Mobile Banking and the Future of Transparency
by Noah Simpson
Mobile banking is defining modern microfinance. Within the space of a few short years it has exploded to become a hot-button issue in the microfinance community, especially because of its potential to reach the unbanked. CGAP’s Technology Blog has covered the emergence of branchless banking extensively, and several of its recent posts have been written on the topic. In view of mobile banking’s extensive influence, it seems fitting to reflect upon the benefits and challenges it holds for consumer protection in general and for transparency in particular.
On many levels, mobile banking is great for consumers. It is allowing many traditionally unbanked people to have remote access to banking services and puts some power in the hands of the consumer. Additionally, when middlemen are taken out of the picture there is less fraud and mishandling of money. Finally, and perhaps most importantly, mobile banking tends to be cheaper than traditional banking. Some barriers exist, such as obtaining a phone in the first place, but banking-capable phones are rapidly dropping in price (e.g. Vodafone’s new phone under $15US, featured in a Technology Blog post). Despite the barriers, the declining costs of mobile banking is allowing greater financial inclusion.
However, mobile banking also presents unique challenges for transparency and consumer protection. Regulation of this area is still in development, and the same issues of pricing transparency involved in traditional branch-based microfinance are prevalent in mobile banking. Though cheaper than traditional banking, questions have been raised about whether it is cheap enough for the poorest people in some cases (see a 2008 study and post by CGAP). Moreover, pricing on loans that are repaid using mobile banking can be just as incoherent as on any other loan, and can have additional service fees tacked on that make costs even more confusing. Pricing transparency is essential for this very reason. Regulation on transparency in mobile banking, while young, has already provided some interesting examples and topics for further research. So far focus has been put on price disclosure by agents and restrictions on fees, but as research continues there may be more areas that deserve attention. As with all regulation, it is important to find a balance between over- and under-regulating, and the exact manifestations of any regulation must be determined by the specific context.
An interesting part of the shift toward mobile banking is the new groups it brings into microfinance and the specific difficulties they pose. The Next Billion blog points out that these trends are shifting the future of banking into the hands of those involved in creating innovation in banking technology instead of Wall Street. Does this mean that new key players will be either more or less interested in consumer protection and transparency? Not necessarily, but it does change the tactics of those who promote these values. So far consumer protection and transparency have been discussed at length by banks and other financial institutions, as well as by regulatory agencies and interested third parties such as MFTransparency. The new influential groups of innovators must engage and be brought into the discussion of transparency in microfinance. Secondly, mobile banking is bringing a whole new group of previously unbanked people into the world of microfinance in ways that may be challenging for the sector as a whole. A presentation available from CGAP expresses concerns about “large numbers of first-timer, unsophisticated financial services users engaged in remote and indirect relationships.” Certainly large numbers of new consumers will provide opportunities for unsustainable and abusive lending practices. In light of these developments, pricing transparency and consumer protection become more important than ever.
A recent report by the CGAP on consumer protection policy in India, which focused on branchless banking, also provides valuable insights. The report reveals that mobile banking has both positive and negative implications for transparency, confirming what we have seen already, and provides specific examples and issues from the Indian market. It explains that “where portable devices are used, clients feel better placed to understand the banking requirements and feel secure about their transactions” (7). This sense of empowerment is important as it means clients are more likely to hold their banks accountable. However, the report also explains that “Many loan contracts are written as to provide scope for multiple interpretations” (24), leading to opaque pricing, and clients have trouble approaching agents or banks for explanations. Clearly transparency in pricing has much room for improvement.
The CGAP report also provides some examples of existing Indian regulation and further suggestions that are helpful for our discussion of transparency in mobile banking. The Reserve Bank of India (RBI) has issued guidelines on “pricing and dissemination of information to customers in a transparent manner on the basis of pricing and the effective interest rates charged. Banks are required to display on their Web sites and branch premises the schedule of charges for various services” (25). This mandate of transparency provides an interesting model for regulation and could be immensely valuable for consumers. In addition to explaining these practices, the report also suggests running financial literacy programs. These programs would be launched alongside the opening of new accounts for first-time users and could be run not only by banks but by the RBI and the Indian government—and by extension the reserve banks and governments of other nations (27,29,30).
Mobile banking continues to emerge as an important part of today’s microfinance industry, and as it becomes more widespread stakeholders must keep pace with the emerging technology in order to ensure transparency is fostered and maintained. Consumers are often empowered through use of mobile banking, but new clients especially can be lost in opaque pricing practices. We at MFTransparency are eager to see how mobile banking takes shape and we will continue to dialogue about issues of transparency and consumer protection in the ever-changing field of microfinance!