Peru leads the way to new approach for digital financial services to promote financial inclusion in Latin America
“Not since the invention of paper money has anything as important happened as the invention of payments with cellular phones. It’s extraordinarily powerful particularly in places where the geography is difficult. Bad roads and bad communications but the cell phone gets through. That’s massive.” – Daniel Schydlowsky, Superintendent of SBS Peru
Peru blazed new trails in Latin America in 2013 as the first country to have e-money legislation enacted by its parliament. Peruvian Congress issued Law No. 29985 in January 2013 with an intent to significantly enhance financial inclusion for unbanked citizens living in poverty and extreme poverty, most of whom are widely dispersed in rural villages and remote areas across the nation’s complex geography. This was also one of the important Maya Declaration commitments that the Superintendencia de Banca, Seguros y AFP (SBS) of Peru made in 2011.
The legislation allows both banks and non-banks to issue electronic money with the aim to govern the basic characteristics of e-money as a tool for financial inclusion. The broadening of financial service providers to include new non-bank e-money issuers was a milestone in the region since, like in many other parts of Latin America, the Peruvian regulator also faced opposition, mainly from the banking sector.
SBS Peru, an Alliance for Financial Inclusion (AFI) member institution, issued supplementary regulations last October 2013. The new regulations allowed e-money issuers to follow a simplified account opening process that is expected to facilitate remote account opening especially for rural and poor households. In developing the law and regulatory framework, Peru learned from the experiences of other countries, particularly Kenya and the Philippines, which demonstrated that e-money products could be effective in the promotion of financial inclusion.
Peru realized that an enabling environment for the development of sustainable and inclusive mobile financial services required a clear regulatory framework that did not inhibit innovation or competition in the market place. Some of the key aspects they reviewed in drafting the law and regulations included:
- A clear definition of e-money, which was drafted after careful consultation with the private sector;
- Supporting a market-driven approach for a greater competitive environment. This included the understanding that all types of e-money issuers needed to be allowed in the market place. In particular, the regulator realized that permitting the participation of mobile operators provided a greater potential to accelerate “the incorporation of the poor into an efficient payment service system, by providing them with convenient and affordable products”;
- A proportionate risk-based approach to e-money that effectively dealt with AML concerns while simultaneously promoting the objective of financial inclusion;
- Safeguarding account holders’ funds by requiring all e-money issuers to hold the equivalent to the total value of the customer funds in a trust account;
- A flexible and simplified approach to consumer protection rules applicable to e-money accounts, which avoids placing unnecessary burdens on e-money providers.
The new package of regulation also enables banks and non-banks to create their own network of agents or use an existent network from another competitor or a bank, therefore permitting shared agent networks to be set up.
A key lesson from the Peruvian experience is the importance of coordination between agencies when regulating e-money. SBS took a leading and proactive role by fostering a regulatory dialogue among governmental agencies which included close coordination with the Ministry of Economy and Finance, the telecommunications agency, the Central Reserve Bank of Peru, and the Ministry of Development and Social Inclusion (MIDIS). The cooperation among agencies shaped e-money legislation and demonstrated that inter-agency collaboration is able to produce a well-rounded outcome to achieve important goals including e-money’s role to support financial inclusion.
The private sector has so far responded favorably with announcements during the recent GSMA Mobile Money Summit in New York that Peru is an example of a country with the right market conditions, the right size population, and the right regulations.
Now the ball is in the court of the private sector to take up the opportunity to demonstrate the full potential of e-money, not only in Peru, but as an example for the rest of Latin America.
Klaus Prochaska is a Senior Policy Analyst and Knowledge Manager at the Alliance for Financial Inclusion.