With more digital transactions being concluded, cash still dominates the scene. This reality illustrates the pressing need to find more ways to move towards a cash-light society. One such innovation is to encourage savings on mobile money accounts through the payment of interest.
FinScope data clearly indicates savings behaviour amongst the poor, either through informal savings groups, investing in jewellery or storing money in a safe place at home. For instance, the 2018 Myanmar FinScope results show that 34% of people save informally. However, the question remains – why do the poor prefer to save informally?
There could be a driving convenience factor to have your money instantly available, or it could be due to established social connections in informal savings groups. There are many possible considerations for drivers of informal savings, but the question we’d like to focus on - is interest on mobile money wallet balances key to promoting formal savings? Seems this question can be answered sooner than expected with an increasing number of countries within SADC allowing for the payment of interest on mobile money wallets. Financial sector regulators in countries such as Tanzania and Ghana are making headlines with news of their commitment to pay interest on mobile money wallets – and rightly so. Malawi and Lesotho are also going in the same positive direction.
FinMark Trust (FMT) strongly advocates for the payment of interest on mobile money given the significant impact such a practice can have on promoting formal savings.
How does it work?
In short, Mobile Money Service Providers (MMSP) are required to hold consumers’ money in a type of trust account, also referred to as an ‘escrow’ account. The trust account is a separate bank account, which accrues interest, just as any other bank account does. In 2014, the interest accrued on mobile money trust accounts held by Commercial Banks in Tanzania amounted to US$156 million. Accordingly, the interest paid out by the commercial bank on the trust account should be paid out to individual, qualifying consumers, net of any fees or charges.
The interest rate can be agreed upon between the commercial bank and MMSP, and each MMSP can determine the method of calculating and payment of interest to their consumers. Most regulators have prohibited this money from being paid back to mobile wallet holders, due to concerns of construing MMSP’s as deposit taking institutions, which may hold serious prudential implications. Instead, Central Banks have opted for utilising the money for activities such as consumer education, social corporate responsibility etc. However, the trend is slowly moving in the direction of paying accumulated interest from the trust account to the mobile money wallet holders as interest.
Changing behaviours and outcomes
By paying interest on mobile money balances, consumers are incentivised to keep money in their e-wallets for longer periods of time, rather than simply cashing-out their balances. The amount of interest accrued on their balances may be considered marginal by some, but for low-income consumers, this money can have a significant impact on their lives. Not only are consumers rewarded in this manner, but saving habits can also be encouraged. Ultimately, the goal would also be to encourage consumers to keep money in their e-wallets and transact using digital payments. The benefits of paying interest do not extend only to end-users, but to MMSPs and regulators as well. For MMSPs, if money is kept in mobile money accounts for extended periods of time, the administrative and liquidity management pressures can be notably eased. For regulators, with savings on mobile money accounts, and ultimately digital transactions, more money will remain visible and within the formal system, as opposed to the obscurity of cash. Accordingly, regulators are positioned to monitor more transactions and better fulfil their AML/CTF responsibilities.
Cash is king
The 2017 GSMA State of the Industry Report shows that cashing-in and cashing-out comprise the majority of mobile money transactions. 75.4% of incoming transactions are cash-in and 73.8% of outgoing transactions are cash-out. Although GSMA reports that these numbers have dropped since 2012 with more digital transactions being concluded, cash still dominates the scene.
This reality illustrates the pressing need to find more ways to move towards a cash-light society. One such innovation is to encourage savings on mobile money accounts through the payment of interest.
FMT’s initiatives
In 2016, FMT developed Mobile Money Guidelines (Guidelines) for the SADC region. A first for the region, the Guidelines aim to address any inconsistencies in the legal and regulatory frameworks for mobile money across the region. The Guidelines were approved by the Committee of Central Bank Governors and consequently afforded due recognition across the region. One of the important aspects addressed in the Guidelines is the payment of interest to mobile money consumers. In line with this, FMT has launched a project to develop a framework for the calculation and payment of interest on mobile money. FMT anticipates that this project will assist regulators to regulate the payment of interest, as well as assist MMSPs in their calculation and payment of interest. Ultimately, the project anticipates to promote financial inclusion through savings on mobile money.
FinScope Consumer Survey (2018). Should the interest accrued on the trust or escrow account be paid out to mobile money customers? https://www.gsma.com/mobilefordevelopment/programme/mobile-money/should-the-interest-accrued-on-the-trust-or-escrow-account-be-paid-out-to-mobile-money-customers/ (2014). Should the interest accrued on the trust or escrow account be paid out to mobile money customers? (2014). T Ehrbeck & M Tarazi, ‘Putting the Banking in Branchless Banking: Regulation and the Case for Interest-Bearing and Insured E-money Savings Accounts (2011) GSMA, State of the Industry Report on Mobile Money (2017).
For more information contact
Nikki Kettles Head of the SADC Financial Inclusion Programme Email: nikkik@finmark.org.za Tel: +27 (0) 11 315 9197