Unique CFSP Workshop: What Might the Rise of Mobile Banking in Developing Countries Mean for Payment System Design?

June 9, 2011

CFSP Faculty Director Robert M. Townsend and M-PESA expert and CFSP Member Tavneet Suri organized a unique workshop at MIT last month titled “The Optimal Design of Payment Systems.” The workshop began examining the potential implications of the rise of mobile banking on monetary policy and payment systems. The workshop raised new questions and revealed many policy and practical take-aways.

“As we have seen in Kenya with (mobile banking giant) M-PESA,” noted Townsend in his opening remarks, “Cellphones have literally taken over the country and piggybacking on cellphones is a payments system. As you consider these systems, the questions that arise are not only about how they work, but also whether they could be improved. It raises issues that are common to payment systems historically in the United States, which is why we have this wonderfully diverse group here together.”

The workshop, which was the first of an ongoing series and represents one of CFSP’s three workshop efforts to advance knowledge in important sub-fields of development economics and poverty, featured presentations by six experts:

• Warren Weber of the Federal Reserve Bank of Minneapolis, who also helped organize the conference, presented on Clearing Houses;

• Will Roberds of the Federal Reserve Bank of Atlanta presented on Gross and Net Settlement Systems;

• Cyril Monnet of the Federal Reserve Bank of Philadelphia presented on Counterparties;

• David Mills of the Federal Reserve’s Division of Reserve Bank Operations and Payment Systems presented on Regulation and Policy;

• Fernando Alvarez of the University of Chicago presented on Transactions and the Demand for Cash;

• A paper by Pierre-Olivier Weill of the University of California-Los Angeles on Liquidity and Capacity Restraints was presented in his absence;

• Tavneet Suri of Massachusetts Institute of Technology presented her findings on the operation and growth of M-PESA.

Discussion followed each of the presentations, and participants uncovered policy and practical take-aways.  Key insights and questions included:

• As mobile money scales up in Kenya and other developing countries, one can imagine systems where there are multiple telcos providing mobile money services, but their various forms of e-money cannot be easily traded across telcos. This raises a set of issues about whether this should be encouraged and/or regulated, whether someone should provide trading and/or clearing, and, if so, should this be a private or public venture?

• Who plays a role (or should play a role) in the management of money in a system that starts to have a circulation of private money? Does or should the central bank also manage and regulate the supply and intervene when needed?

• Determining whether a system will use net or gross settlement may have significant implications for efficiency as net settlement is viewed as having large efficiency gains over gross settlement. If developing economies want gross settlement, then there may need to be expectations for the government during gridlocks. Gross settlement is very liquidity intensive. Yet, net settlement works better when there are a few large banks or a club setting (with a lot of trust), but if you want more open access, then history seems to suggest they should use gross settlement.  These raised questions about whether there might be ways of improving the agent networks used by mobile banking companies in order to gain efficiency.

• What is the optimal role of the telco (or private company that deals with mobile money)? For example, should the telco be allowed to issue e-money? Should the e-money all be backed 100%? Should it be like the Philippines where the cash backing the e-money is held at the central bank? Should the telco be allowed to issue e-money without it being backed by cash?

CFSP’s Optimal Design of Payments Workshop is expected to continue its work on answering these important questions through further meetings and, possibly, new research. More information, including the agenda, slide presentations, vision statement, and a list of participants can be found via the links below. Updates can be followed on the workshop web site or by subscribing to our quarterly newsletter.

More Links:

-Optimal Design of Payment Systems Vision Statement
-Optimal Design of Payment Systems Agenda (May 2011)
-Optimal Design of Payment Systems Participants (May 2011)


Related papers:

• Fernando Alvarez, The Demand for Liquid Assets with Uncertain Lumpy Expenditures

• David Mills,  Systems The Optimal Design of Payment Systems: Regulation and Policy (slides)

• Cyril Monnet, The Emergence and Future of Central Counterparties

• Will Roberds, The Design of Wholesale Payments Networks: The Importance of Incentives

• Warren Weber, Clearing Arrangments in the United States before the Fed (slides)

• Pierre-Olivier Weill, Liquidity Provision in Capacity Constrained Markets & Leaning Against the Wind