1 1.4: Putting the Banking in Branchless Banking

CHAPTER 1.4

Putting the Banking in 

Branchless Banking: 

Regulation and the Case for 

Interest-Bearing and Insured 

E-money Savings Accounts

TILMAN EHRBECK, Consultative Group to Assist the Poor

MICHAEL TARAZI, Consultative Group to Assist the Poor

Buoyed by a growing belief that poor people need a 

full array of financial services, financial inclusion advocates are now focusing on how to responsibly provide 

low-income individuals with financial services beyond 

microcredit—services such as savings, payments and 

insurance. A primary obstacle to the provision of such 

services, particularly low-value payments and savings, 

has historically been high transaction costs. It has been 

too expensive to develop the infrastructure required to 

profitably reach underserved population segments.

Branchless banking, however, is changing the 

economics of providing financial services by leveraging 

existing and widespread retail outlets and technology, 

particularly mobile telephones, to provide more services 

to more people at lower cost.

When using branchless banking to provide savings 

services, regulation is often the key obstacle, particularly in the case of e-money issued by non-banks such 

as mobile network operators.1 In an effort to distinguish 

such products from savings accounts, regulators around 

the world have regulated them as “payments” services, 

denying e-money accounts the benefit of interest payments and deposit insurance. In some cases, these prohibitions extend to e-money issued by banks, particularly 

in countries such as the Philippines and Malaysia where 

e-money is regulated as a product regardless of whether 

the issuer is a bank or non-bank.

In regulating e-money as a payments product, 

regulators may be missing an opportunity to make great 

progress in financial inclusion. E-money can safely 

and efficiently be used as a savings vehicle. Regulators 

should allow e-money to offer the full benefit of savings 

accounts—interest and deposit insurance—to the millions 

of low-income e-money users. 

E-money as payments 

E-money is commonly understood as:

•	 monetary value as represented by a claim on an 

issuer, 

•	 stored on an electronic device,

•	 prepaid,

•	 accepted by third parties other than the issuer, and

•	 redeemable in cash.

Both banks and non-banks can issue e-money. In 

the case of non-bank issuers, however, regulators typically safeguard the cash collected in exchange for electronic value (the “e-float”) by requiring 100 percent 

to be placed in an account held at a fully prudentially 

regulated bank.2 This account is typically a pooled acReprinted from the World Economic Forum’s Mobile Financial 

Services Development Report 2011
21.4: Putting the Banking in Branchless Banking

count held in trust (or the equivalent) for the benefit of 

e-money customers so as to isolate the funds from claims 

by issuer creditors (in the case of issuer bankruptcy, for 

example), although other approaches also exist.3

Regulators have struggled with the business model. 

Collecting cash from the general public sounded like 

the equivalent of collecting deposits. However, in the 

banking laws of many countries, deposit taking is considered the exclusive domain of fully prudentially regulated banks. Consequently, regulators were in a bind. 

How could they permit non-banks to collect deposits 

without requiring them to obtain banking licenses that 

would subject them to complicated and costly prudential requirements—requirements likely to prevent nonbanks from issuing e-money at all?

The solution was to regulate non-bank issued 

e-money as a “payments” product—focusing on the 

funds transfer function of e-money and effectively 

lumping e-money issuers together with money transfer 

companies such as Western Union. The cash-in function was not considered a deposit, but simply the equivalent of handing money over to Western Union before 

its eventual transfer (within a prescribed time period) 

to another recipient. This “e-money as payments” approach was convenient not only for bankers struggling 

to avoid the question of deposit taking but also for nonbank e-money issuers that had no desire to be licensed 

as fully prudentially regulated institutions and preferred 

to avoid unwanted attention from the banking sector as 

a result of appearing to compete on basic services.

While regulators should be commended for creatively enabling inclusive financial services, regulating e-money as a payment product may close the door 

to using e-money to provide the savings services that 

e-money more closely resembles. When an e-money 

customer gives cash in exchange for electronic value, 

there is typically no requirement that such electronic 

value ever be transferred.4 In fact, many e-money customers use their electronic accounts as a means of safe 

storage. A 2007ñ2008 study of 350 M-PESA users 

revealed that for reasons of safety and convenient access, M-PESA is used as a storage mechanism by both 

the banked and unbanked (Morawczynski and Pickens 

2009).5 Another study found that M-PESA was used for 

both long- and short-term savings (Pulver 2008). It is 

this storage function that distinguishes e-money from a 

payments product and makes it more akin to a savings 

account than to a Western Union transfer.6

There is one significant difference however between e-money and a bank savings account. As long as 

the cash backing e-money is 100 percent held in a fully 

prudentially regulated institution, the e-money issuer 

does not intermediate the funds in a way that puts them 

at risk.7 As a result, the e-float is not at any greater risk 

than cash held at a bank.8

E-money as savings

Once the intermediation risk of non-bank e-money issuance is removed, it is difficult to see why e-money 

should not provide low-income users the full benefits 

of a savings account. In fact, e-money accounts already 

provide one key benefit: safe storage. A secure mechanism for storing value is highly valued by users, particularly poor users with few safe options. 

However, advocates of financial inclusion can do 

more than simply promote savings as safe storage. They 

can promote savings as interest-bearing and insured accounts—the type of savings enjoyed by most banking 

customers. In so doing, they can put the “banking” in 

branchless banking.

Paying interest

The payment of interest on e-money accounts provides several benefits to customers and regulators alike. 

For customers, interest encourages savings and teaches 

low-income users the time value of money. It affords 

many low-income users a rare opportunity to earn a 

return on their capital. When asked what additional 

service they would like to receive through M-PESA, 

users cited earning interest most often (Pulver 2008, p. 

5)9. For regulators, providing an added incentive to save 

encourages more citizens and more money to enter the 

formal and traceable economy, not only providing benefits to the financial system as a whole but also providing a means to monitor transactions in the fight against 

money laundering and terrorist financing. 

Despite the benefits, no country currently permitting non-banks to issue e-money allows issuers to pay 

interest on e-float. Such prohibition often extends to 

“interest equivalents”—any benefit, such as free mobile 

airtime, linked to a customer’s account balance. When 

pressed for a reason, regulators often simply state that 

paying interest is a banking activity. However, definitions of banking activity typically focus on taking deposits and, in most regulations, intermediating deposits 

through lending. Intermediating deposits places them at 

risk, thereby raising systemic concerns prudential regulation is intended to mitigate. While non-bank e-money 

issuers are arguably taking deposits, these deposits, if totally held in a bank, are not intermediated by the issuer. 

Even when regulation expressly defines the payment of 

interest as a banking activity, it is hard to identify what 

risk lies in allowing non-bank issuers to pay interest. 

There are several operational arguments against 

paying interest. The interest accruing on small accounts 

is often viewed as negligible. However, e-money structures present a unique opportunity for low-income individuals to earn higher interest rates. Because e-money 

accounts typically pool client funds for an extended 

period, the total balance often qualifies for higher interest rates than might otherwise be earned by low-value 

individual bank accounts. For example, a time deposit 
3 1.4: Putting the Banking in Branchless Banking

CUSTOMER

BANK

BANK M-PESA HOLDING

COMPANY LTD.

TRUSTEE

AGENT

AGENT

AGENT

BANK

CUSTOMER

CUSTOMER

CUSTOMER

CUSTOMER

CUSTOMER

SAFARICOM LIMITED

MOBILE NETWORK OPERATOR

E-MONEY ISSUER

AGENT NETWORK

MANAGER

D

A

A

A

D

D

B

C

E

F

Figure 1: M-PESA legal structure

Agent Agreement

•	 Executed after agent meets Safaricom’s minimum eligibility

requirements

•	 Requires KES100,000 per agent outlet cash advance as float

against which agent conducts transactions

•	 Sets forth anti-money laundering requirements

•	 Sets forth branding requirements

• Sets forth Safaricom business practices requirements

Agreement

•	 Executed after agent meets Safaricom’s minimum eligibility

requirements

•	 Requires KES100,000 per agent outlet cash advance as float

against which agent conducts transactions

•	 Sets forth anti-money laundering requirements

•	 Sets forth branding requirements

• Sets forth Safaricom business practices requirements

Declaration of trust in favour of all M-PESA account 

holders of safaricom limited

•	 Declaration of Trust between M-PESA Holding Co. Limited (as

trustee) and Safaricom Ltd (on behalf of M-PESA customers

as beneficiaries).

•	 Requires customer and agent funds backing e-money to be

paid to Trustee to be held (together with any interest accruing thereon) in commercial bank accounts and/or Govt. of

Kenya securities.

•	 Prohibits the accrual of interest to any M-PESA Account

Holder. Any interest “shall generally be applied first to defray

the Trustee’s own costs. . .but may be applied for such other

purposes (whether charitable or not) as the Trustee, may in

its sole discretion determine.”

•	 Requires parties to enter into a Management Agreement (see

C below) by which Safaricom is appointed as Trustee’s agent

for purposes of (i) managing commercial bank accounts

where trust fund is held as well as (ii) directing the Trustee

in placement of trust funds in commercial bank accounts and

Govt. of Kenya securities.

Management Agreement

•	 Agreement required by Declaration of Trust the terms of

which are referenced therein.

Commercial Bank Agreement

•	 Sets forth the terms by which M-PESA Holding Co. (trustee)

deposits trust funds into commercial bank accounts

Customer Terms and Conditions

•	 Form agreement between Safaricom and customer, signed by

customer at agent outlets

•	 Sets forth basic terms and operating procedures of M-PESA,

including privacy policy and dispute resolution

•	 Sets forth that funds are held in trust for customer

•	 Sets forth that M-PESA is neither a bank nor a deposit-taking

institution 

•	 Sets forth that no interest will be paid on the funds

Agent Network Manager Agreement

•	 Contract between Safaricom and a third party setting forth

the terms by which such third party manages agents on

behalf of Safaricom

A C

D

E

F

B

Source: Analysis by the Consultative Group to Assist the Poor
41.4: Putting the Banking in Branchless Banking

in Kenya currently earns 3.43 percent annual interest 

whereas, even if poor customers could open a bank savings account and meet minimum balance requirements, 

a savings account earns only 1.25 percent.10

Another argument against permitting non-bank issuers to pay interest is that it might cause them to recklessly invest working capital to provide higher interest 

rates to their customers. While this would not endanger 

the e-float kept in a custodial bank account secure from 

the issuer’s creditors, it could result in the bankruptcy 

of e-money issuers, ultimately putting the reputation of 

the entire e-money sector at risk. This argument presupposes that e-money issuers would compete on interest to the point of jeopardizing their entire businesses. 

Even if this possibility was not remote, one solution is 

to permit non-bank e-money issuers to simply “pass 

through” the interest accruing on the e-float, rather 

than pay interest directly. This would benefit e-money 

users by encouraging issuers to negotiate with custodial 

banks for the highest interest rate—a benefit ultimately 

passed on to the customer.

An argument against an interest pass through is 

that e-money issuers need to keep the interest on the 

e-float for their own profit because they are not able 

to recoup costs through transaction fees alone. But 

this is an argument against mandating the payment of 

interest on e-money, not an argument against permitting it. Whether an issuer pays interest will ultimately 

be a business question based on whether the issuer 

can afford to pass through the interest, and assume the 

related administrative and technology costs. The success of M-PESA, in terms of number of customers and 

amounts transacted, suggests that the interest can be 

irrelevant to viability. Safaricom, the mobile network 

behind M-PESA, does not benefit from the interest accruing on deposited e-float.11 (See Figure 1, M-PESA 

Legal Structure.) Instead, Safaricom and the Central 

Bank of Kenya agreed to donate the interest to charity 

rather than distribute it to customers on whose funds 

the interest accrued. 

Extending deposit insurance

Deposit insurance is meant to protect bank customers from a bank’s inability to pay its debts. Bank failures 

and the recent financial crisis have resulted in a rapid 

increase in the number of countries, currently 104 and 

rising, that have a government or private mechanism for 

insuring bank deposits.12 These include a large number 

of poor and developing countries. Deposit insurance is 

not just for the benefit of bank customers. By encouraging trust in the formal banking system, governments 

promote savings, increase cash reserves, and stimulate 

the entire economy. 

Even though e-float is typically held in a bank,13

few, if any, regulators in the developing world extend 

deposit insurance to customers of e-money accounts 

issued by non-banks. The custodial accounts holding 

the e-float do benefit from deposit insurance. But because the funds are pooled, insured amounts are typically well below the e-float total. For example, the US$ 

1,300 insurance limit in Kenya would do little to cover 

M-PESA’s e-float amount.14 In addition, deposit insurance benefits the named holder of the account, which 

in cases where e-float is not held in trust, is often the 

e-money issuer.

Extending the benefit of deposit insurance to 

e-money is, in principle, a relatively simple endeavor. 

The United States already provides such deposit protection. In the United States, as long as e-float is placed 

in an insured depository institution, it is considered 

an insured deposit. For pooled custodial accounts, the 

United States also affords pass-through protection to 

each customer up to the insurance limit. To qualify for 

pass-through protection, (i) the bank’s records must 

disclose the custodial nature of the pooled account, (ii) 

the records of the bank or the issuer must disclose the 

names of the individual owners and the amount owed 

to each owner, and (iii) the agreement between the issuer and the customers must indicate that ownership of 

the funds remains with the customer (Federal Deposit 

Insurance Corporation 2008).15 These requirements are 

not difficult to meet and most e-money schemes already 

comply as part of their standard business practice.

Provided the pooled account is insured, passthrough deposit insurance need not increase insurance 

premiums. Premiums are typically based on the total of 

domestic deposits, or in the case of the United States 

recently, the bank’s total asset base. Neither of these 

calculations would be affected by extending insurance 

protection to individual e-money holders since neither 

the total deposit nor asset base would change. 

Conclusion

Banking regulators are understandably uncomfortable 

with non-banks offering traditional banking services. 

The temptation is always there to insist on the centrality of banks. Models like Kenya’s M-KESHO take 

the pressure off of regulators to think about e-money’s 

potential role in promoting savings. A joint product 

of Safaricom and Equity Bank, M-KESHO provides 

M-PESA users with an interest bearing and insured 

Equity Bank account accessible through mobile phones. 

However, its value proposition for low-income customers has yet to be proven. For example, to withdraw 

funds from M-KESHO, a customer must first pay a fee 

to transfer funds from the M-KESHO account held 

at Equity Bank to the M-PESA account and then pay 

a second fee to withdraw cash from M-PESA. These 

two transaction fees largely undercut any interest benefit. M-KESHO is nevertheless promising as it lays the 

rails for the cost-effective provision of other financial 

services such as credit and insurance. However, the 
5 1.4: Putting the Banking in Branchless Banking

potential of models like M-KESHO does not obviate 

the need to explore how M-PESA and other e-money 

products may provide interest-bearing and insured savings more effectively on their own.

E-money represents a promising opportunity to 

provide low-income individuals with more than just 

payment and safe storage services: it can offer savings 

vehicles with the full benefit of interest and deposit 

insurance. The extension of such benefits can be done 

with relative ease and at minimal risk. E-money products from non-banks should not be seen as interlopers 

in the banking domain, but rather as a much needed 

stepping stone across which the benefits of high-quality 

savings instruments can be passed through to the millions who lack access to them.

Notes

1 Non-banks are permitted to issue e-money in an increasing 

number of developed and developing nations, including the 

West African Union, Kenya, Rwanda, the Philippines, Malaysia, 

Indonesia, Fiji, and Cambodia. Such arrangements are also under 

consideration in countries such as Democratic Republic of the 

Congo and Burundi, and in the South Pacific.

2 This is a more stringent requirement than imposed on deposittaking financial institutions, which are typically subject to reserve 

requirements mandating only some small portion of overall 

deposits to be kept in liquid form ñtypically cash—to satisfy 

potential depositor claims. This difference in treatment reflects a 

fundamental difference between banks and non-bank service providers and their respective business models. A bank’s business is 

predicated on the ability to intermediate capital, i.e., take money 

from those who have it and provide it in loans or other products 

to those who need it. Non-banks, on the other hand, are typically 

expressly prevented from intermediating deposits and thus must 

make money in other ways, such as transaction charges, lowered 

airtime distribution costs, and reduced customer churn.

3 For a discussion on regulation of non-bank e-money issuers, see 

Tarazi and Breloff (2010). Some regulatory systems do not impose 

the requirement that the e-money float be held in trust, and some 

permit its investment in other safe and liquid investments, such 

as government obligations, rather than requiring it to be held in a 

bank. Still, others are silent or ambiguous on the subject.

4 Based on a review of applicable regulation and/or practice 

in Kenya, the Philippines, West Africa, Fiji, Afghanistan, and 

Malaysia. The authors did not conduct a global survey of applicable regulation.

5 Nearly a third of banked customers and a fifth of unbanked customers use M-PESA to store value.

6 In an effort to more firmly characterize e-money as a payments 

product, some regulators considered putting a limit on the 

amount of time funds can be stored electronically. Perhaps realizing that time limits could discourage use and savings, they are 

not widely imposed, if at all. As e-money is used increasingly as 

savings, regulators may eventually feel compelled to impose time 

limits.

7 E-money issuers are often permitted to invest the float in government-issued securities—a form of intermediation considered 

lower risk. However, perhaps due to the lack of liquidity associated with such securities, most non-bank e-money issuers opt for 

the other legally prescribed option—holding the e-float in a fully 

prudentially regulated financial institution.

8 The risk is further minimized in cases where the e-money issuer 

maintains the e-float in several banks, mitigating the risk of any 

one bank failing.

9 The study showed that 38 percent of respondents cited earning 

interest and 24 percent cited the ability to use M-PESA for ATM 

withdrawals,which has since been enabled. 

10 Interest rates as of January 2011. See www.centralbank.go.ke.

11 Nevertheless, the terms of the trust do not expressly prevent 

Safaricom from benefitting from the interest. Section 6.2 of the 

Amended Trust Deed of 2008 states any interest “shall generally 

be applied first to defray the Trustee’s own costs...but may be 

applied for such other purposes (whether charitable or not) as the 

Trustee, may in its sole discretion determine”.

12 International Association of Deposit Insurers at http://www.iadi.

org/aboutiadi.aspx?id=79.

13 Another safeguarding measure is private insurance. The European 

Union (EU), for example, permits safeguarding of funds backing 

e-money through insurance. EU Directive 2007/64/EC permits 

non-bank e-money issuers in lieu of liquidity provisions, to insure 

or comparably guarantee the funds backing e-float in an amount 

payable in the event that the non-bank issuer is unable to meet its 

financial obligations. EU Directive 2007/64/EC, Article 9.1(c) incorporated by reference from Article 7.1 of EU Directive 2009/110/

EC (2009). It is not clear if any e-money issuer has availed itself of 

this private insurance option.

14 The trust responsible for the M-PESA e-float is charged 0.01% 

of deposited e-float as an insurance premium, though such 

expenses may be reimbursed from interest accruing on the 

e-float.

15 The second requirement that bank or issuer records disclose the 

names of the individual owners and amounts owed may require 

regulators to impose data storage and back-up protocols similar to 

those imposed on regulated financial institutions.

References

Federal Deposit Insurance Corporation. 2008. “Stored Value Cards 

and Other Nontraditional Access Mechanisms, New General 

Counsel’s Opinion No. 8.” Financial Institution Letter FIL-129-

2008. Washington, D.C.: FDIC.

Morawczynski, O. and M. Pickens,. 2009. “Poor People Using Mobile 

Financial Services: Observations on Customer Usage and Impact 

from M-PESA.” CGAP Brief. Washington, D.C.: CGAP. 

Pulver, C. 2008. “The Performance and Impact of M-PESA: Preliminary 

Evidence from a Household Survey.” Financial Sector Deepening 

Kenya. 

Tarazi, M. and P. Breloff, 2010. “Non-bank E-money Issuers: Regulatory 

Approaches to Protecting Customer Funds.” Focus Note 63. 

Washington, D.C.: CGAP.