the ability to cap these if needed.

The new regulations are available in Bahasa Indonesia only I will post more details on this blog once I have a translation, and welcome any questions or discussions.
Michael Joyce is a policy advisor working with the Government of Indonesia on mobile money and financial inclusion. He has been working on mobile money in Asia for six years, specialising in risk, regulation and operations. The views on this blog are his own and do not represent the views of the Government of Indonesia or constitute legal advice.