Branchless banking: services through mobile banking agent management companies - International Law Office

Services
Regulatory approval
Bank's obligations
Managers' conduct
Comment


The National Banking and Securities Commission has introduced a new concept – the mobile banking agent management company, also referred to simply as a 'manager'. It has amended the General Provisions for Credit Institutions, which defines the term as the holder of a telecommunications public network concession or permit granted by the Department of Communications and Transport under the Federal Telecommunications Law.

Services

Banks may provide a number of services through a network of banking agents under the control of a manager. The most important functions are opening, placement, assignment and distribution in relation to mobile bank accounts for the agent's customers, either as a low-risk mobile bank account or a low-transaction mobile bank account, based on real-time information provided by the agents. Bank of Mexico Ruling 1/2006 of January 27 2006 defines a 'mobile bank account' as an account which is registered as such by a bank and which is linked to a mobile phone line. The three types of mobile bank account are:

• an unlimited account, which is not subject to restrictions on deposit or withdrawal amounts;
• a low-risk account, which is subject to caps - set by the bank - on deposits and withdrawals; and
• a low-transaction account, which is available only to individuals whose transactions are limited to 2,000 investment units (approximately $700) a month.

The other services that may be offered are:

• the monitoring of mobile bank account identification numbers and folios;
• cash-out transactions or other disposals of money charged to a mobile bank account;
• cash-in transactions to a mobile bank account;
• fund transfers between mobile bank accounts and other types of account (including transfers between accounts held with other banks);
• the consultation of balance details and other transactions; and
• the processing and handling of distribution activities for low-risk and low-transaction accounts, as well as cash-in/cash-out transactions, fund transfers and consultation of balance details.

Regulatory approval

Banks wishing to offer such services must obtain Banking Commission approval. Their application should include a business plan which sets out:

• operating and administrative database processes and information systems to be used for the services;
• procedures for monitoring the manager's performance;
• procedures for reporting the manager's performance to the bank's board of directors, audit committee or chief executive officer (depending on the volume handled by each manager);
• certification by the bank's chief executive officer, audit committee and internal auditors, confirming compliance with the procedures adopted for the management, control and protection of the information created, received or transferred with respect to the services;
• procedures for detecting and evaluating potential adverse effects or liabilities arising from the services;
• standard forms of agency agreement to be entered into by the bank and each manager and between the manager and the agents;
• a detailed description of the procedures and systems involved in the services that the manager offers to the public.
• a detailed description of the electronic devices to be used to ensure the proper execution of bank transactions and to ensure security for customers and the general public;
• policies and procedures to be implemented by the bank to determine each manager and agent's eligibility to provide services;
• policies and procedures for the authentication and proper use of ID numbers and passwords by customers and for preventing misuse of such information by the manager and agents;
• the bank's policies on database management and internal controls for risk management, anti-money laundering and terrorism financing;
• profiles of the agents;
• a description of the various operational stages to be implemented by the manager; and
• criteria for determining restrictions on the amounts available for low-risk mobile bank accounts.

Bank's obligations

In addition, each bank must:

• enter into a deposit agreement with each manager, whereby the bank may extend a loan facility to the manager to create the deposit account - the account is used to support the services offered to the public and the balance will be reduced or increased on the basis of credit and debit activities;
• ensure that each manager advises customers that it is acting only in the name of the bank and on the latters' behalf;
• provide each manager with all information and documentation that the bank will use in its dealings with the customers;
• implement operating systems and procedures that allow for proper management of the services provided by the manager;
• isolate and clearly identify the respective activities conducted by the manager and the bank;
• implement procedures for customers to report the theft or loss of passwords;
• establish internal audit procedures for the management of numbers and folios of each mobile bank account; and
• certify (through the manager) that each mobile bank account matches the risk profile of the bank's customers.

Manager's conduct

Managers and agents may not:

• make the services offered by the bank conditional on the acquisition of other services or products;
• promote their own services on any electronic or hard-copy receipt provided to the bank's customers;
• provide services in any manner not agreed with the bank;
• delegate agency to a third party;
• charge extra fees to customers on their own account; or
• provide services in their own name.

Comment

The introduction of this new system has been welcomed as a good beginning for the regulation of branchless banking in Mexico. However, the system in itself is not enough, as it uses a bank-based model and only a minority of Mexicans have access to banking services. A bank-based model means that a manager always acts in the name and on behalf of the bank, which remains liable for the services provided by the manager.

During the first quarter of 2010, mobile phone traffic in Mexico increased by 17.7% compared with the same period in 2009. Mexico has 85.3 million active mobile phone accounts, which represents an increase of over 11% on 2009. However, compared with other countries in South America and Europe, Mexico has a relatively limited banking industry. In 2009 there were 10.4 bank branches, 31.6 automatic teller machines (ATMs) and 415 point of sale (POS) terminals for every 100,000 Mexican residents.(1)

Thus, the government has a good opportunity to regulate a new branchless banking model to allow people who do not have access to banking services, but have a mobile phone, to obtain bank services - which would be a significant step forward for the Mexican economy.

At present, only banks are allowed to obtain funds from the general public. The Banking Law provides that securing funds from the general public will occur when: (i) funds are solicited, or an offer is made to obtain funds, from unidentified individuals or companies or an offering is made through the mass media; or (ii) funds are obtained or solicited regularly or as business practice. An overhaul of Mexico's banking regulations will be needed to implement a non-bank-based model; however, the benefits of a complete overhaul will outweigh the risks involved.

For further information on this topic please contact Miguel Angel Peralta or Christian Dorantes Picazo at Basham Ringe y Correa SC by telephone (+52 55 5261 0474), fax (+52 55 5261 0557) or email (peralta@basham.com.mx or cdorantes@basham.com.mx).

Endnotes

(1) In contrast, Chile had 11.4 bank branches, 37.3 ATMs and 783 POS terminals, while Brazil had 9.7 bank branches, 78.6 ATMs and 716 POS terminals. This compares with 50.8 bank branches, 83.1 ATMs and 688 POS terminals in Germany and 101.4 bank branches, 135 ATMs and 3,012 POS terminals in Spain. (Statistics provided by the National Commission for the Protection of Financial Services Users.)