Part 2: E-MMT Systems: Too Catastrophic To Fail
The consumer and systemic risks posed by unregulated Electronic Mobile Money Transfer (E-MMT) systems are material and could imperil entire economies. This article, and the accompanying Analysis Paper, assess Somalia's E-MMT landscape and set out the possible regulatory approaches needed to mitigate these risks.
The issues facing many E-MMT operators in Somalia are complex and varied. There are no regulatory guidelines that set out detailed standards on how they should operate; concerns about competition and intellectual property fuel suspicions about regulations; and the skills gaps in key regulatory institutions make the task of driving through reforms very difficult, if not impossible.
These challenges besides, a recurrent sticking point is how to classify E-MMTs: are they telecommunication companies that purely facilitate the transfer of funds across different mobile telephones, albeit within the same network? Or should be they be treated as quasi-financial institutions and regulated as such?
The ability of customers to deposit funds into a mobile wallet for periods of time, and redeem the funds into cash on demand, demonstrates that E-MMTS are not pure telecom companies. Conversely, customers that use the E-MMTs would not have access to full banking services – cheque and account clearing, loans, ability to effect money transfers to other banks, etc – so arguably, E-MMTs cannot be classed as full banks.
“ One thing that is often overlooked is that E-MMTs do not increase financial inclusion in the commonly understood meaning of the term. They are simply electronic mobile cash-machines, limited to a network, that transfer substantial liquidity benefits to E-MMT owners and expose material risks to consumers and economies"
This is a circular argument which has been successfully deployed in recent years to stop any meaningful regulatory reform in this area. Many E-MMTs (and some governments) believe that regulations tend to impair the model’s service flexibility and reverse its successes in expanding financial inclusion to the world's poorest communities. One thing that is often overlooked is that E-MMTs do not increase financial inclusion in the commonly understood meaning of the term. They are simply electronic mobile cash-machines, limited to a network, that transfer substantial liquidity benefits to E-MMT owners and expose material risks to consumers and economies.
In my view, the question is not so much the medium used to effect the transfer of funds from A to B, as the responsibility for safeguarding the customer’s funds when things go wrong and maintaining economic stability. A regulator’s priority should be the duty of care to the millions of vulnerable customers whose livelihood may be put at risk by this business model.
The potentially immeasurable impact of an E-MMT failure
In developed economies, the concept of “Too Big to Fail” – (TBTF) refers to institutions that are so systemically important, their disorderly failure creates economic and social chaos (as seen in the 2007/2008 financial crisis). Many of these TBTF institutions enjoyed implied government guarantee (e.g. the potential for the government to step in if they get into trouble) which encouraged them to take on even more risks, thereby creating a vicious cycle. That is why there had been a concerted global push at making sure financial institutions are able to fail safely without leaving unacceptable social and economic havoc in their wake.
Indeed, E-MMTs present the equivalent, but clearly much worse, TBTF problem for poorer economies that are least able to withstand simultaneous economic and social upheavals. In a rough estimate, some providers facilitate more than two-third of the Gross Domestic Product of some countries in Africa, including Somalia. However, unlike developed economies, governments in many of these poor countries will not be in a position to intervene when there is a crisis, nor provide effective regulatory oversight to mitigate these risks. The likelihood of detriment to consumers, if things were to go wrong, is almost assured.
And here is the unsettling conclusion: in a region where someone’s life savings and that of entire families could be a few hard-earned U.S. Dollars in an E-MMT wallet, the consequences of losing their income at a stroke, without any recourse to a regulatory safety net, is surely too immeasurable a catastrophe to contemplate.
Possible Regulatory Options
The second part of my analysis summarises the “business model” circular debate which continues to paralyse all meaningful regulatory development efforts thus far and highlights how the risks are heavily weighed against the consumers and wider economy. The Paper also proposes a new model as a possible regulatory option.
You can download the full Analysis Paper from the link below:
https://docs.wixstatic.com/ugd/d80f13_13a6586f6d8d419792e8e7e5b03f87df.pdf
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