63811 Lowering the Cost of Payments and Money Africa Trade Policy Notes Transfers in UEMOA Note #23 Thilasoni Benjamin Musuku, Maria Chiara Malaguti, Andrew McEwen Mason, and Ceu Pereira* July, 2011 Lowering cross-border transaction costs in any There are new players seeking to enter the monetary block or trade corridor is an payment services market in UEMOA. This is important step in encouraging greater trade considered a healthy indicator of the and enhanced use of formal financial services. opportunities that exist for competitive (and The eight UEMOA countries use a common competing) transactional products and services currency, the CFA Franc (FCFA). The currency is to overcome some of the inefficiencies and controlled and issued by the region’s central product gaps that still exist. However, given the bank, BCEAO. Additionally, UEMOA has a new players, underlying money transfer costs common modern payments infrastructure, for final users have not decreased to the extent which ought to facilitate widespread access to expected. basic transactional payment instruments and transmission circuits. Recent technological developments such as mobile payments provide the context for the Achieving scale in financial services is generally analysis provided in this note. Technology acknowledged as being important to promoting opens up opportunities to increase the reach of financial sector development in Africa, to lower financial services, expand the scale of the cost of financial services, increase operations and reduce costs, thereby enabling competition and innovation and increase usage of existing infrastructure to greater access. According to information provided by potential. BCEAO, despite the region’s high-quality electronic payment system infrastructure that This policy note had two principal objectives: can facilitate access to basic services less than The first is to identify opportunities for and 10 percent of the UEMOA population has a barriers to reducing the cost of money transfers bank account. between and within UEMOA member countries. 1 The second objective is to identify means of “bancarisation� and the use of non-cash further extending the reach of modern payment payment instruments. The seminar was services and promoting access to basic attended by a cross section of financial sector transactional services to a much broader cross stakeholders and produced a set of action plans section of the population than the current user for BCEAO, banks, the bankers’ association, the base. banking commission and the UEMOA governments. The Current Payments Landscape As a result, the government of Senegal, in The BCEAO Regional Payment system Project partnership with Ecobank, has launched a produced high-quality basic infrastructure to program to encourage university students to deal with both wholesale and retail payments. open bank accounts with associated bank cards. With the Système de Transfert Automatisé et The government then pays student allowances de Réglement1 (STAR), Système Interbancaire into these accounts, and students can use their de Compensation Automatisé2 (SICA) and cards to make payments and cash withdrawals Groupement Interbancaire Monétique3 (GIM), at Ecobank branches and ATMs on university UEMOA countries have a world-class clearing campuses. Also, GIM-UEMOA, the interbank and settlement infrastructure. However, the card switching and clearing service, is actively infrastructure remains markedly underused and working to widen its membership to include the usage costs, although lower than before, broadest possible range of operators, including remain very high. As a result, there is room for mobile telephone payment operators. concerted efforts by all market players to focus on both reducing costs and improving access It is unclear to what extent these actions have and usage. resulted in measurable increases in “bancarisation�. This problem is complex and Overall, the payments landscape of UEMOA may well need to be addressed through a more exhibits several distinct characteristics and holistic approach. trends as follows: (ii) Cash is by far the dominant payment (i) Shallow penetration of formal channels and instrument used in UEMOA: As previously services: There is a well-established formal noted, only some 10 percent of the population banking sector, but it serves a very small has bank accounts, which means that 90 percentage of the population. Most of the percent or more of the population have no population remains “unbanked� and reliant on access to basic transactional instruments such cash. This is well recognized by BCEAO and as electronic credits and debits, EFTPOS or even measures are being taken to address this issue. checks. Remedies for this situation are rapidly For example, in August 2007, BCEAO hosted a emerging as a result of innovative electronic seminar to consider how to promote payment instruments and circuits that do not require users to have a bank account. However, 1 Automated Transfer and Settlement System. these new services are still at an early stage of 2 Automated Interbank Clearing System. introduction and have as yet not achieved a critical mass. Cash therefore remains king. 3 Interbank Payment Card Group. 2 Checks account for the great majority of all non- customer base, rather than considering the cash payments. According to data provided by potential for growing the overall user base to BCEAO, in 2008 interbank checks accounted for encompass the entire population of UEMOA. 86 percent of SICA-UEMOA transactions by There is an opening here for collaboration volume and 87 percent by value. rather than competition when it comes to provision of basic payment system services. (iii) New players and services hold great promise: The established “duopoly� of (iv) Important role of remittances: commercial banks and international money Traditionally, there have been strong inward transfer operators (MTOs) is being increasingly remittance flows from diaspora communities in challenged by a range of new entrants into the European countries such as France and Italy, payment services market, most of them and from the United States. These have been indigenous. These new entrants are seeking to serviced primarily by well-established exploit a variety of opportunities to offer international (foreign-owned) MTOs, which payments and money transfer services, often have exclusive agency relationships with generally using modern technologies such as banks in recipient countries. The flows have mobile phones and cards. therefore traditionally been from developed economies to less-developed UEMOA A common thread among these services is the economies (from north to south). goal of operators to reduce the cost of transferring money and thus enhance inclusion In the last few years, these payment flows have to those who cannot afford bank accounts. For been supplemented by increasing flows within example, although all of these service providers the region (between east and west). These have contractual arrangements with licensed flows are driven by labor migration between banks where they hold funds as required under UEMOA countries. To a large extent, they rely BCEAO regulations, they do not require the on people physically carrying cash between customer to have a bank account. Although countries, but new entrants to the payments there is still considerable scope for further cost scene are offering intra-regional money transfer reductions, their services are predicated on low services with some success. For example, the fees as well as speed and convenience. indigenous MTO Money Express is seeing Nonetheless, there is little interoperability increasing volumes of transfers between between these newer payment systems and UEMOA countries.4 Some commercial banks are services, and few currently use existing BCEAO also starting to focus on intra-regional infrastructure. transfers.5 While most of the new market players that Within UEMOA, all MTOs are required to participated in this study spoke enthusiastically operate through agency agreements with other about the number of new customers they had financial institutions such as banks or Poste attracted, in terms of absolute numbers, they Finances. Most banks and other financial are barely scratching the surface. There is a lack 4 of vision on the part both established and new Source: discussion with Poste Finances, Togo, June 2010. service providers. They appear to see the 5 Source: discussion with Financial Bank, Togo, June 2010. market only in terms of their own small 3 institutions offer money transfer services from some financial institutions to carve out market only a few MTOs. This may be convenient for share at the expense of interoperability and the banks, and is claimed by some banks as growing the overall market. This is a major being less confusing for customers, but also impediment to the development of the overall probably has the effect of keeping the cost of UEMOA payments system. transfers higher than it would be if there was more rigorous competition. In order to encourage as many operators as possible to join GIM-UEMOA, it may be useful (v) Many different institutions issue payment to examine the procedures and costs of cards: GIM-UEMOA members also have the becoming a member, to ensure that these option of installing and operating their own factors do not act as a deterrent to smaller card terminal networks or participating in GIM- operators. A tiered membership structure could UEMOA’s own network. Members of GIM- help improve the situation, with smaller card UEMOA issue their own debit cards, but have operators connecting to GIM-UEMOA via the the option of co-branding them with the GIM- networks of full GIM-UEMOA members. UEMOA logo. According to data provided by GIM-UEMOA, approximately one million GIM- (vi) Mobile payments are becoming popular: A UEMOA branded debit cards have been issued recent trend in UEMOA is the emergence of to date. non-bank players in the market that have identified a variety of opportunities to offer In addition to GIM-UEMOA–branded cards, payments and money transfer services, typically many banks also issue their own cards, which using modern technologies such as mobile can typically only be used at their own outlets. phones or cards to access services. Although These include both debit and prepaid cards. those providing such services have contractual Other non-bank financial institutions (NBFIs) are arrangements with licensed banks for holding also starting to issue their own cards, based on funds (as required under BCEAO Regulations) funds held in a bank with which the NBFI in they do not require the customer to have a question has an agreement. bank account. Several factors limit the growth in usage of Most of the new mobile telephone-based these cards. For instance, having a GIM bank services appear to be single country-based, at card presupposes that the card holder has a least initially. This may be due to the fact that bank account. Accordingly, the low level of each country has its own telecommunications “bancarisation� in UEMOA member countries is licensing and regulatory regime, and also the a key factor limiting the use of card products. fact that any financial service is required to be With fewer than 1,000 ATMs and 2,000 EFTPOS separately licensed by BCEAO for each country terminals, there is little incentive for consumers in which it is offered. Nevertheless, MNOs are to acquire a card. The cost of acquiring and planning to offer mobile payment services using a GIM card is high relative to most progressively across the UEMOA region. While consumers’ financial resources. Not all bank- these will be stand-alone operations at first, in issued cards carry the GIM-UEMOA logo, so the longer term they may be interconnected. they can only be used at the issuing institution’s outlets. This appears to reflect the desire of 4 Given the great variety, innovation and energy compared to checks, the use of which far of the newer entrants into the payments outweighs that of all other payment market, there may appear to be little need for instruments. Indeed, the Directive does not BCEAO to take specific measures to encourage make reference to more innovative channels or new players or services. However, most of the electronic instruments based on mobile players are motivated to expand market share telephones or prepaid cards offered by non- for themselves, rather than growing the overall bank financial institutions. market. Thus there is a public policy agenda here that BCEAO needs to address as part of its Lower use of cash as a consequence of Directive payment systems oversight function. No. 8/2002/CM/UEMOA, would actually result in a move from one inefficient and costly paper- The Legal framework Applicable to Payment based instrument to another. Using checks is Services slightly more efficient but does not signify a major adoption of “modern payment In recent years, new technologies have changed instruments and procedures�.6 the landscape in the payments industry. Technology has fostered new entrants into the Moreover, the coverage provided by the legal payments market, allowing non-financial framework as regard new players, such as non- institutions to offer new services that in some bank payment service providers, is still unclear. circumstances do not require opening a bank Despite the existence of the e-money account. This in turn has highlighted the need instruction, most players still cannot provide for legal reforms designed to ensure a level services without bank intermediation. This is playing field between established operators and the result of potential inconsistencies between new entrants. (i) the Banking Law, which builds regulation of payment services and systems around banking The legal and regulatory framework applicable activities; (ii) Regulation No. 15, which leaves to payment systems and services should open the possibility for other entities to issue contribute to bringing the highest level of and manage payment instruments but links safety, efficiency, cost effectiveness, fairness payment services to a bank account; and (iii) and convenience to the maximum number of BCEAO Instruction No. 1, which regulates e- businesses and individuals. Although new money but is meant to implement Regulation pieces of legislation, such as the e-money No. 15 and cannot exceed its scope of instruction, have been introduced in UEMOA in mandating only bank-based models. recent years, most provisions in the existing framework relate to the banking sector and One typical concern about extending operation paper-based instruments. of payment services to non-financial institutions is the risk that anti-money laundering and anti- Directive 08/CM/2002/UEMOA introduced a terrorism measures would become more number of provisions to discourage the use of difficult to apply. In the case of UEMOA, cash and to promote the use of bank-based payment channels. Although these instruments 6 also include electronic transfers and direct BCEAO. 2007. “The new payment systems in the West debits, they are not given specific preference African Economic and Monetary Union (WAEMU)�. 5 Directive No. 7/2002/CM/UEMOA of September this is a chicken-and-egg situation: fees can only 19, 2002 on money laundering has been come down with very high transaction volumes adopted and there is a harmonization law to that can only be attained when the fees are cover ant—money laundering. A consistent low. policy covering all payment service providers can be calibrated on a risk-based basis to the Availability of electronic terminals needs of a given type of service. The deployment of ATMs and EFTPOS terminals What Factors are Limiting UEMOA money is seriously inadequate whether measured in relation to the size of the population, transfers? geographical extent of the UEMOA countries or The payments infrastructure in UEMOA is even the number of bank accounts. This world-class in terms of functionality and severely limits take-up of card-based payments. capability. It should be facilitating broad-based access to basic transactional services, whether There is also no fundamental reason why the by individuals or businesses at low cost. Below use of ATMs and EFTPOS terminals should be are some of the challenges to be overcome to confined to holders of bank-issued cards. increase usage of the system beyond a very Institutions other than banks could be encouraged to issue cards usable in ATMs and small fraction of potential users: EFTPOS terminals, without being tied to specific Cost banks. This could provide an expanded role for GIM-UEOMA, particularly if it develops into the The implementation and deployment of switch for all payment services, not just bank- electronic services requires providers to make operated systems. significant investments in networks and access points, and over the life of the system providers Interoperability must be able to recoup this investment. As a result, the cost of using electronic payment Another key factor for rapid and widespread services is still very high and thus out of reach uptake of electronic payment circuits is of the majority of the population, even though interoperability. If electronic payment services some of the new services (such as mobile are to be adopted more broadly, cards or payment services) are available at appreciably mobile phones must be usable not only with lower cost than the more well-established their own systems or mobile networks but also services (such as those provided via GIM- with other systems not covered by the “parent� UEMOA). system. Service providers may need to consider how Card-based payment services in UEMOA do best they can attract a much larger user base, exhibit a great degree of interoperability due to perhaps by forgoing a higher level of the existence of the GIM-UEMOA card switching profitability in the short term in the interests of and clearing system. The picture is less building the market overall. If non-cash encouraging for emerging mobile phone-based payment services are to achieve critical mass, payment services, which in general are not costs must come down. But to a certain degree interoperable. Some mobile operators claim that interoperability of “mobile money� is 6 prohibited under the rules of the other countries, because it must comply with telecommunications regulators, although local regulations and be licensed separately in interoperability is clearly encouraged for voice each country. This represents a significant and SMS services.7 Mobile payment operators administrative burden that can make it may be reluctant to contemplate unattractive to offer a service across the entire interoperability for a variety of reasons UEMOA sub-region. There is clearly a need – including need to protect their market share. and opportunity – for the introduction of a The complexity of devising appropriate system of mutual recognition whereby a service agreements and commercial arrangements, for sanctioned by one country can be “cross- example for charging and/or revenue-sharing, licensed� in other countries - similar to the EU may also hinder the development of suitable passport system model for service providers. arrangements among mobile operators and inter-bank switching services.8 Policy Suggestions for the Way Forward The overall lack of interoperability is a A number of private sector players have significant brake on the development of introduced or are in the process of introducing emergent electronic payment services, new products and services based on innovative particularly cross-border mobile payment uses of modern technology. This demonstrates services where UEMOA has potential given a significant dynamism in the market. However, common currency and single overseer for the introduction of new products and services is payment systems. having a limited impact in driving overall transaction costs lower or encouraging greater Legal and regulatory barriers financial access. One important reason for this is the lack of interoperability of new products The assumption that the provision of payment and services leading to market fragmentation. services requires some form of intermediation Combined with the difficulty of establishing by banks entails that the current legal cross-border extension of payment services, framework does not fully foster innovation or this reduces the scope for reaping economies of promote a level playing field, This not only scale and thereby the growth of the overall makes it difficult for new players to compete payments market. To make progress on these with banks, but also lessens pressures to reduce issues the next critical step is: costs. With regard to MTOs, although exclusivity agreements are prohibited by Develop a UEMOA payments system strategy: BCEAO, requiring bank intermediation results in National payments systems in UEOMA are payment of commissions that are inevitably developing rapidly and they are much more passed on to users. complex today than just a few years ago. Addressing payments system complexity and It is also difficult for a payment service provider issues associated with terminal availability and based in one UEMOA country to expand into interoperability requires a much greater degree of oversight of the payment system by the 7 Source: discussion with Sonatel 13 April 2010. central bank than is currently exercised. At 8 present, there are only three professional staff Source: ibid. in the oversight unit at BCEAO. 7 BCEAO should to take the lead in developing a customers and in the interest of the overall comprehensive UEMOA-wide payment system market. strategy, building on the clear success of the 2000-2007 BCEAO Payment System Project. Encourage (or require) all card payment There is growing fragmentation, high cost, low (monétique) service providers to join GIM- usage of existing infrastructure and foundations UEMOA. of the legal and regulatory framework requires Ensure there are pressures on payment updating. service providers to reduce fees on an As the central bank of UEMOA, BCEAO is ideally ongoing basis. placed to bring together all stakeholders Make it easier for financial and throughout the Union to develop a holistic payment services to be cross-licensed strategic plan focusing on improving financial or recognized in multiple member access and ensuring broad acceptance of states, and thereby stimulate cross- electronic payment products. border payments. Encourage rapid and broad-based The successful articulation and execution of a deployment of interoperable “end- holistic payments strategy would provide point� merchant devices where governments of UEMOA member countries, electronic payments can be accepted. international development agencies and other These devices should include mobile partners with a strong strategic platform on phones in addition to EFTPOS terminals. which to provide further support for improving Ensure that services are introduced in the payments landscape. an orderly and safe manner, observing strong consumer protection. Within this strategy it will be necessary to address the following: Interoperability of payment systems and services: The interoperability between payment Develop BCEAO oversight of payment systems: systems in UEMOA needs to be accompanied by The UEMOA payments system is developing agreements by private sector participants on rapidly in a number of areas. While this is a sign keeping fees among networks to a minimum of a healthy market, it reinforces the need for otherwise the increase in volumes may not BCEAO to strengthen its oversight capability. materialize. There are several measures that This will lessen barriers to market can be taken: developments and ensure that developments benefit the entire community and economy at Ensure that legal and regulatory the highest levels of safety, risk mitigation and barriers to interoperability are consumer protection. In particular, the exercise removed. of effective oversight should: Work closely with telecommunications regulators in all UEMOA countries to Encourage all players to work together towards ensure that regulations are consistent achieving the greatest possible level of systems and do not inhibit interoperability. interoperability in the interest both of their Develop and implement ways of massively increasing transaction 8 volumes through GIM-UEMOA. GIM- UEMOA is woefully underused system, which leads to inefficiencies and high cost structures. Using the payments system strategy, BCEAO should engage all market players in meaningful and ongoing consultation to encourage interoperability, including taking advice on limiting factors and ways to overcome them. *About the Authors Thilasoni Benjamin Musuku and Andrew McEwen Mason are consultants in the Africa finance and private sector development unit. Ceu Pereira is a payments systems specialist and Maria Chiara Malaguti is a consultant in the Financial Infrastructure unit. This note is an abridged version of the report on “Lowering the Cost of Payment and Money Transfers in UEMOA� prepared under general guidance of Michael Fuchs. This work is funded by the Multi- Donor Trust Fund for Trade and Development supported by the governments of the United Kingdom, Finland, Sweden and Norway. The views expressed in this paper reflect solely those of the authors and not necessarily the views of the funders, the World Bank Group or its Executive Directors. 9