West African Economic and Monetary Union: Selected Issues

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Abstract

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Mobile Payments in the Waemu1

With relatively high mobile phone penetration and a large market for cross-border payments in the WAEMU, the expansion of mobile payment services offers a significant opportunity to increase the region’s financial inclusion. This note first benchmarks the stance of mobile payments in the WAEMU to countries, such as Kenya and Tanzania. It highlights transaction costs, issues of network interoperability, and legal and regulatory barriers as possible constraints to the market’s development in the WAEMU. An overview of oversight issues on mobile payments provides the key pillars necessary to safeguard stability: minimum market entry requirements, financial integrity controls, funds safeguards, and payment stability.

A. Introduction

1. As conventional financial infrastructure is still limited, but mobile phone penetration is high, mobile payments could boost financial inclusion in the WAEMU (Figure 1). Financial access in the WAEMU remains low: only about 13 percent of the population has deposits at a commercial bank, less than one third of firms access credit, and payment methods, such as checks, the use of credit and debit cards, and electronic payments in general are much less developed relative to benchmark countries (preceding note). However, while direct contact with financial infrastructure remains low, in particular for the most vulnerable parts of the populations, mobile phone penetration has increased rapidly in the WAEMU over the last decade. In some WAEMU countries, it even exceeds mobile phone penetration in countries which have pioneered mobile payments, such as Kenya and Tanzania. The development of mobile financial services could thus serve as a means to increase financial inclusiveness.

Figure 1.
Figure 1.

WAEMU: The WAEMU’s Market for Mobile Payments

Citation: IMF Staff Country Reports 2015, 101; 10.5089/9781475567595.002.A004

2. The market for mobile payments in the WAEMU appears large, in particular for cross-border payments, and has increasingly attracted operators in the last few years (Figure 2). In addition to a large unbanked population, the magnitude of remittances in the region suggests a substantial market for cross-border mobile payments. Providers appear to have responded to the large demand in the region, as the number of mobile payment operators has more than doubled since 2010, with most of the providers now operating in Côte d’Ivoire and Senegal.

Figure 2.
Figure 2.

WAEMU: Provider if Mobile Payments in the WAEMU

Citation: IMF Staff Country Reports 2015, 101; 10.5089/9781475567595.002.A004

3. A series of initiatives have been taken by the BCEAO to promote the mobile payment sector in the last decade. In order to promote the use of non-cash payment instruments, the BCEAO has enacted an e-money law in 2006 requiring financial institutions to make full use of electronic money. In 2012, to unlock the mobile money market, it embarked on an extensive assessment process: (i) visiting other countries in which mobile payment services are more successful, such as Kenya and the Philippines to draw lessons from their approaches; (ii) hosting a regional consultation conference to explore how to develop further mobile money across WAEMU, such as streamlining the licensing process, avoiding increases in minimum capital requirements, allowing greater simplification of account openings, and developing financial education programs for the wider public; and (iii) undertaking a study to gain a more informed understanding of how citizens use formal, semi-formal and informal financial services.

4. The volume of mobile payments has grown recently but remains lower than in benchmark countries, especially for the most vulnerable parts of the population. Mobile payments have expanded rapidly over the last years: In the period between December 2013 and September 2014, the number of existing accounts has increased by 35 percent to 17 million. In the same period, the number of transactions has increased by more than 40 percent to almost 179 million and a transaction value of 2,445 billion FCFA (about 5 percent of 2014 GDP). However, the usage of informal channels of cash based money transfers remains dominant, and the provision of mobile financial services has been far lower than in benchmark countries, such as Tanzania and Kenya. Latest available indicators suggest that mobile payments have been less accessed by the more vulnerable parts of the population, such as the bottom 40 percent of the income population, the population living in rural areas, or females (Figure 3).

Figure 3.
Figure 3.

WAEMU: Mobile Banking Across Demographical Groups, 2011

Citation: IMF Staff Country Reports 2015, 101; 10.5089/9781475567595.002.A004

5. This note. First, the note points to possible impediments to mobile payments in the region. It then highlights the essential pillars to safeguard stability in the mobile payments sector.

B. Possible Impediments to Mobile Payments in the WAEMU

6. The following factors may be impeding the development of the mobile payments sector in the WAEMU:

  • Cost (Figure 5). The relatively high cost of using electronic payment services, especially for smaller transaction, appears to make mobile payment services unattractive for the population at the lower end of the income distribution. In particular, Figure 4 highlights for selected operators in the WAEMU, that the cost of making an in-network transfer are particularly high relative to the transaction amount for smaller transaction (up to 10 USD). These costs may be related to the high cost incurred by mobile service providers investing in networks and access points.

  • Intermediation (Figure 4). The current regulatory framework for providing payment services in WAEMU requires some form of intermediation by banks. This may be limiting the room for innovation and making it difficult for new players to compete with banks. It may also be contributing to the increasing costs of mobile payment services due to the fees associated with bank intermediation. In contrast, Kenya and other countries which have witnessed a rapid growth in use of mobile payment services have adopted nonbank-led models. These countries have also been partnering up with an on average larger group of banks and remittance partners.

  • Number of services and interoperability (Figure 6). Most providers in the WAEMU offer basic transfer and bill payment services. Other services such as international remittances, a link to other banking products, mobile micro-insurance and loan disbursements and payments, however, are still less developed than in benchmark countries. While the potential for cross-border transaction is high, it not explored by most providers. Such services would require interoperability among different service networks, a feature which appears to be still relatively weak in the WAEMU, inter alia owing to regulatory constraints. For example, payment system providers are licensed on a national basis, making it difficult to expand into other WAEMU countries. Newer services, such as mobile loan disbursements and micro-insurance are not yet developed in the WAEMU.

Figure 4.
Figure 4.

WAEMU: Number of Bank and Remittance Partners

(Abflute NLimber Country, 2014)

Citation: IMF Staff Country Reports 2015, 101; 10.5089/9781475567595.002.A004

Sources: GSMA (2014), MMU Deployment Tracker.
Figure 5.
Figure 5.

WAEMU: Transaction Cost for Selected Providers

(In Network Transfer, Cost Calculated on Upper-Bound Amounts of Transaction Grid)

Citation: IMF Staff Country Reports 2015, 101; 10.5089/9781475567595.002.A004

Source: Companies’ Websites.
Figure 6.
Figure 6.

WAEMU: Mobile Service Provided in the WAEMU, Kenya and Tanzania

Citation: IMF Staff Country Reports 2015, 101; 10.5089/9781475567595.002.A004

Source: GSMA 2014), MMU Deployment Tracker.

WAEMU: Kenya’s M-PESA Experience (based on IMF, 2012)

The fast spread of M-Pesa after its introduction in Kenya in 2007 has helped reduce transaction cost, facilitated personal transaction, and contributed to the use of services of financial intermediaries. Based on IMF (2012), this box summarizes the main determinants of M-Pesa’s success as well as risk management issues.

Determinants of M-Pesa’s success. While a rapid expansion in the use of mobile phones has contributed to the success of the developments of the sector, the following structural factors have likely made it possible:

  • Inexpensive and flexible use of technology. Safaricom’s widespread presence brought with it a large network of airtime resellers which became M-Pesa agents. Based on physical locations, agents are organized into groups with or without a centralized aggregator, such as a bank.

  • Macroeconomic environment. Unusually large excess reserves held by commercial banks at the central bank led to the search for alternative lines of business.

  • Banking infrastructure. The increasing availability of bank branches favored mobile-based transfers.

  • Government policies. The Central Bank of Kenya (CBK) allowed Safaricom to operate M-Pesa as a parallel payments system, requiring only that customers’ funds be deposited in a regulated financial institution, while Safaricom deposits and earned interest are placed in a non-profit trust account. The CBK also introduced limits on transaction sizes to mitigate money laundering risks.

Risk management issues. Advice for risk-prevention for M-Pesa by the Fund and actions taken included:

  • A formalization of M-Pesa operations in the National Payments Systems Bill to provide a legal basis for M-Pesa operations and ensure customer protection, even if not linked to a deposit account.

  • Coverage of operational risks through regulations addressing in detail the technological capabilities and control processes to ensure security.

  • Explicit incorporation of credit, liquidity and operational risks associated with M-Pesa transfers for microfinance institutions as well as consumer protection.

  • Close monitoring of risks related to cross-border mobile payments.

C. Oversight Issues in Mobile Payments

7. Mobile payment services promote financial inclusion, but they carry a number of risks which may be mitigated by an oversight framework with the following components:

  • Minimum entry requirement into the sector. Entry requirements, such as minimum capital requirements for non-bank mobile service providers, will help reduce the risk of failure because operators will have to demonstrate that they have the financial capacity to supply mobile payment services. Such protection is particularly important given that mobile payment services are mostly addressed to the most vulnerable parts of the population.

  • Financial integrity controls. Mobile payments may increase the complexity of payments and give rise to money laundering and financing of terrorism risks. Therefore, these services should be subject to adequate anti-money laundering/combating terrorism financing (AML/CFT) risk-based supervision by the WAEMU Banking Commission. Their providers should effectively implement AML/CFT preventive measures and report suspicious transactions to financial intelligence units.

  • Fund safeguarding. As mobile payment services address mostly people at the lower end of the income distribution, they should include some form of guarantee or insurance to cover funds in case of failure of the mobile financial service provider. Such guarantee can be in the form of coverage by insurance companies or the inclusion of these services within the scope of deposit insurance schemes applicable in some countries.

  • Operational resiliency. Mobile payment services may run substantial operational risk, particularly when functioning under poor or limited infrastructure. Therefore, mobile payment providers’ business continuity plans should be regularly tested for viability and effectiveness.

  • Payment system stability. The high number of transactions connected with mobile payments may create settlement risk which might translate into both liquidity and credit risks potentially affecting financial stability. Therefore, mobile payment services, particularly those performed by non-banks, should be subject to a very robust clearance and settlement system leveraging on the system used for bank transactions.

D. Main Conclusions

8. Subject to a strong oversight framework, the development of mobile financial services in the WAEMU should be promoted further. Mobile payment services have been picking up in WAEMU, but there is potential for a further expansion. Policies should be targeted at reducing cost, in particular for small transaction amounts. Policies which favor the expansion of interoperability between networks could further open the market for cross-border payments. To safeguard stability, such development of mobile payment services should go hand in hand with measures to strengthen the oversight framework.

References

  • African Development Bank Group, 2013, “Financial Inclusion and Integration through Mobile Payments and Transfer”.

  • Musuku, T.B., M. C. Malaguti, A. McEwan Mason, and C. Pereira, 2011, “Lowering the Cost of Payments and Money Transfers in UEMOA,Africa trade policy notes (23), Washington, DC: World Bank.

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  • Groupe Speciale Mobile Association, 2014, “State of the Industry 2013: Mobile Financial Services for the Unbanked,GSM Association.

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  • IMF, 2012, “Enhancing Financial Sector Surveillance in Low Income Countries (LICs) – Case Studies,Supplement to IMF Policy Paper, Washington, DC.

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  • Khiaonarong, Tanai, 2014, “Oversight Issues in Mobile Payments,IMF Working Paper WP/14/123.

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Prepared by Rachid Awad and Monique Newiak.

West African Economic and Monetary Union: Selected Issues
Author: International Monetary Fund. African Dept.
  • View in gallery

    WAEMU: The WAEMU’s Market for Mobile Payments

  • View in gallery

    WAEMU: Provider if Mobile Payments in the WAEMU

  • View in gallery

    WAEMU: Mobile Banking Across Demographical Groups, 2011

  • View in gallery

    WAEMU: Number of Bank and Remittance Partners

    (Abflute NLimber Country, 2014)

  • View in gallery

    WAEMU: Transaction Cost for Selected Providers

    (In Network Transfer, Cost Calculated on Upper-Bound Amounts of Transaction Grid)

  • View in gallery

    WAEMU: Mobile Service Provided in the WAEMU, Kenya and Tanzania