Banks raise alarm over mobile cash deposit insurance

Users of mobile phone money transfer and payments services could lose their cash if any of the banks that hold their deposits collapse, the banking industry’s lobby group has said.

The Kenya Bankers Association (KBA) has suggested increased insurance cover for the mobile money deposits to minimise the risk exposure.

The government deposit protection insurance guarantees a maximum cover of Sh100,000 per every account held in commercial banks, which means mobile phone money service operators would only recover a small fraction of the customer deposits that run into billions of shillings held in a few banks.

“The mobile payments deposits are virtually uninsured against bank failure,” says KBA in a report released this week.

The report, which is based on a study by KBA, says customers holding cash deposits in their mobile phones could lose out in case of a bank failure since they are not individually guaranteed by the insurance fund.

“The custodial accounts holding the e-float (mobile money deposits) do benefit from deposit insurance on the one hand, however, because the funds are pooled, insured amounts are typically well below the e-float total….this insurance would do little to cover mobile payments e-float amount,” says KBA.

In an interview on Thursday Safaricom, which runs the M-Pesa service that is the biggest mobile money platform holding billions of shillings at any one time, concurred that individual customer deposits are not insured.

READ: Mobile phone customer deposits hit Sh226 bn

The company, however, added that it has deposited the M-Pesa money in tier-1 (big, stable) banks that have a much lower risk of collapsing as well in the risk-free government securities.

“In the case of Safaricom, our customers are protected.  We have spread the deposits throughout several tier-1 banks and government securities, the risk of M-Pesa customers losing their funds is therefore quite remote,” said Nzioka Waita, the director of corporate affairs at Safaricom.

Mr Waita said that Safaricom was “not in a position to comment on how other providers or the rest of the industry handles this potential risk.”
Airtel Kenya runs Airtel money services, the second biggest mobile money services provider.

Its vice-president for corporate affairs Michael Okwiri did not respond to our request for comment.

The study was authored on behalf of KBA by Joy Malala a legal researcher at Warwick University, but KBA said the research did not necessarily represent its view.

It referred to the study as work in progress published to elicit discussion. The paper noted that the funds collected are stored in a pooled trust accounts at several commercial banks for the benefit of the customers, but a mechanisms is lacking for transferring those funds to customers should an institution holding the funds collapse.

“In the event of insolvency, however, there is no mechanism in place for customers to claim trust assets. This leaves the consumer with no recourse if the said bank becomes insolvent. This further highlights the complexity that these electronically stored value poses,” said Ms Malala.

Mr Waita noted that the current mobile money structure that the banking regulator has set means that the government deposit protection insurance of up to Sh100,000 per account does not apply to mobile money balances as these sit in an amalgamated trust account at various banks in Kenya.

“The only way these balances can be lost is if a bank in Kenya, which is holding the trust funds, does not have sufficient liquidity to cover its liabilities. Therefore, each operator needs to ensure that their customers are protected from some form of bank liquidity crisis,” said Mr Waita.

Ms Malala said the system for protecting consumers of the mobile money was anchored on the trust customers have on Safaricom, but should now go beyond this.

“The success of the mobile payments has rested in part on the trust that consumers have in one of the market leaders in mobile payments, Safaricom,” said Ms Malala.

It recommends basic regulation with simple and clear rules to ensure appropriate liquidity and ownership of funds, collected against the electronic value issued.

“Regulation can also set minimum standards for fund redemption to avoid undue restrictions including in the event of insolvency of the provider or the bank where the funds are deposited,” said Ms Malala in the research.

Ms Malala says to curb chances of fraud, transaction limits and minimum operating standards need to be imposed on agents.