Banking on Competition

Financial services innovations are popping up all around the world. They range from mobile money services like mPesa that are putting basic banking services in the hands of households who never had them, to virtual currencies such as Bitcoin that are reducing the transactions costs of paying people around the world, to online providers like PerkStreet that are providing people alternatives to traditional banks, to innovative small business lenders like Kabbage. These innovations could revolutionize many aspects of the financial services industry including traditional retail banking and lending.

Virtually all of these innovations are coming from outside—often well outside—the traditional financial services industry. Unfortunately, and herein lies the problem I want to talk about, they all live, but for the grace of God, at the mercy of financial services laws and regulators.

mPesa is a case-in-point. It was started by Safaricom, the dominant mobile network operator in Kenya, and not by a bank. As it happens, the Kenyan government didn’t require mPesa to go through the hurdles of banking regulation, including getting a banking charter. What mPesa, and others who have tried to mimic its success, have found in other countries is that most governments insist on imposing banking regulations on these mobile money firms or require that they partner with a bank. When that happens the mobile money firms either don’t get off the ground at all or