Opening Access to the Consumer Financial Transactions Data in Somalia
Why Somali consumers should have access to their own financial transactions data in their mobile money wallets
If you are a consumer who lives in Somalia, the likelihood is that you have one or two wallets on your phone – either an EVC Plus, an EDahab or both. Both of these wallets are provided by the two dominant market players in Somalia’s electronic mobile money (EMM) system. These wallets are not directly interoperable with core functionalities that limit consumers to sending and receiving electronic payments only.
EMM providers enjoy dominant market share, offer broadly price competitive services to consumers, including the transfer of funds within their own networks, free of charge. The EMM system also allows consumers to receive overseas remittances directly into their mobile wallets, making the remittance process easy and convenient but no less expensive. Recent World Bank estimate put the annual EMM transaction value at around $32 billion a year – many times more than Somalia’s entire Gross Domestic Product.
The EMM market is supervised by the Central Bank of Somalia (CBS) in a regulatory framework that is patchy and imperfect at best (the wider prudential risks of EMM is explored separately here). The CBS does not have regulatory framework that gives Somali consumers access to, or control over, their financial data held within their EMM wallets, creating a symmetry of power between the operators who run the system and the consumers who use it.
Further, the use of siloed networks, and lack of interoperability, continue to act against any meaningful innovation in Somalia’s financial services market, raising the entry barriers for new challengers. While significant liquidity benefits accrue to the operators of these EMM wallets, their market duopoly suppresses innovation and continues to limit consumers’ choices in accessing new financial markets, thereby perpetuating financial exclusion.
The current EMM system in Somalia also has several other inherent limitations: the lack of interoperability between the systems of the different operators (i) increases consumer costs and (ii) injects systemic risks into the financial system through the overreliance on two key operators to provide critical economic functions on which millions of Somalis depend. By preventing third parties to participate in the EMM system, the overall resilience of the financial system is weakened. EMM operators also sit on consumers’ transactional data – effectively the core data that shows a customer’s financial net worth. This data has significant value for consumers, and if exploited appropriately, will have the potential to open up opportunities for consumers to access other financial products or services.
" the use of siloed networks, and lack of interoperability, continue to act against any meaningful innovation in Somalia’s financial services market, raising the entry barriers for new challengers. While significant liquidity benefits accrue to the operators of these EMM wallets, their market duopoly suppresses innovation and continues to limit consumers’ choices in accessing new financial markets, thereby perpetuating financial exclusion"
The CBS’s recent implementation of Mobile Money Regulations (MMR) and payment and settlement systems were meant to open up the market, reduce systemic risks and help spur innovation. The reality is different: operators continue to run their siloed systems; central bank clearing has not made much progress, largely due to issues of regulatory credibility, nor has there been any effective implementation of regulatory standards and rigorous oversight. In essence, the regulatory landscape pre-MMR is indistinguishable from the one post MMR.
This is why a new approach to encourage or enforce market competition is needed.
The "Faaido" Data Framework Model
The Faaido Data Framework Model ('Faaido Model') is a regulatory approach that is intended to help consumers understand the benefits of their financial transaction data; make it possible for the users of EMM wallets to share their financial data with CBS-regulated third parties in order to be able to access diverse range of other financial products and services; and allows these CBS-regulated third parties to offer a host of ancillary services to consumers. It is a regulatory approach that not opens up the potential for extracting value from consumer transactional data but also provides a neat workaround the issue of EMM operator interoperability.
The Faaido Model could bring in a number of benefits at a stroke:
1. Third parties can help consumers, who already own the transaction data, to exploit their data in a way that creates value for them, including ability to build personal credit profiles, initiate and receive payments without having to carry multiple EMM SIM cards, further reducing consumer costs.
2. The current issue of the lack of interoperability between the EMM operators will largely disappear. New third party payment aggregators will come into the market, acting as the bridge between current and future operators.
3. The framework will provide a significant incentive for consumers to move their accounts to operators that subscribe to the Faaido Model in order to be able to access relevant benefits. This will create a better functioning and competitive market.
4. The Faaido Model will also create opportunities by attracting a whole host of new players into the market, including payment initiators; personal financial management companies; credit and insurance providers, supporting a much wider financial innovation ecosystem.
5. It will provide much needed competition for incumbents to improve their product proposition, and improve financial system resilience by diversifying systemic and idiosyncratic risks across a wide range of market participants.
How the Faaido Model would work in practice
The model is based on a simple industry standard Application Programming Interface (API) which is already used in Somalia. The purpose of the API is to serve as a standard for sharing data and enabling communication between current EMM operators and third parties. It enables EMM operators to open up consumer financial data to external third-parties through a documented interface and under central bank oversight.
Through this API, third parties (with appropriate consent from consumers) will be able to help consumers exploit the value of their transaction data, including ability to initiate or receive payments or use their data profile to secure access to other financial services. The CBS provides the necessary regulatory oversight by creating a new regulatory regime through which third parties can register as market participants with the appropriate license to help consumers gain access to financial products and services through the analytical insights from their financial transactions data.
Central Bank-led Model
If the private sector model does not achieve its intended regulatory objectives, the CBS’s own payment and clearing system can be used as a data hub into which third parties could plug their API. This is another way of enforcing market competition. In this model, the CBS collects transactional data from the EMM operators on a weekly / monthly basis through a standard Regulatory Return. Third parties can then plug their API to the CBS system to extract the financial data, having obtained relevant customer consent in line with CBS regulatory requirements.
A new sandbox for innovation
A financial services market that is open to innovation benefits everyone. For the Faaido Model to work, a basic level of consumer protection needs to be built into the system so that the risks of data misuse or other misconduct is mitigated. It is also important for the framework participants to have a simplified regulatory model that is proportionate to their scale and complexity to help spur innovation and competition.
The CBS should also look into further reforms of the current EMM market, including introducing regulatory requirements for "Account Transaction Portability" functionality, giving consumers the right to migrate their transactions data to different operators. It is another regulatory intervention option that should be deployed to promote effective payment system market competition.
The Faido Model is intended unlock the benefits of competition and financial services innovation, whilst easily co-existing with the current EVC Plus and EDahab systems that the consumers understand and use well. The API process is a cheap and effective way of exploiting value from transaction data that is not only valuable for consumers but opens up markets for other products and services, supporting wider economic growth. After all, the financial transactions data is owned by consumers and the CBS, through the Faaido Model, would merely be facilitating access to the data to enhance consumer value and spur market innovation.
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The personal views, thoughts and opinions expressed in the text belong sorely to the author, and not necessarily to the author’s employer, organisation or other group or individual.
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